Golden Parachute

What is a 'Golden Parachute'

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. Golden parachutes are contracts given to key executives and can be used as a type of anti-takeover measure, often collectively referred to as poison pills, taken by a firm to discourage an unwanted takeover attempt. Benefits may include stock options, cash bonuses and generous severance pay.

BREAKING DOWN 'Golden Parachute'

Golden parachute clauses can be used to define the lucrative benefits that an employee would receive if he is terminated. The term often relates to the terminations that result from a takeover or merger.

Controversy Surrounding Golden Parachutes

The use of golden parachutes is controversial. Supporters believe that golden parachutes make it easier to hire and retain top executives, particularly in merger-prone industries. In addition, proponents believe that these lucrative benefit packages allow executives to remain objective if the company is involved in a takeover or merger, and that they can discourage takeovers because of the costs that are associated with the golden parachute contracts.

Opponents of golden parachutes argue that executives are already well-compensated and should not be rewarded for being terminated. Opponents may further argue that executives have an inherent fiduciary responsibility to act in the best interest of the company, so they should not need additional financial incentive to remain objective and act in the manner that best benefits the company. In addition, many people who disagree with golden parachutes cite that the associated costs are minuscule compared to the takeover costs and, as a result, can have little to no impact on the outcome of the takeover attempt.

Examples of Golden Parachutes

Some examples of golden parachutes that have been reported in the press include:

• Meg Whitman, chief executive officer (CEO) of Hewlett-Packard Enterprise, stands to receive almost $9 million if there is a change of control at the company and more than $51 million if she is terminated.

• Until a federal court blocked it in May 2016, Staples Inc. and Office Depot Inc. were looking to merge. If they had done so, the CEO of Office Depot would have collected $39 million under his golden parachute.

Dell Inc. is in the process of merging with storage giant EMC Corporation. By virtue of his golden parachute, EMC's CEO will receive compensation worth $27 million.