A golden parachute consists of substantial benefits given to top executives if the company is taken over by another firm and the executives are terminated as a result of the merger or takeover. These contracts with key executives can serve as an anti-takeover measure, often referred to as poison pills, designed to discourage an unwelcome takeover attempt. Benefits may include stock options, cash bonuses, and generous severance pay.
Golden parachutes are named as such because they are designed to provide a soft landing for high-level employees who lose their jobs.
Key Takeaways
- Golden parachutes are lucrative severance packages integrated into the contracts of top executives that compensate them upon termination.
- Besides large bonuses and stock compensation, golden parachutes may also offer ongoing insurance and pension benefits.
- The practice is controversial, as even poorly performing or short-tenured executives can receive substantial payouts for little work or during lackluster tenures.
How Golden Parachutes Work
Golden parachute clauses can define the lucrative benefits an employee would receive if terminated. This term is often associated with the termination of top executives due to a takeover or merger. Golden parachutes may include severance pay in the form of cash, special bonuses, stock options, or the vesting of previously-awarded compensation. The employment contract contains explicit language detailing the conditions under which the golden parachute clause will become valid.
In addition to monetary awards, other examples of opulent parachute benefits include:
- Continued enrollment in company pension plans
- Vesting of all retirement benefits
- Paid health and dental insurance
- Compensation for legal fees
Instances of these exclusive advantages have sparked criticism from shareholders and the public. Consequently, the post-financial crisis era has seen many companies review their executive-level compensation policies. New policies aim to link executive performance to corporate success and to determine if such packages truly serve the best interests of the firm and its investors.
Controversy Surrounding Golden Parachutes
The use of golden parachutes is contentious. Supporters believe they make hiring and retaining top executives easier, particularly in merger-prone industries. Proponents also argue these lucrative benefit packages enable executives to remain objective during takeover or merger events and discourage takeovers due to the high associated costs of golden parachutes.
Opponents argue that executives are already well-compensated and should not be rewarded for termination. Critics assert that executives have a fiduciary responsibility to act in the company’s best interest and shouldn’t need additional financial incentives to remain objective. Additionally, it’s argued the costs associated with golden parachutes are negligible compared to total takeover costs, thus having little impact on takeover outcomes.
Another related term is the golden handshake. Similar to a golden parachute, it offers a severance package to an executive upon unemployment. However, a golden handshake includes severance packages granted to executives upon retirement as well.
Examples of Golden Parachutes
Some instances of golden parachutes reported in the media include:
- Meg Whitman: As CEO of Hewlett-Packard Enterprise, Whitman stood to receive almost $91 million if the company was acquired under her control, along with more than $51 million if terminated. She eventually received a total of $35.6 million after the company’s restructuring.
- Staples and Office Depot: During the exploration of a merger (blocked by a federal court in May 2016), the CEO of Office Depot would have collected $39 million under his golden parachute terms.
- Dell and EMC: When Dell merged with storage giant EMC in 2016, EMC’s CEO received $27 million in compensation per his golden parachute agreement.
Understanding the role and impact of golden parachutes enables better comprehension of corporate strategies during acquisitions and the complexities of executive compensation.
Related Terms: Golden Handshake, Executive Severance, Takeover, Merger.
References
- Bloomberg. “HPE’s Whitman Gets $35.6 Million in 2016 After Company Split”.
- South Florida Sun Sentinel. “Office Depot CEO could walk with $39 million after merger”.
- The Wall Street Journal. “Dell Closes $60 Billion Merger with EMC”.
- Hartford Business Journal. "$27 million golden parachute for EMC CEO Joe Tucci".
