What’s a golden parachute?

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Golden parachute clauses in executive employment contracts provide benefits if the employee loses their job, often due to a company acquisition. Benefits can include reduced stock rates and generous severance pay, but can also lead to unintended consequences such as facilitating acquisitions or paying incompetent executives. Investors may be frustrated by the lack of consideration for job competence and lower-level employees may suffer from job loss due to paying large severance to CEOs. Golden handshake is a related term for extra bonuses or severance pay to encourage retirement.

If you are hired in a higher-level executive position, your employment contract will usually have several statements about what types of benefits you can expect to receive if your employment is terminated. These contract clauses are called the golden parachute since they will effectively provide the employee with a smooth, safe and valuable “landing” if he or she loses his or her job. They can be offered under many different circumstances and the benefits of being fired can be tremendously lucrative.

Golden parachute clauses often contain language stating that these benefits will only be available if a company is acquired by another company and thus the employee loses his job. If enough employees in the upper echelons of a company have golden parachute options in their contracts, it might discourage another company from trying to annex or take over a company. It can cost a lot of money to provide these benefits to many employees.

Typical benefits of a golden parachute include allowing the employee to own or purchase large amounts of stock at reduced rates and granting the employee generous cash grants or severance pay. Under certain circumstances, the golden parachute can include payouts of over a million dollars and provides a type of what is called a perverse incentive. This is a kind of incentive with unintended consequences. In that case, the hope is that gold parachutes will consequently discourage hostile takeovers.

On the other hand, it can be argued that an unintended consequence of golden parachutes is the possibility for executives to facilitate the acquisition of their company, in order to benefit from receiving attractive payments and stock options. These clauses that define ultimate benefits must be worded precisely and many argue that in some cases they do not define enough, and people who are not entitled to payments receive them. They may not take into account the competency factor. If a company needs to terminate someone’s job due to a lack of competence, the person could still receive golden parachute payments, depending on the exact wording in their contract.

Investors can get frustrated with gold parachute options for this specific reason. If job competence is not listed as an important part of earning severance, the company may lose money by providing parachutes to terminated executives. Lower-level employees can also pay for these “parachutes”, losing their jobs if a company has to reduce expenses due to paying large severance pay to incompetent CEOs.

The golden parachute is not to be confused with the golden handshake. This is a related term and is usually an extra bonus or severance pay that is intended to encourage long-time workers to retire more quickly. By doing so, they will receive better retirement options and pave the way for a company to hire workers at a lower rate of pay.

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