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.