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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. Most definitions specify the employment termination is as a result of a merger or takeover, also known as "Change-in-control benefits", but more recently the term has been used to describe perceived excessive CFO (and other executives) severance packages unrelated to change in ownership (also known as a golden handshake). The benefits may include severance pay, cash bonuses, stock options, or other benefits.
The first use of the term "golden parachute" is credited to a 1961 attempt by creditors to oust Howard Hughes from control of Trans World Airlines. The creditors provided Charles C. Tillinghast Jr. an employment contract that included a clause that would pay him money in the event that he lost his job.
The use of golden parachutes expanded greatly in the early 1980s in response to the large increase in the number of takeovers and mergers.
In Europe the highest "change-in-control benefits" have been for French executives, as of 2006 according to a study by the Hay Group human resource management firm. French executives receive roughly the double of their salary and bonus in their golden parachute.
News reference volume of the term "golden parachute" spiked in late 2008 during the global economic recession, and 2008 US Presidential Debates. Despite the poor economy, in the two years before 2012 a study by the professional services firm Alvarez & Marsal found a 32% increase in the value of "change-in-control benefits" provided to US executives. In late 2011, USA Today reported several CEO retirement packages in excess of $100 million, "raising eyebrows even among those accustomed to oversized payouts".
In the 1980s, golden parachutes prompted shareholder suits challenging the parachutes' validity, SEC "termination agreement disclosure rules" in 1986, and provisions in the Deficit Reduction Act of 1984 aimed at limiting the size of future parachutes with a special tax on payouts that topped three times annual pay. In the 1990s in the United States, some government efforts were made to diminish "change-in-control benefits". As of 1996, Section 280G of the Internal Revenue Code denies a corporation a deduction for any excess "parachute payment" made to a departing employee, and Section 4999 imposes on the recipient a nondeductible 20% excise tax, in addition to regular income and Social Security taxes. The idea being the expenses are in excess of reasonable compensation for personal services
The 2010 United States Dodd-Frank Act includes in its provisions a mandate for shareholder votes on any future adoption of a golden parachute by publicly traded firms. In Switzerland, a referendum which "would give shareholders the power to veto executive pay plans, including golden parachutes" was put to a vote on March 3, 2013. Voters in Switzerland passed measures limiting CEO pay and outlawing golden parachutes in Swiss referendum, 2013.
Studies and reports
One study found golden parachutes associated with an increased likelihood of either receiving an acquisition offer or being acquired, a lower premium (in share price) in the event of an acquisition, and higher (unconditional) expected acquisition premiums. It found firms adopting golden parachutes have lower market value compared to assets of the company and that their value continues to decline during and after adopting golden parachutes.
"Gratuitous" payments made to CEOs on agreeing to have their companies acquired (i.e. payments made to CEOs by the acquiring company not mandated under the CEO's contract at the time the company is acquired) have been criticized. A "prominent" mergers and acquisitions lawyer told the New York Times that `I have had a number of situations where we've gone to management looking to do a deal and been stopped at the door until a compensation arrangement was signed, sealed, and delivered.` Another lawyer told the Times: `Publicly, we have to call these things retention bonuses. Privately, sometimes it's the only way we would have got the deal done. It's a kickback. ...
A study investigating acquirer-paid sweeteners at 311 large-firm acquisitions completed between 1995 and 1997 found that CEOs of the acquired companies accept lower acquisition premiums when the acquirer promised them a high-ranking managerial post after the acquisition.
On June 24, 2013, The Wall Street Journal reported that McKesson Chairman and CEO John Hammergren's pension benefits of $159 million had set a record for "the largest pension on file for a current executive of a public company, and almost certainly the largest ever in corporate America." A study in 2012 by GMI Ratings, which tracks executive pay, found that 60% of CEOs at S&P 500 companies have pensions, and their value averages $11.5 million.
On June 29, 2013, The New York Times reported on research findings suggesting that "despite years of public outcry against such deals, multimillion-dollar severance packages are still common," and they continue to become "more complex and opaque."
Arguments for and against
Proponents of golden parachutes argue that the parachutes provide benefits to stockholders:
- 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.
While critics have pointed 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.
- Benefits create perverse incentives.
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- Golden parachutes on the rise during down economy by Éric L’Italien, Lawyer, Norton Rose Canada| Deal Law Wire| 5 April 2012
- CEOs' golden parachute exit packages pass $100 million By Gary Strauss, USA TODAY 11/8/2011
- Biggest Golden Parachutes time.com
- Gross increase in "golden parachute" queries in 2008 ", Google Trends
- see note 37, 38, 39
- Mitchell Schnurman `CEO Pay Is A Real Problem, but This Isn't the Time to Fix It` Fort Worth Star Telegram, September 28, 2008
- Executive Compensation Tax Issues By Paul James Hanley of Grimshaw & Harring, P.C. © 1996.
- Golden Parachutes and the Wealth of Shareholders Harvard Law and Economics Discussion Paper No. 683 | Lucian A. Bebchuk, Alma Cohen, Charles C. Y. Wang | 1 December 2010
- Revill, John; Walen, Jeanne; Morse, Andrew (February 20, 2013). "Furor Ends $78 Million Pay Deal". Wall Street Journal, pp B1.
- "Voters in Swiss referendum back curbs on executives' pay and bonuses". The Guardian. 3 March 2013.
- Sorkin, Andrew Ross `Those Sweet Trips to the Merger Mall`, New York Times April 7, 2002
- Bebchuk and Fried, Pay Without Performance (2004), p.92
- What’s In It For Me? CEOs Whose Firms Are Acquired Jay Hartzell,* Eli Ofek,** and David Yermack***, August 2002
- Maremont, Mark (2013-06-24). "For McKesson's CEO, A Pension of $159 Million". Online.wsj.com. Retrieved 2014-04-23.
- Golden Parachutes Are Still Very Much in Style
- Golden Parachute, untangling the ripcords. Richard P. Bress. Stanford Law Review © 1987