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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Golden Handshake

What it is:

A golden handshake is essentially a severance agreement between an employee and employer.

How it works (Example):

A golden handshake is similar to a golden boot, which is an incentive package sometimes offered to older workers. 

A golden handshake is usually offered to a director, senior executive or consultant who is let go before his or her contract has expired. This situation is most common after the event of a merger, takeover or buyout.

For example, let's assume that John is the CFO of Company XYZ. The board of directors has decided to sell the company to Company ABC. Company ABC already has a CFO, and so John will be laid off after the merger occurs. 

Though John will lose his job through no fault of his own, he is able to mitigate the financial consequences of abrupt unemployment because he had a golden handshake clause in his employment contract when he was hired. As a result, John received six months of severance pay after he was laid off.

Why it Matters:

A golden handshake offers executives protection from merger-related layoffs and other situations. 

Golden handshakes can be controversial, of course. On one hand, golden handshakes often include promises not to sue or work for competitors, which can help companies part with certain employees peacefully and for a fixed cost. Alternatively, they sometimes come across as distasteful when the amount of the severance package is considered excessive or if the employee receives the pay even after gross misconduct.

[InvestingAnswers Feature: 7 Warning Signs of an Impending Layoff]

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