Golden Parachute Definition

A golden parachute is a financial arrangement in a company's executive's employment contract that provides substantial benefits if they are terminated or experience a change in control of the company, often including substantial severance pay and other perks.

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Usually, those circumstances are a merger with or takeover by another firm—closely followed by the termination of the executive. Benefits included in a golden parachute may include cash bonuses, stock options, and additional severance payments.

How Golden Parachutes Work

The meaning of “golden parachute” comes from the desire to provide terminated executives with a soft landing after their job ends. Golden parachutes are contracts that set out the terms and conditions of an executive’s departure. They are triggered only under specific circumstances. Often, these special compensation packages are so expensive that they are known as “poison pills” to discourage takeovers. The cost of paying a company’s golden parachute liabilities can be so unattractive that it discourages a merger or acquisition.

Golden Parachute Benefits

The definition of a golden parachute makes clear that the benefits of these contracts are quite rich. They include monetary awards and other perks. Some of those benefits may include:  

  • Paid health and dental insurance for as long as the plan allows,
  • Vesting of all stock options,
  • Vesting of all unvested retirement benefits, and
  • Guaranteed payment of legal fees for any post-employment litigation.

As you can see, the golden parachute advantages for a former executive can be quite pricey for a company. Automatic vesting of stock options alone can sometimes cost tens of millions of dollars. As a result, many savvy investors have pressured companies to re-think how senior executives’ compensation packages should look. 

Golden Parachute Disadvantages

As we mentioned, golden parachutes can present many disadvantages for companies. While companies sometimes use them to attract and maintain talent, opponents argue that qualified executives should not need many layers of incentives to accept a plum leadership role. Opponents also argue that short-tenured or incompetent CEOs should not be handsomely rewarded for poor work. Additionally, some opponents of golden parachutes believe that companies that are frequent takeover targets do not retain talent by offering golden parachutes. These opponents believe that golden parachutes put the company at several layers of financial disadvantage.

Golden Parachute Examples

Golden parachutes can run into the hundreds of millions of dollars. One of the most famous examples of a golden parachute is General Electric’s golden parachute for its renowned CEO, Jack Welch. At the time of his departure, he was surrounded by controversy, including issues about the potential misuse of company jets. Nonetheless, Welch was awarded over $400 million in golden parachute payments. This included over nine million dollars in annual payments for life! 

Golden Parachute Definition: Summary

  • Golden parachutes are lucrative benefit packages memorialized into contracts for top corporate executives.
  • These contracts go into effect when executives are terminated, either after a corporate takeover or as a result of other special circumstances.
  • A golden parachute may include such benefits as cash, vesting of options and retirement benefits, and payment of insurance and pension benefits.
  • Opponents of golden parachutes believe that these contracts do not have the intended effect and instead reward poor performers and short-tenured executives for poor work.

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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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