A "Golden Parachute" is a large severance package that is provided to a senior executive or member of a board of directors in the event of a merger, acquisition, or other change in corporate control. This compensation package is meant to provide financial protection to the executive or director in the event of job loss or other involuntary termination that occurs as a result of this change in control. The "Golden Parachute" typically includes a substantial amount of cash, stock options, or other benefits that are designed to make the executive's transition to a new position or retirement less difficult and more financially secure. Critics of Golden Parachutes argue that they can encourage executives and directors to prioritize their own financial interests over the long-term interests of the company and its shareholders.
The structure of compounding executive pay packages has been one of the most debated topics in corporate America. One of the most coveted term among the executives hunting for a new job is the “Golden Parachute”. This term has made its way into everyday lexicon, but what is a Golden Parachute, exactly?
A Golden Parachute is an agreement that offers significant financial benefits to an executive in the event of their termination from the company due to a merger or acquisition, or any other form of ownership change. In simpler terms, it is a type of severance package that provides payouts to the executive if a company takes over the firm they're employed with.
Golden Parachute is intended to protect executives from forced exits, or mergers and acquisitions, which causes instability and uncertainty for the employees. Such agreements give executives a sense of financial security, especially when there might be a competitive scenario for shareholders or the company.
However, Golden Parachutes have been criticized for being excessive and unfair to shareholders. Critics argue that executives should not be rewarded for being terminated, especially if the termination is due to poor performance. Additionally, Golden Parachutes can be costly for the company and can lead to a decrease in shareholder value.
The first instances where Golden Parachute appeared in corporate America was when the Securities and Exchange Commission (SEC) passed a regulation in the late 1960s. This regulation forced public companies to share merger-related information with their shareholders.
In the 1980s, Golden Parachutes were given as a way to retain executives during a takeover event. Executives are incentivized to stay with the company in times of uncertainty and disruption when they are being fought over. In the decades since the 1980s, the use of the Golden Parachute has grown in popularity, fueled in part by the increasing levels of executive compensation.
However, the use of Golden Parachutes has also faced criticism. Critics argue that these agreements can incentivize executives to prioritize their own financial gain over the long-term success of the company. Additionally, Golden Parachutes can be seen as a form of excessive compensation, especially when they are awarded to executives who have not performed well or have been involved in unethical behavior.
The benefits of a Golden Parachute may include the ability to attract top-level executives to a company that might not have been able to, and the chance to lock these executives in place during a takeover process. Companies can also avoid publicly defying the shareholders in Golden Parachute scenarios, which is a clear winner fundamentally.
However, critics of Golden Parachutes argue that these agreements cost shareholders too much money and encourage executives to put their own interests above those of the company. Another argument is that executives have an unfair advantage and are already well-compensated, and they don't deserve any more money after the cost of the M&A is taken out.
Golden Parachutes have long been debated for their potential to disrupt shareholder value. Companies that offer Golden Parachutes may be more attractive to potential executives, but it may not benefit shareholders. Critics argue that these packages are nothing more than an unnecessary expense that benefits executives and disproportionately puts a burden on shareholders.
In the case of a company takeover, the acquiring company may experience short-term dips in the stock value due to the expensive Golden Parachute payouts, which puts shareholders in a quandary.
Golden Parachute Agreements have several crucial features. The agreements generally offer executives a payout during a merger, acquisition, or exit situation. Also, the amount of the payout is often calculated based on the executive's base salary along with other components like bonus payments and stock options.
Another crucial feature is that Golden Parachutes usually have a “double trigger” clause. The trigger clause allows a payout to the executive only if two separate events occur: a change in control or ownership, as well as termination (i.e., loss of job) upon that change in control or ownership.
One conspicuous golden parachute package was that of former Honeywell CEO David Cote. In the event of a change of control, he would receive a payout of $208 million, or 7% of the company’s market cap at the time. Another example is Coca-Cola’s Muhtar Kent, whose golden parachute package was worth $20 million in 2016.
In many cases, Golden Parachute Agreements require shareholder approval. Shareholders must approve these agreements, which often include financial payments that go beyond what was offered to other company employees. It is common practice for companies to have consultations with their shareholders to ensure any golden parachute agreements are accepted.
Golden Parachutes have faced criticism over the years, frequently blasting out a debate in the public arena. Many corporate management analysts believe these policies to be unfair and undermining to shareholder value. One of the most notable criticisms of Golden Parachutes is that very often, these agreements offer unreasonable amounts of money in regards to the executive’s value that he/she brings to the company.
Companies aiming to retain top talent and offer alternatives to Golden Parachutes must think of other creative ways to incentivize their executives to stick around, especially during an acquisition. Some companies incentivize executives with a non-compete clause that prevents the executive from working with the competitors of the company after exiting. Flexibility in working arrangements has become increasingly more important since the pandemic, and companies can adapt by being more flexible in their employee benefits packages.
The topic of Golden Parachutes for executives is complicated, with both pros and cons that need to be considered. While executive pay packages have always been high in the corporate world, many businesses argue that Golden Parachutes have gone too far in incentivizing executives at the expense of shareholders. It is the responsibility of the Board of Directors to ensure that their company’s compensation packages are well-balanced, promote fairness, and offer benefits to both shareholders and executives.