What Is a Golden Parachute?

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A Golden Parachute: All You Need to Know

A golden parachute is a contractual provision or clause that is designed to provide a certain amount of financial or non-financial security to executive employees of a company, in the event they leave that company in the near future. These types of provisions are usually included in executive compensation packages, and are usually given to high-level executives, such as the CEO or CFO.

The concept of a golden parachute is designed to protect the executives of a company, in the event they become unemployed or forced out of their positions without cause. The idea behind the golden parachute is to ensure that employees are properly compensated for the hard work they have put in to the company, even if the company no longer wishes for them to stay.

In this article, we’ll take a look at what a golden parachute is, the reasons why it is implemented, its potential limitations, and what it can provide for the executive in question.

What Is a Golden Parachute?

Put simply, a golden parachute is a contractual arrangement made between a company and an executive that requires the executive to receive substantial severance benefits if the executive’s employment is terminated for any reason. This includes both involuntary termination and voluntary resignation.

The severance benefits afforded to the executive may consist of a payment of money, stock-options, and other forms of non-financial compensation such as healthcare coverage and the ability to keep certain benefits like a company car.

The term “golden parachute” has been a part of executive contracts since the 1970s and continues to be included in most executive compensation packages today.

Reasons Executives Have Golden Parachutes

There are a few different reasons why companies may want to include a golden parachute as part of an executive’s compensation package. Here are some of the most common reasons:

  1. Keep Executives Loyal – The primary reason companies often offer golden parachutes to executives is to keep them loyal to the company during uncertain times. By offering them the promise of financial security, even if they leave the company, it creates a sense of loyalty and ensures that executives stay with the company even when times are tough.

  2. Incentivize Executives – A golden parachute can also be used to incentivize executives to stay with the company despite any potential difficulties. By offering a golden parachute, companies can incentivize executives to stay in their position for longer, as the potential for a large financial reward can be enticing.

  3. Protection from Inappropriate Termination – In some cases, companies may offer golden parachutes to executives as a form of protection against possible wrongful termination. If a company were to terminate an executive without cause, the executive may be able to sue the company or seek compensation through a contractual agreement. If a golden parachute was previously agreed upon, this could ensure that the executive is properly compensated for any lack of notice or wrongful termination without needing to file a lawsuit.

Potential Limitations of a Golden Parachute

While a golden parachute can provide some protection and incentives for executives, they do also come with some limitations. Here are some of the potential drawbacks of a golden parachute:

  1. Cost to Company – Golden parachutes can be expensive for companies. Most often, executives with golden parachutes are the highest paid executives in the company, and the cost of their severance can be quite prohibitive for the company.

  2. Misuse of the Golden Parachute – There have been numerous cases of executives abusing their golden parachute. For example, if an executive was to threaten to leave the company unless they received a golden parachute, the company may be forced to provide one, whether they wanted to or not.

  3. Bad Perception – Finally, golden parachutes can often paint executives and companies in a bad light. In the public perception, offering large amounts of money to executives in the event of termination or resignation can be seen as irresponsible and potentially be damaging to the company’s reputation.

What a Golden Parachute Can Provide

A golden parachute can provide a number of benefits to executives:

  1. Severance Pay – The most obvious benefit of a golden parachute is a severance package that includes a large payment of cash to the executive in the event their employment is terminated. Depending on the executive’s status, the severance pay can range from three months of salary to three years of salary.

  2. Stock Options – In addition to a cash payment, golden parachutes may also include a large number of stock options. These stock options can be extremely valuable and may also include options to buy back the company’s stock as a way to protect the executive’s investment.

  3. Non-Financial Benefits – Last but not least, golden parachutes may also include various non-financial benefits. This may include the provision of a company car or the continued payment of health insurance, among other things.

A golden parachute is an important component of many executive compensation packages and can provide financial and non-financial security to executive employees in the case of involuntary termination or resignation. While there are potential drawbacks to the use of a golden parachute, such as the cost to the company and potential for misuse, they still may be beneficial for company morale and provide useful incentives for executives to stay with the company. Executives with a golden parachute may be eligible for severance payments, stock options, and a variety of non-financial benefits that can help them transition to a new job.

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