A golden parachute is an agreement between a company and an employee (usually an upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. These may include severance pay, cash bonuses,

stock option In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified d ...

s, or other benefits. Most definitions specify the employment termination is as a result of a merger or takeover,golden parachute
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:London.golden parachute
. ''Miriam-Webster Online''.

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. also known as "change-in-control benefits",Golden parachutes on the rise during down economy
by Éric L’Italien, Lawyer, Norton Rose Canada, Deal Law Wire, 5 April 2012 but more recently the term has been used to describe perceived excessive CEO (and other executive)

severance package A severance package is pay and benefits that employees may be entitled to receive when they leave employment at a company unwillfully. In addition to their remaining regular pay, it may include some of the following: * Any additional payment base ...

s unrelated to change in ownership (also known as a golden handshake).CEOs' golden parachute exit packages pass $100 million
By Gary Strauss, USA TODAY 11/8/2011

History

The first use of the term "golden parachute" is credited to a 1961 attempt by creditors to oust

Howard Hughes Howard Robard Hughes Jr. (December 24, 1905 – April 5, 1976) was an American business magnate, record-setting pilot, engineer, film producer, and philanthropist, known during his lifetime as one of the most influential and richest people in t ...

from control of Trans World Airlines. The creditors provided

Charles C. Tillinghast Jr. Charles Carpenter Tillinghast Jr. (January 30, 1911 – July 25, 1998) was a chairman of Trans World Airlines and chancellor of Brown University. Biography Charles C. Tillinghast Jr. was born in Saxtons River, Vermont on January 30, 1911. He was ...

an employment contract that included a clause that would pay him money if he lost his job. The use of golden parachutes expanded greatly in the early 1980s in response to the large increase in the number of

takeovers In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to ...

and mergers. American executive pay practices were subject to increasing public scrutiny in the 1980’s. During the 1980’s hostile takeover wave, the practice of using golden parachutes in an executive's compensation package began to spread rapidly. By 1981, some 15% of the 250 largest U.S. corporations had golden parachutes in place. In Europe the highest "change-in-control benefits" have been for French executives, as of 2006 according to a study by the Hay Group human resource management firm. French executives receive roughly double their combined salary and bonus amounts in their golden parachute. News reference volume of the term "golden parachute" spiked in late 2008 during the global economic recession, and 2008 US presidential debates. Despite the poor economy, in the two years before 2012 a study by the professional services firm Alvarez & Marsal found a 32% increase in the value of "change-in-control benefits" provided to US executives. In late 2011, ''

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'' reported several

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retirement packages in excess of $100 million, "raising eyebrows even among those accustomed to oversized payouts". In the 1980s, golden parachutes prompted shareholder suits challenging the parachutes' validity, SEC "termination agreement disclosure rules" in 1986, and provisions in the

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aimed at limiting the size of future parachutes with a special tax on payouts that topped three times annual pay. In the 1990s in the United States, some government efforts were made to diminish "change-in-control benefits". As of 1996, Section 280G of the Internal Revenue Code denies a corporation a deduction for any excess "parachute payment" made to a departing employee, and Section 4999 imposes on the recipient a nondeductible 20% excise tax, in addition to regular income and Social Security taxes. The 2010 United States Dodd-Frank Act includes in its provisions a mandate for shareholder votes on any future adoption of a golden parachute by publicly traded firms.Golden Parachutes and the Wealth of Shareholders
Harvard Law and Economics Discussion Paper No. 683 , Lucian A. Bebchuk, Alma Cohen, Charles C. Y. Wang , 1 December 2010 In

Switzerland ). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...

, a referendum which "would give shareholders the power to veto executive pay plans, including golden parachutes" was put to a vote on March 3, 2013.Revill, John; Walen, Jeanne; Morse, Andrew (February 20, 2013). "Furor Ends $78 Million Pay Deal". ''

Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...

'', pp B1. Voters approved measures limiting

pay and outlawing golden parachutes.

Studies and reports

One study found golden parachutes associated with an increased likelihood of either receiving an acquisition offer or being acquired, a lower premium (in share price) in case of an acquisition, and higher (unconditional) expected acquisition premiums. It found firms adopting golden parachutes have lower market value compared to assets of the company and that their value continues to decline during and after adopting golden parachutes. "Gratuitous" payments made to CEOs on agreeing to have their companies acquired (i.e. payments made to CEOs by the acquiring company not mandated under the CEO's contract at the time the company is acquired) have been criticized. A "prominent" mergers and acquisitions lawyer told the ''

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'' that "I have had a number of situations where we've gone to management looking to do a deal and been stopped at the door until a compensation arrangement was signed, sealed, and delivered." Another lawyer told the ''Times'': "Publicly, we have to call these things retention bonuses. Privately, sometimes it's the only way we would have got the deal done. It's a kickback."Bebchuk and Fried, ''Pay Without Performance'' (2004), p.92 A study investigating acquirer-paid sweeteners at 311 large-firm acquisitions completed between 1995 and 1997 found that CEOs of the acquired companies accept lower acquisition premiums when the acquirer promised them a high-ranking managerial post after the acquisition. Golden parachutes are often viewed as excessive due to the substantial payouts given to senior management after an acquisition. This is further seen as excessive because other stakeholders during these acquisitions can be subject to layoffs. Golden parachutes can preserve a firms value for all stakeholders and are set in place to protect CEO’s during potential takeover situations. On June 24, 2013, ''The Wall Street Journal'' reported that McKesson Corporation chairman and CEO John Hammergren's pension benefits of $159 million had set a record for "the largest pension on file for a current executive of a public company, and almost certainly the largest ever in corporate America." A study in 2012 by GMI Ratings, which tracks executive pay, found that 60% of CEOs at S&P 500 companies have pensions, and their value averages $11.5 million. On June 29, 2013, ''The New York Times'' reported on research findings suggesting that "despite years of public outcry against such deals, multimillion-dollar severance packages are still common", and they continue to become "more complex and opaque".

Arguments for and against

Support

Proponents of golden parachutes argue that the parachutes provide benefits to stockholders: * Make it easier to hire and retain executives, especially in industries more prone to mergers. * Help an executive to remain objective about the company during the takeover process, and possible loss of position after takeover. * Dissuade takeover attempts by increasing the cost of a takeover, often part of a poison pill strategy. * It helps the CEO to implement long-term targets thereby increasing revenue of the organisation (Mapetuse 2018)

Opposition

While critics have pointed out that: * Dismissal is a risk in any occupation, and executives are already well compensated. * Executives already have a fiduciary responsibility to the company, and should not need additional incentives to stay objective. * Golden parachute costs are a very small percentage of a takeover's costs and do not affect the outcome. * Benefits create

perverse incentive A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentional ...

References