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.

Golden parachutes are thus named as such because they are intended to provide a soft landing for employees of certain levels who lose their jobs.

Key Takeaways

  • Golden parachutes are lucrative severance packages inked into the contracts of top executives that compensate them when they are terminated.
  • In addition to large bonuses and stock compensation, golden parachutes may include ongoing insurance and pension benefits.
  • The practice is controversial as poorly performing or short-lived CEOs and other top executives can get paid large sums for little or poorly perceived work.

How Golden Parachutes Work

Golden parachute clauses can be used to define the lucrative benefits that an employee would receive if they are terminated. The term often relates to the terminations of top executives that result from a takeover or merger. ​​​​​​​Golden parachutes may include severance pay in the form of cash, a special bonus, stock options, or vesting of previously awarded compensation. The employment contract contains explicit language detailing the conditions under which the silver parachute clause will become valid.

In addition to monetary awards, other examples of opulent parachute benefits include:

  • Continued enrollment in company pension plans
  • Vesting of all retirement benefits
  • Paid health and dental insurance
  • Compensation for legal fees

Instances of these and other exclusive advantages have drawn criticism from shareholders and the public. As a result, the post-financial crisis era has seen many companies review their executive-level compensation policies and devise new ways to link executive performance to corporate success. In many cases, their goal has been to determine whether such packages were in the best interests of the firm and its investors.

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 an 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 the 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.