A golden parachute is defined as a contract between an employer and a top-level executive that offers substantial financial benefits from one to other upon the termination of employment. The benefits include handsome severance pay, cash bonus, and stock options.
This contractual agreement is also perceived as poison pills because the company will have to pay the agreed amount irrespective of the fact that currently, it could not handle such a big pay-out.
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Meaning of Golden Parachute
A golden parachute is applicable when another firm takes over the company, and as a result, some top-level executives have to leave their job. It is an anti-takeover measure to discourage takeover bids.
A golden parachute is an intriguing concept and is also considered a controversial agreement as it includes hefty pay-outs even during contentious dismissal.
Examples of Golden Parachute
TBS Company hires its new executive David and agrees to a golden parachute contract. Under this contract, the company becomes liable to pay the new employee a sum of 40 million dollars as severance pay along with some stocks and retirement package of 19 million dollars.
After a few years, the company faces a take-over bid and is merged with XYZ Company. David loses his job, but as per his agreement, he is richer by 40 million dollars plus 10 million dollars plus the stocks. He had nothing to worry about during the take-over because he had his fingers in both pies.
He was to retain his lucrative position if the company did not bow down, and in case it did it made him extremely rich. The golden parachute is a boon for the individuals who have signed it but is not always a blessing for the employers who have agreed to the terms and conditions.
Real-life examples of Golden Parachute
There are some real-life examples of cases involving golden parachute. Some of the most noteworthy ones are-
In the year 2016 Office Depot Inc and Staples Inc were exploring a merger which later did not take place. The company was supposed to pay nearly 39 million dollars as agreed under the golden parachute to the CEO of Office Depot if the merger had taken place.
As per the reports, the CEO of Hewlett-Packard Enterprise will be paid nearly 9 million dollars if there is a change-in-control and 51 million dollars if her employment is terminated.
The infamous company, Enron, gained negative publicity because of allegations of questionable accounting and fraud. Several of its executives had a golden parachute agreement and managed to grab the necessary severance packages even if the clients, investors and other employees were left to deal with it without any money.
The CEO of Hewlett Packard Carly Fiorina was dismissed from her job in the year 2005 because of bad performance. She received a tidy sum of 45 million US dollars as per the golden parachute clause even when her performance was considered below par.
5 Advantages of Golden Parachute
The advantages of the golden parachute are-
- Golden parachute helps the company to hire and retain talents of high level. The lucrative deal acts as bait to top talent and helps the company to get the best of the lot from the hiring pool.
- During a take-over bid, the agreement keeps the executive objective. It removes the conflict of interest, and the executive is not tempted to delay or sabotage the efforts because he is secured in his position. He is secured in his position and offers full co-operation during the process.
- The golden parachute increases the cost of takeover and thus dissuades such bids. Other companies might find the deal less appealing as they would have to meet out severance packages to the top-level executives who have a golden parachute agreement with the company.
- Golden parachute removes the stress that employees’ even top-level ones have about their future in case of a dismissal. The CEO is nervous about taking risks as it can jeopardize their jobs. But now he can implement long-term beneficial targets to maximize the revenues of the company without being nervous about his job.
- Sometimes employees tend to turn against their firm when they face dismissal from the employment. The golden parachute stops them from handing out important information to the rival companies. It also prevents the employees from suing the employer or the firm for any perceived grievances. Generally, the parting is amicable after a golden parachute package.
8 Disadvantages
- As the executive’s future is secure, he can take part in any underhand measure to harm the company. In some cases, it is the individual with the golden parachute contract that encourages a take-over bid as he wants to have his cake and eat it too.
- The company has to pay the agreed payment even it proves a serious dent in the organization’s coffers. It minimizes the bottom line profitability of the company. Other employees feel less-privileged and neglected in this scenario. The dissatisfaction hinders the performance and efficiency of employees as well as the company.
- The massive payout is not subjective to the performance of an employee and can be misused. The executives do not have the need to work harder and efficiently. Their job is secure, and thus, the performance can dip to create a poor work ethic. Even if the individual is involved in any kind of misdemeanor or illegal activity, his severance package is safe and sound.
- The executives do not fear dismissal as they are already well compensated.
- It is a myth that golden parachute can stop a takeover bid. When such huge amounts are at stake, the amount decided upon by golden parachute does not matter.
- It is a fact that only a few top-level executives are considered for a golden parachute agreement. It causes resentment amongst other employees and harms the working relationship within the company.
- As per some people remaining objective is a good thing during take-over bids but the critics have a serious issue with this fact. It is the role and responsibility of the executives to look after the best interest of the company, but if they remain objective, they are unable to fulfill their duties to the hilt.
- Sometimes golden parachute acts as a reward for failure.
Here is a video by Marketing91 on Golden Parachute.
The legality of a golden handshake
Under normal circumstances, if a company has agreed to a golden parachute clause with an employee, it is legitimate.
In some bankruptcy cases, the court has disallowed the golden handshake pay-off and have allowed retention pay for the rest of the employees.
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