A golden parachute is an agreement between an organization and an employee (usually a senior executive) stating that the employee will receive certain significant benefits when the employee is laid off. Golden parachutes are contracted with key executives and can be used as a kind of anti-takeover measure, often collectively referred to as a poisonous drug, adopted by a firm to discourage an unwanted takeover effort. Benefits may include stock options, cash bonuses, and generous severance pay. For example, after a change of ownership or a shake in management, the golden parachute clause in an executive’s employment contract may determine that the executive will be paid special severance pay, bonus, stock option, or another cash benefit upon his departure from the company. Benefits offered to employees include stock options, severance pay, cash bonuses, or other benefits.
The term “golden parachute” was first used in 1961. Charles C. Tillinghust Jr., former president, and chief executive of Trans World Airlines, was credited as the first gold parachute recipient when the company was trying to gain control away from Howard Hughes. In the 1980s, Golden Parachutes encouraged shareholders to challenge China’s legitimacy of parachutes, the SEC’s “Termination of Termination Agreement,” and aimed at limiting the size of future parachutes by three years on special provisions on the 1986 Deficit Reduction Act. In the case of Hughes regaining control of the company and dismissing Tillinghast, the company gave Tillinghust a clause in its contract that would have provided him with a large sum of money if he had lost his job. In Switzerland, a referendum, which would “empower shareholders to veto executive pay plans with gold parachutes”, was voted on March 3, 2013. Voters have approved measures to limit the CEO’s salary and ban gold parachutes.
Golden Parachute Clauses can be used to define their profits if an employee is terminated. The term is often associated with the termination of top executives as a result of takeovers or mergers. When someone is given an executive position at the firm, the contract often includes a golden parachute clause. This clause specifies the amount of the severance pay, the stock options, and the cash bonus that he will receive. John M. of Harvard, entitled “Golden Parachutes and Shareholders’ Assets.” A survey from the Olin Center found that corporations supplying gold parachutes were more likely to acquire and had lower market prices and share prices. Examples of these and other distinct benefits have drawn criticism from shareholders and the public. As a result, in the aftermath of the post-financial crisis, many companies have reviewed their executive-level compensation policies and seen new ways to link executive performance to corporate success. Golden parachutes have benefited companies and individuals but they have also created some controversy.
Golden parachutes are used to attract top talent. Executives want protection – especially if the company is in an industry that is at risk of M&A or if the company experiences high executive turnover rates. Golden parachutes can help relieve the stress that executives feel about their work. Many of them are afraid that making the wrong decision or going the wrong way in key decisions can cause them to lose their jobs, so they are reluctant to take risks or go against the status quo. Competitors wanting to acquire a company with a golden parachute for its top executives think twice about being involved in adverse takeovers as they will then be responsible for providing costly completion packages to take control of the company and replace the additional management team. Under Dodd-Frank law, corporations must vote shareholders on potential Golden Parachute payouts, separate from any attachment or other sale-related issues.