What is a 'Golden Parachute'

A golden parachute consists of substantial benefits given to top executives if the company is taken over by another firm and the executives are terminated as a result of the merger or takeover. Golden parachutes are contracts with key executives, and can be used as a type of anti-takeover measure, often collectively referred to as poison pills, taken by a firm to discourage an unwanted takeover attempt. Benefits may include stock options, cash bonuses, and generous severance pay.

BREAKING DOWN 'Golden Parachute'

Golden parachute clauses can be used to define the lucrative benefits that an employee would receive if s/he is terminated. The term often relates to the terminations that result from a takeover or merger.

Controversy Surrounding Golden Parachutes

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 benefit 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 that are 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 should not need additional financial incentive to remain objective and act in the manner that best benefits the company. In addition, many people who disagree with golden parachutes argue that the associated costs are minuscule compared to the takeover costs and, as a result, can have little to no impact on the outcome of the takeover attempt.

Then there is the golden handshake. It is similar to a golden parachute in that it offers a severance package to an executive when he or she becomes unemployed. While both terms describe severance packages given to such an executive upon termination of duties, a golden handshake goes further to include the severance packages granted executives upon retirement, too.

Examples of Golden Parachutes

Some examples of golden parachutes that have been reported in the press include:

• Meg Whitman, chief executive officer (CEO) of Hewlett-Packard Enterprise, stands to receive almost $9 million if there is a change of control at the company, and more than $51 million if she is terminated.

• Until a federal court blocked it in May 2016, Staples Inc. and Office Depot Inc. were exploring a merger. Had they merged, the CEO of Office Depot would have collected $39 million under the terms of his golden parachute.

Dell Inc. is in the process of merging with storage giant EMC Corporation. Per the terms of his golden parachute, EMC's CEO will receive compensation worth $27 million.

RELATED TERMS
  1. Golden Life Jacket

    A golden life jacket is a large compensation package offered ...
  2. Golden Bungee

    A benefit conferred to select top executives that is a combination ...
  3. Golden Handshake

    A golden handshake is a stipulation in an employment contract ...
  4. Golden Rule

    The golden rule, as it pertains to government spending, stipulates ...
  5. Golden Share

    A type of share that gives its shareholder veto power over changes ...
  6. Golden Geese

    Golden geese, or a golden goose, is a source of income or profit ...
Related Articles
  1. Investing

    Amazon Wins Patent for Shipping Label Parachute System

    In the future, the company may deliver packages with a shipping label that incorporates a parachute.
  2. Financial Advisor

    Investing After the Golden Age

    How can advisors manage client expectations now that the "Golden Age" of investing is over?
  3. Investing

    Forex Investing: How To Use The Golden Cross

    Many currency traders know about the golden cross, but most don't make full use of it. Learn how you can profit from this FX trend indicator.
  4. Investing

    Mergers And Acquisitions: Understanding Takeovers

    In the language of mergers and acquisitions, battleground terms meld with bizarre metaphors to create a unique vocabulary.
  5. Investing

    Amazon Gets Patent for Data Collecting Drones

    Drones delivering packages aren't enough for Amazon. It wants them to collect data, too.
  6. Trading

    Why A Falling Stock Is Not Always A Bargain

    Learn how to successfully trade pullbacks and to avoid being crushed by "falling safes."
  7. Insurance

    Will "Say On Pay" Go All The Way?

    The Corporate And Financial Institution Compensation Fairness Act is now before Senate. What is it and should it go through?
  8. Retirement

    Top 5 Crucial Things to Do Before You Retire

    Here are five important things to do before you retire to help you enjoy your golden years.
  9. Personal Finance

    Executive Deferred Comp: Understanding NQDC

    Non-qualifying deferred compensation offers benefits and risks for the execs who are eligible.
  10. Investing

    Why Do Companies Care About Their Stock Prices?

    A company's stock price reflects the company's earnings potential, its future viability, determines management compensation can play a critical role in mergers and acquisitions.
RELATED FAQS
  1. Why should I pay myself first?

    The concept of "paying yourself first" is one of the pillars of personal finance and considered the golden rule by many financial ... Read Answer >>
  2. What happens to the shares of a company that has been the object of a hostile takeover?

    Learn about the effect on the share price of companies that are targets of hostile takeovers, which are tactics used by famed ... Read Answer >>
  3. A Hostile Takeover vs. Friendly Takeover

    Learn about the difference between a hostile takeover and a friendly takeover, and understand how proxy fights and tender ... Read Answer >>
  4. How is terminal value discounted?

    Find out why investors use the terminal value, why the terminal value is discounted to the present day, and how it relates ... Read Answer >>
  5. How does a merger affect the shareholders?

    Explore the impact of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
Trading Center