What Is a Golden Parachute?

What Is a Golden Parachute?

Golden parachutes are a type of employment contract that specifies the type of severance or retirement benefits that top executives will receive when they leave their high-ranking positions. Learn more about the operation of golden parachutes.


What Is a Golden Parachute?

A golden parachute agreement is an agreement between a key executive and a public or private company that specifies the compensation package that a senior-level employee will receive upon job termination or if ownership changes. Severance pay, stock options, shareholder votes, cash bonuses, and other perks are common components of golden parachutes. This "parachute" provides a soft landing for senior executives.

In 1961, Charles C. Tillinghast, Jr. of Trans World Airlines was the first recipient of a golden parachute. The airline offered Tillinghast a lucrative package if businessman Howard Hughes, the company's majority shareholder, took control and fired him.


What Is the Function of Golden Parachutes?

Golden parachutes are a type of executive compensation given to high-ranking employees to ensure they will receive adequate severance pay and other benefits if they are terminated. Taking on senior-level positions such as chief executive officer or chief financial officer can be risky due to the possibility of mergers, layoffs, or takeover attempts. As a result, these pension plans and payouts incentivize people to take on these risky, time-consuming jobs.


The Golden Handcuffs versus the Golden Handshake versus the Golden Parachute

Financial agreements between high-level employees and companies are referred to as golden parachutes, handshakes, and handcuffs, but there are significant differences. Discover more about each term:

Golden Handcuffs: This refers to a distinct set of benefits that a key employee will receive if they remain with the company or do not leave before a certain date.

Golden handshake: This type of leave agreement provides greater pension benefits than golden parachute agreements and generally applies to employees who are laid off, retire, or otherwise leave the company while in good standing (for example, after decades of quality service).

Golden parachute: The term "golden parachute" refers to the monetary benefits received when leaving a company. Historically, golden parachute clauses stipulated retirement packages only if there was a change in control (through a merger or hostile takeover, for example).


3 Advantages of a Golden Parachute

Giving golden parachutes to high-ranking executives has some advantages in terms of business strategy. When your company has positions to fill, a golden parachute can:

1. Attract top talent: Offering golden parachutes as part of an employment package can help attract quality job candidates.

2. Incentivize good work: These financial agreements can help incentivize employees to achieve great things in the name of the company rather than for personal gain.

3. Encourage amicable relationships: Golden parachutes promote a more amicable exit strategy and cordial relationship during job termination.


3 Disadvantages of a Golden Parachute

The use of golden parachutes may elicit some criticism and disadvantages. A golden parachute may:

1. Create resentment: The benefits of golden parachutes can be so massive that other employees feel inferior.

2. Reward underperformance: A top-level employee may underperform, lose their job, and still receive their golden parachute package, resulting in a win for the employee but a significant loss for the company.

3. Displease shareholders: Shareholders are often opposed to the golden parachute because they believe it is not a fair use of their money and investments.