What Is a Golden Handshake?
A golden handshake is a stipulation in an employment agreement which states that the employer will provide a significant severance package if the employee loses their job. It is usually provided to top executives for loss of employment through retirement, layoffs or even firing for negligence. However, payment can be made in several ways, such as cash or stock options.
- Golden handshakes are pre-negotiated employment agreements that provide a severance if the employee were to involuntarily leave their position early.
- Payment can be made in cash, stock options, or anything else accepted in the contract.
- Golden Handshakes often come with non-compete clauses
- Golden Handshakes are often controversial and can cause outrage among the general public.
- Sometimes low-level employees receive a smaller version of the golden handshake.
How a Golden Handshake Works
Sometimes these golden handshakes are for millions of dollars, which makes them a very important issue for investors to consider. For example in 1989, R.J. Reynolds Nabisco paid F. Ross Johnson over $53 million as part of a golden handshake clause severance compensation. Some contracts, along with compensation, include non-competition clauses, which state that the employee is not allowed to open a competing business for a specified period of time after employment is terminated.
A golden handshake can also be referred to as a golden parachute.
Occasionally nonexecutives receive a golden handshake type of bonus. It is a far cry from what CEOs and top executives get, one may call it a silver handshake, nevertheless it is better than leaving with nothing.
The easiest example that comes to mind is automotive companies buying out union workers' contracts. This can then free up that capital to hire new workers at a more advantageous labor cost. Another example would people being forced into early retirement. Often times these people are paid severance packages to pack their bags so the company can bring in new talent.
Criticisms of Golden Handshakes
Golden handshakes can be very controversial and can sometimes damage a company's public image because large executive payoffs are viewed as a reward for failure. For example, in 2010 British oil company BP had an oil spill that occurred in the Gulf of Mexico as a result of the explosion and sinking 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 $60 billion, BP's CEO Tony Hayward was pushed out, but nonetheless received a golden handshake payout of a year's salary, worth $1.61 million, in addition to keeping his approximately $17 million pension fund.
Other famous golden handshake controversies involved U.S. banks during the 2008 financial crisis. After many of these banks got into deep financial trouble or collapsed altogether, top executives began to depart with large pay packages intact. Some big banks allowed top level staff to cash out of incentive programs by accelerating the vesting of their stock awards. For example, these golden handshakes received renewed press attention when Antonio Weiss, a former Lazard banker, acknowledged that he received up to $21 million in unvested income and deferred compensation following his departure.
Bank shareholders who were left with worthless stock and bond investments balked. Since then, some companies have given investors a say on executive pay packages at shareholder meetings. These shareholder votes are usually non-binding, but do provide a strong signal to management regarding investors' attitude toward excessive executive payouts like golden handshakes.