What is a Golden Parachute?
A golden parachute is an agreement between a company and an employee (usually a high level executive) that provides significant financial benefits to the employee upon termination.
Golden Parachute Example
For example, upon a change in ownership or a shake-up in management, a golden parachute clause in an executive's employment contract might specify that the executive will be granted special severance pay, bonuses, stock options, or other non-cash benefits upon his departure from the organization.
Theoretically, since the executive's own financial future is protected, he or she is free to make decisions about reorganizations, mergers or sell-offs that are in the long-term best interests of the company, even though such actions may lead to his or her dismissal.
Why Golden Parachutes Matter
Golden parachutes are meant to help companies hire and retain top talent. At the same time, golden parachutes have increased compensation costs, which can pose an obstacle to a transaction.
They are also controversial because many represent a massive payout, irrespective of company and executive performance. As a result, golden parachutes are sometimes perceived as 'poison pills.' Transactions, if they involve the dismissal of top executives, can be perceived as too expensive even if they will benefit the company overall.