A golden parachute
is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is unspecified. These benefits may include severance pay, cash bonuses, stock options, or other benefits. They are designed to reduce perverse incentive
A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences.- Examples :...
s — paradoxically (and ironically) they may create them.
Proponents of golden parachutes argue that they provide three main benefits:
- 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.
- Dissuade takeover attempts by increasing the cost of a takeover, often part of a Poison Pill
A shareholder rights plan, colloquially known as a "poison pill", or simply "the pill" is a type of defensive tactic used by a corporation's board of directors against a takeover...
strategy, although tin parachutes (giving every employee takeover benefits and/or job protection) are generally far more effective in this regard.
Critics have responded to the above by pointing 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.
The use of golden parachutes have caused some investors concern since they don't specify that the executive has to perform successfully to any degree.
The first known use of the term "golden parachute" dates back to when creditors sought to oust Howard Hughes
Howard Robard Hughes, Jr. was an American business magnate, investor, aviator, engineer, film producer, director, and philanthropist. He was one of the wealthiest people in the world...
from control of TWA
The Twa are any of several hunting peoples of Africa who live interdependently with agricultural Bantu populations, and generally hold a socially subordinate position: They provide the farming population with game in exchange for agricultural products....
airlines. The creditors provided Charles C. Tillinghast Jr.
Charles Carpenter Tillinghast, Jr. was a chairman of Trans World Airlines and chancellor of Brown University.-Biography:...
an employment contract—dubbed a golden parachute in likely reference to the protection a parachute
A parachute is a device used to slow the motion of an object through an atmosphere by creating drag, or in the case of ram-air parachutes, aerodynamic lift. Parachutes are usually made out of light, strong cloth, originally silk, now most commonly nylon...
offered—with protection against the almost definite job loss Tillinghast would have faced if famed aviator
An aviator is a person who flies an aircraft. The first recorded use of the term was in 1887, as a variation of 'aviation', from the Latin avis , coined in 1863 by G. de la Landelle in Aviation Ou Navigation Aérienne...
Howard Hughes had successfully maintained control of TWA.
The use of the term "golden parachute" has significantly increased in 2008 because of the global economic recession, especially being used by news media and in the 2008 Presidential Debates
The bipartisan Commission on Presidential Debates sponsored four debates for the 2008 U.S. presidential general election, which took place at various locations around the United States in September and October 2008...
The use of golden parachutes expanded greatly in the early 1980s in response to the large increase in the number of takeovers and mergers.
According to a 2006 study by the Hay Group
Hay Group or The Hay Group is a global human resources management consulting firm headquartered in Philadelphia, with offices worldwide. It was founded in 1943 by Edward N. Hay. In 1984 the firm was purchased by Saatchi & Saatchi, but returned to private ownership in 1990 after a management...
human resource management firm, the French executives' golden parachutes are the highest in Europe, and equivalent to the funds received by 50% of the American executives. In contrast, the French standard revenues for executives located themselves in the European average. French executives receive roughly the double of their salary and bonus in their golden parachute.