What is Golden Bungee
A golden bungee is a benefit conferred to select top executives that combines a lucrative severance package and deferred cash payment and stock options. A golden bungee is generally included in an executive’s employment agreement and is activated upon a change of control such as an acquisition of the company, or a merger with another entity. The golden bungee can be regarded as a combination of a golden parachute – which is the lucrative severance package component – and a golden handcuff, which is represented by the deferred cash payment and stock options that are offered as inducement for the executive to continue staying with the company.
BREAKING DOWN Golden Bungee
The golden bungee is easy to visualize, since the executive first parachutes down with the severance package from the previous company, but then bounces right back up with the retention package for the new combined entity. The position with the new entity is typically at a similar seniority level as the executive’s position with the acquired company or may be structured as a high-level independent contractor or consultant role.
The rationale offered for the golden bungee is that it helps top executives make strategic decisions regarding the future of the company that are in the best interests of shareholders. Otherwise, if they fear the loss of their jobs on a change of control at their company, they may be inclined to not entertain offers for the purchase or merger of the company.
A criticism of the golden bungee is that it is yet another manifestation of excessive executive compensation. It may also be a deterrent to small companies being bought or acquired, since the buyer or acquirer may balk at the additional expense incurred through the golden bungee. The acquirer may also want to bring in a new management team, in which case it may be difficult to cut the golden bungee without incurring significant additional cost.
Although the executive who is the recipient of a golden bungee undoubtedly views this corporate largesse as his or her rightful due, activist shareholders may view it as a clear case of “double dipping” (i.e. potentially being paid twice), and may ask uncomfortable questions at the next annual general meeting.
Example of a Golden Bungee
A golden bungee might be utilized in the case of an acquisition or merger as a way to place the controlling executive in a stable financial position in order to make decisions that are best for the company and not just directly benefiting to him or her.