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. Payment can be made several ways, such as cash or stock options.

BREAKING DOWN 'Golden Handshake'

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.

Golden Handshake Controversy

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.

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