Definition
A golden parachute is a clause in a top executive’s employment contract that guarantees substantial benefits, like a large severance pay or stock options, if the company is acquired and their employment is terminated as a result. This clause is used as a financial safety net for executives in case of a sudden change in company ownership. It’s often used to protect executives from the initial consequences of mergers or acquisitions.
Key Takeaways
- A Golden Parachute is a clause in a top executive’s contract that provides a sizable severance package if the company is sold and their employment is terminated as a result. This can include benefits such as cash bonuses, stock options, or other benefits.
- Golden Parachutes are used to attract and retain top executives, especially in industries where mergers and acquisitions are common. The provisions serve as a form of job and financial security for executives.
- While these agreements can have benefits, they can also lead to shareholder discontent due to their high cost and potential to incentivize executives to pursue company sale even if it isn’t in the best interest of the company or its shareholders.
Importance
The finance term “Golden Parachute” is important because it represents a form of compensation agreement established between companies and top executives, promising sizeable benefits if the company is taken over by another firm, resulting in job loss for those executives.
These benefits may include severance pay, cash bonuses, stock options, or other compensation.
This clause helps attract and retain high-quality executives who might otherwise be hesitant to work for companies vulnerable to takeover.
The idea behind these lucrative packages is to allow executives to make decisions potentially increasing the company’s buyout value, without worrying about their personal financial consequences.
However, it has been critiqued for potentially encouraging reckless actions and excessive risk-taking.
Explanation
A golden parachute is a contractual agreement between a company and an employee, typically a high-level executive, which guarantees the employee certain benefits or compensations if they are terminated or if the company undergoes a major transition like a merger or acquisition. It serves as a type of protection for executives, offering them financial security in significantly unpredictable scenarios.
The benefits might include items like severance pay, cash bonuses, stock options, or other benefits. The purpose of a golden parachute is multifaceted.
Firstly, it acts as a motivating tool to attract and retain talent in high-risk environments, or companies prone to buyouts and mergers, by providing a layer of financial security. Secondly, it is also used to ensure impartiality among executives during the takeover process.
Since leaders have the security of the golden parachute, they can make unbiased decisions in the best interest of the company without worrying about their financial future. However, golden parachutes have been subject to criticism due to their perceived excessive payouts and possible encouragement of risk-taking among leaders.
Examples of Golden Parachute
Albert J. Dunlap: The former CEO of Sunbeam Corporation is one example of a golden parachute. In 1998, Dunlap was fired for accounting irregularities, and despite the controversy, he left the company with $60 million in severance pay and stock benefits as part of his golden parachute agreement. His severance package was the subject of much controversy and media coverage.
Tony Hayward: The former CEO of BP, Tony Hayward, is another real-world example. Following the Deepwater Horizon oil spill in 2010, Hayward received a severance package estimated at around $
6 million, along with an annual pension of approximately $930,
This golden parachute caught widespread attention because of the environmental disaster that occurred during his tenure.
Marissa Mayer: The CEO of Yahoo, Marissa Mayer, received a golden parachute of around $23 million when the company was sold to Verizon. Even though Yahoo had faced a decline during her leadership tenure, her contract provided this significant payout upon her departure.These golden parachutes, while controversial, serve as examples of how some executives are compensated even when the companies they oversee do not perform well.
FAQs about Golden Parachute
What is a Golden Parachute?
A Golden Parachute refers to an agreement between a company and an employee (usually a top-level executive) stipulating that the employee will receive specific significant benefits if employment is terminated. These benefits may include severance pay, cash bonuses, stock options, or other benefits.
What is the purpose of a Golden Parachute?
A Golden Parachute is mainly designed to protect top-tier executives in the event of a sudden job loss, especially during events like mergers and acquisitions. They provide security to executives, who have to make important decisions and strategical steps for the company.
Are Golden Parachutes legal?
Yes, Golden Parachutes are legal but they are subject to certain tax implications under Internal Revenue Code Section 280G. Many countries and regions have tax penalties or regulations that can limit the size of golden parachute packages.
What is a criticism surrounding Golden Parachutes?
The main criticism surrounding Golden Parachutes is that they can be excessively generous, rewarding executives for failure or poor performance. Some critics argue that they’re not in the best interest of shareholders because they consume corporate funds that could be used elsewhere.
Who typically gets a Golden Parachute?
Golden Parachutes are primarily associated with top-level executives. They are more prevalent in large corporations where sudden changes in management personnel are relatively common, especially during takeovers or mergers.
Related Entrepreneurship Terms
- Severance Package
- Change in Control Clause
- Shareholder Activism
- Executive Compensation
- Mergers and Acquisitions
Sources for More Information
- Investopedia: This reputable financial website offers detailed explanations and examples about various finance terms, including Golden Parachute.
- Corporate Finance Institute: They provide professional courses and free resources about finance and accounting, which include extensive information about Golden Parachute.
- Bloomberg: A global business and finance news platform that provides analysis, data, and news on several topics. Their archives may contain informative articles about the Golden Parachute.
- Forbes: An American business magazine known for its listicles and finance articles. They have a vast number of articles explaining finance terms including Golden Parachute.
