What Is a Golden Parachute?
Let me explain what a golden parachute is. It's a set of substantial benefits given to top executives if their company gets taken over by another firm and they end up terminated as a result of that merger or takeover. These are formal contracts with key executives, and they act as a type of anti-takeover measure—often lumped in with things like poison pills—to discourage unwanted acquisition attempts. The benefits can include stock options, cash bonuses, and generous severance pay.
Think of them as a soft landing for high-level employees who lose their jobs; that's why they're called golden parachutes.
Key Takeaways
You should know that golden parachutes are lucrative severance packages written into the contracts of top executives to compensate them upon termination. Besides large bonuses and stock compensation, they might cover ongoing insurance and pension benefits. This practice draws controversy because it can pay out big sums to CEOs or executives who performed poorly or didn't stay long.
How Golden Parachutes Work
Golden parachute clauses define the lucrative benefits an employee gets if they're terminated, often tied to top executives losing jobs due to a takeover or merger. These can include severance pay as cash, special bonuses, stock options, or vesting of prior compensation. The contract spells out exactly when the clause kicks in.
Beyond money, these benefits might extend to continued enrollment in company pension plans, vesting of all retirement benefits, paid health and dental insurance, or even compensation for legal fees. After the financial crisis, many companies revisited these executive compensation policies to tie them more closely to performance and check if they're truly in the best interests of the firm and its investors.
Controversy Surrounding Golden Parachutes
The use of golden parachutes is controversial. Supporters say they make it easier to hire and keep top executives, especially in industries prone to mergers. They also argue that these packages help executives stay objective during a takeover and can deter acquisitions due to the added costs.
Opponents counter that executives are already well-paid and shouldn't get rewarded for being let go. They point out that executives have a fiduciary duty to act in the company's best interest without needing extra incentives. Plus, the costs of these parachutes are often small compared to overall takeover expenses, so they might not really influence the outcome.
There's also the golden handshake, which is similar but includes severance for executives upon retirement as well as termination.
Examples of Golden Parachutes
Here are some real-world examples that have made headlines. Meg Whitman, as CEO of Hewlett-Packard Enterprise, was set to receive almost $91 million if the company was acquired under her watch, or more than $51 million if terminated. She ended up with $35.6 million after the company was scaled back.
When Staples and Office Depot considered merging but got blocked by a federal court in May 2016, the Office Depot CEO would have gotten $39 million under his golden parachute terms if it had gone through. In another case, Dell's 2016 merger with EMC netted EMC's CEO $27 million in compensation per his parachute agreement.
Other articles for you
The text explains morbidity rate as a measure of disease occurrence in populations, distinguishing it from mortality rate and its uses in health and insurance.
Earnings per share (EPS) is a key metric that measures a company's profitability by dividing net income by outstanding shares.
The GARCH process is an econometric model for estimating volatility in financial markets, providing a realistic approach to predict asset prices and rates.
A nonperforming asset (NPA) is a loan or advance in default or arrears, burdening lenders and requiring classification and recovery actions.
Triangular arbitrage is a forex trading strategy that exploits exchange rate discrepancies among three currencies to generate profit through a series of rapid trades.
The spot rate is the current market price for immediate settlement of assets like currencies, commodities, or securities.
The Global Financial Stability Report is a semiannual IMF publication assessing global financial stability and emerging market financing risks.
Japanese Government Bonds are low-risk securities issued by Japan, backed by the government, with various types and influenced by the Bank of Japan's policies.
Wash trading is an illegal practice where traders buy and sell the same security to artificially inflate volumes and mislead investors.
A vostro account is a banking arrangement where one bank holds funds for another, facilitating international financial services.