What Is a Golden Handshake?
Let me explain what a golden handshake is: it's a clause in an executive's contract that guarantees them a substantial severance package if they lose their job for reasons like dismissal, layoff, or even retirement. You see this mostly with top executives, and the payout is negotiated upfront before they sign on. The payment can come in forms like cash or stock options, but remember, these perks have faced scrutiny because they don't always motivate better performance.
How a Golden Handshake Works
Here's how it operates: these agreements are set up as pre-negotiated deals that kick in if the executive leaves involuntarily early. You might get cash, stock options, or whatever the contract specifies. Companies use them to lure high-caliber talent, especially those not currently employed elsewhere. Keep in mind, these can be worth millions, so as an investor, you should pay attention to them—for instance, back in 1989, R.J. Reynolds Nabisco handed F. Ross Johnson about $50 million under such a clause.
Special Considerations
You should know that golden handshakes aren't just for executives; sometimes non-executives get a version of it, though it's usually smaller—call it a silver handshake if you will. For example, auto companies might buy out union workers' contracts to hire cheaper labor, or offer severance to those pushed into early retirement. It's still better than nothing, but it pales compared to what CEOs receive.
Criticism of Golden Handshakes
Critics point out several issues with golden handshakes. First, they often reward executives even when they miss goals or fail to deliver results, since the benefit isn't linked to performance. Even worse, you might see payouts for negligence or wrongdoing, which can tarnish a company's image as it looks like rewarding failure. And let's be direct: these executives already earn more than regular employees, so adding this on top fuels public upset.
Examples of Golden Handshakes
Take British Petroleum's case: after the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, which cost the company over $69 billion, CEO Tony Hayward was ousted but walked away with a $1.5 million salary payout plus his $17 million pension. Another one is Merrill Lynch during the 2007-2008 financial crisis—Chairman and CEO Stanley O'Neal left with $161.5 million despite the company's $2.3 billion loss and a government fine tied to subprime mortgages. In the broader crisis, many bank executives got huge packages even as their firms collapsed, leading to shareholder backlash and some reforms like non-binding votes on pay.
Golden Handshake FAQs
You might wonder what getting a golden handshake means—it's simply a high-value severance for top executives if they lose their job. Yes, they're still in use to attract key talent. The opposite could be a golden hello, like a signing bonus at the start of employment.
The Bottom Line
In summary, a golden handshake is a contract provision giving executives a big severance if they're fired, laid off, or retire, often worth a lot due to their value to the company. But as you've seen, they're criticized for seemingly rewarding failure or negligence.
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