Golden Handshake: Definition, Examples, Controversies

What Is a Golden Handshake?

The term golden handshake refers to a clause in an executive's contract that provides them with a significant severance package if the employee loses their job due to firing, restructuring, negligence, or retirement. Golden handshakes are normally provided to top executives in the event that they lose employment. The amount paid out is commonly negotiated before the contract is signed. Payment of a golden handshake can be made in a variety of ways, including cash and stock options. Golden handshakes and other similar perks have come under scrutiny because they don't necessarily motivate the employee.

How Golden Handshakes Work

Executive compensation often comes in a variety of forms, which can be negotiated before the individual joins the company. Compensation for these employees often includes their salaries, stock options, cash, and bonuses. But in order to attract the right people, companies may often include other benefits and incentives. Some of these other perks may include compensation that isn't directly related to their job performance, such as the golden handshake.

A golden handshake is usually negotiated before the employee is onboarded. It refers to a payment made to the employee if they lose their job because of firing, layoff, restructuring, negligence, and even retirement. As noted above, this type of benefit is commonly used as a tactic to hire specific individuals—especially those who aren't already employed with the hiring company.

These golden handshakes can reach in the millions of dollars range, which makes them a very important issue for investors to consider. For example in 1989, R.J. Reynolds Nabisco paid F. Ross Johnson over $52 million as part of a golden handshake clause. Some contracts, along with compensation, include non-compete agreements, which state that the employee is not allowed to open a competing business for a specified period of time after they are terminated.

Special Considerations

Certain non-executives may also receive a golden handshake as a bonus in some cases. It is usually drastically different than the compensation that chief executive officers (CEOs) and top executives get, so one might call it a silver handshake. Nevertheless, it is better than leaving with nothing. 

An example of this is automotive companies that buy out union workers' contracts. This can then free up that capital to hire new workers at a more advantageous labor cost. Another example is people who are forced into early retirement. Often times companies want to bring in new talent so these people are paid severance packages.

Criticism of Golden Handshakes

Golden handshakes can be very controversial for a number of reasons. As noted earlier, these benefits aren't necessarily related to the employee's job performance. This means that the executive is still compensated even if they cannot deliver results. Even more baffling to critics is that some executives may still be paid a golden handshake if they're let go because of negligence.

This kind of benefit can damage a company's public image because large executive payoffs are viewed as a reward for failure. And these individuals are often paid higher salaries than employees who aren't on the executive team.

Examples of Golden Handshakes

Golden handshakes often make headlines, notably when executives don't meet targets or goals, or even in cases where the company experiences a bad public relations (PR) incident. The following are just two examples of famous golden handshakes.

British Petroleum

Oil company British Petroleum (BP) had an oil spill in 2010 that occurred in the Gulf of Mexico as a result of an explosion of the Deepwater Horizon oil rig. The rig was leased to BP for exploration of the Macondo Prospect, an oil field off the coast of Louisiana.

After the accident, which resulted in costs to the company of more than $69 billion, BP's CEO Tony Hayward was pushed out. However, he received a golden handshake payout of a year's salary, worth $1.5 million, in addition to keeping his approximately $17 million pension fund.

Banks

Other famous golden handshake controversies occurred during the 2007-2008 financial crisis. After many banks struggled financially, many top executives were forced to depart. But before they left, their large pay packages were left intact. Some big banks allowed top-level staff to cash out of incentive programs by accelerating the vesting of their stock awards.

Bank shareholders (who were left with worthless stock and bond investments) were upset by these agreements. Since then, some companies have given investors a say on executive pay packages at shareholder meetings. These shareholder votes are usually non-binding. But they do provide a strong signal to management about investors' attitude toward excessive executive payouts.