A golden parachute is an agreement between a company and an employee
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 severance packages unrelated to change
in ownership. The benefits may include severance pay, cash bonuses, stock
options, or other benefits. History
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 the event of an acquisition, and higher
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 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 = Support=
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.
= Opposition= 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. See also
Golden handcuffs Golden handshake
References