Golden parachute
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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 incentives — 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 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[who?][citation needed] 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 from control of TWA airlines. The creditors provided Charles C. Tillinghast Jr. an employment contract—dubbed a golden parachute in likely[original research?] reference to the protection a parachute offered—with protection against the almost definite[according to whom?] job loss Tillinghast would have faced if famed aviator Howard Hughes had successfully maintained control of TWA.[citation needed]
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.[1]
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 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.
