Golden Parachute

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DEFINITION of 'Golden Parachute'

Substantial benefits given to a top executive (or top executives) in the event that the company is taken over by another firm and the executive is 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 antitakeover measure taken by a firm to discourage an unwanted takeover attempt. Benefits include items such as stock options, cash bonuses, generous severance pay or any combination of these benefits.

Also known as "change-in-control benefits."

INVESTOPEDIA EXPLAINS 'Golden Parachute'

Golden parachute clauses can be used to define the lucrative benefits that an employee would receive in the event he or she is terminated; however, the term often relates to terminations that result from a takeover or merger. 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 benefits 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 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, and, therefore, should not need additional financial incentive to remain objective and to act in the manner that best benefits the company. In addition, many people who disagree with golden parachutes cite that the associated costs are miniscule when compared to the takeover costs and, as a result, can have little to no impact on the outcome of the takeover attempt.

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