The term golden handshake refers to a clause in an executive’s contract that provides them with a significant severance package if the employee loses their job due to firing, restructuring, negligence, or retirement. Golden handshakes are typically reserved for top executives in the event that they lose employment. The amount paid out is generally negotiated before the contract is signed. Payment of a golden handshake can be made in various forms, including cash and stock options. Golden handshakes have come under scrutiny as they don’t necessarily motivate employee performance.
Key Takeaways
- Golden handshakes are pre-negotiated employment agreements that provide severance if the employee leaves their position involuntarily.
- Payment can be made in cash, stock options, or other agreed-upon forms.
- Golden handshakes are often controversial and can provoke public discontent.
- Even lower-level employees may sometimes receive a smaller version of the golden handshake.
How Golden Handshakes Work
Executive compensation often includes salaries, stock options, cash, and bonuses, and companies may offer additional perks to attract top talent. One such perk is the golden handshake, which promises a payment if employment is terminated due to firing, layoff, restructuring, negligence, or even retirement. This benefit is usually negotiated at the outset of the employment contract to attract desirable candidates, especially those not currently with the company.
Golden handshakes can be substantial, reaching millions of dollars, making them crucial for investors to consider. For instance, in 1989, R.J. Reynolds Nabisco paid F. Ross Johnson over $52 million as part of a golden handshake clause. Golden handshakes may also be known as golden parachutes.
Special Considerations
Non-executives may also receive golden handshakes, albeit less substantial, sometimes referred to as silver handshakes. This is still preferable to leaving without severance. For example, automotive companies might buy out union workers’ contracts, thereby freeing capital to hire new workers at reduced labor costs. Similarly, those forced into early retirement may receive such packages as companies opt to refresh their talent pools.
Criticism of Golden Handshakes
Golden handshakes carry substantial controversy, notably because they are not necessarily tied to an executive’s job performance. Therefore, executives may receive substantial compensations even if they fail to deliver results. Particularly confounding is that some executives are awarded golden handshakes even after negligence-driven dismissals.
This compensation approach can hurt a company’s public image as high executive payouts, especially amid failure, are seen negatively. Furthermore, these payoffs come on top of salaries that are already higher than those of non-executive employees.
Examples of Golden Handshakes
Golden handshakes often attract significant media attention, especially when executives fall short of expectations or there are public relations dilemmas. Here are two notable examples:
British Petroleum
In 2010, an oil spill in the Gulf of Mexico brought considerable costs to British Petroleum (BP), following an explosion on the Deepwater Horizon oil rig. This incident led to CEO Tony Hayward’s departure, but not before he received a golden handshake of $1.5 million plus a $17 million pension.
Banks
During the 2007-2008 financial crisis, many banks faced severe financial difficulties. Amid these challenges, many top executives were forced out but received large pay packages. Shareholders, left with worthless stocks and bonds, were outraged by these golden handshakes. This gave rise to non-binding shareholder votes on executive pay packages, illustrating investors’ dissatisfaction with excessive payouts.
Related Terms: severance package, executive compensation, golden parachute, restructuring, retirement, public relations
References
- Winston-Salem Journal. “Former RJR Nabisco CEO Johnson Dies, Leaves Controversial Legacy”.
- United States Environmental Protection Agency. “Deepwater Horizon—BP Gulf of Mexico Oil Spill”.
- BP. “Gulf Commitment”.
- NPR. “Hayward’s ‘Golden Parachute’ is Relatively Modest”.
