Golden Parachute

From ArticleWorld

Much has been written about the concept of a golden parachute over the course of the past ten years. In simple terms, a so-called golden parachute is a clause that is included within the contract for many corporate or business executives. The clause provides that the executive will receive substantial monetary or other compensation if he or she is ever forced to leave his or her employment with the company. These severence packages can include everything from cash payments, to bonus payments, stock options of different types, equity bonds and the like. In many instances, a golden parachute will include a combination of these benefits.

In many instances a golden parachute comes into play when a company is facing the prospect of being acquired by another enterprise. These clauses allow a high ranking executive to get out of the company in a profitable manner before a likely termination with no benefits should the company be taken over by another entity or enterprise.


Golden parachute components

There are three essential components to a golden parachute. These are:

  • The value of acceleration of stock options as well as restricted stock
  • post termination benefits such as health and life insurance for the executive and for his or her family
  • Option plans which allow employees to be covered by a golden parachute program of one sort or another

Golden parachute examples

There are a number of common situations in which golden parachutes come into play, come into effect. A common example is when a change in corporate ownership occurs. The executives are able to "bail out" of the corporation before the corporate ownership change takes place. As a result, the executives can avoid the prospect of being in a financially precarious position should the new owners of the corporation elect to terminate existing executives -- which is, in fact, a common practice after a change in ownership of a corporation or other business entity.

Golden parachute features

Perhaps the most important aspect associated with a golden parachute is the ability of these devices to minimize takeovers. In short, they serve as something of a poison pill. The payments that are legally guaranteed under the terms of a golden parachute may make a takeover of a business impractical due to the expense associated with the golden parachute program that might be in place. In short, it simply might prove far too expensive to satisfy the legal obligations of a golden parachute program should a company succeed in taking over a business enterprise.

Benefits of a golden parachute

There are some specific and significant benefits to a golden parachute program. These include:

  • Attracting top executive talent due to the financial security guaranteed by a golden parachute program
  • Provides for a proper assessment and evaluation of management in the event of a takeover

Golden parachute example

In the 21st century, mergers, acquisitions and takeovers are on the rise. In many instances, corporate employees are hit the hardest as a result of these activities. With that said, many executives find themselves well protected through the presence of golden parachute programs that are now in place in nearly every major corporate enterprise in the United States and in many other countries the world over. When all is said and done, golden parachutes are not likely to disappear any time soon. Executives and officers insist upon this protection even before they agree to come on board at a particular corporation or business enterprise.