Golden parachute

Some big bosses have a special deal. This deal is called a golden parachute. It gives them extra money if they lose their job. This often happens when a new company buys them.

These deals can include lots of cash. They might also get special stocks. This helps the bosses feel safe. It makes them stay at their work.

Some people think these deals are too big. They say it is not fair. Other people think they help companies work well. It is a big topic for many leaders.

A golden parachute is a special deal for top bosses. It gives them big benefits if they lose their job. This often happens when one company buys another company. These benefits can be cash or special stocks.

People first used this term in 1961. It happened during a fight for control of an airline. The use of these deals grew a lot in the 1980s. By 1981, many large U.S. companies used them. Some people think these deals are too large. In 2011, some exit deals were over $100 million.

Some people say these deals help companies. They say it helps keep good leaders. It can also help a leader stay fair during a takeover. But other people disagree. They say these deals are not fair to others. They say bosses are already paid very well. Some laws now try to limit these big payments. In Switzerland, voters even voted to outlaw them in 2013.

A golden parachute is a special agreement between a company and a top leader. This deal says the leader will get big benefits if they lose their job. These benefits often include extra cash or bonuses. They can also include stock options. This usually happens during a merger or a takeover. A takeover is when one company buys another company.

These deals work by giving leaders a safety net. The benefits are often called "change-in-control benefits." Some people also call them "golden handshakes." These payments can be very large. In 2011, some packages were worth more than $100 million. Some people think these amounts are too big. They worry about how much money is being spent.

People first used this term in 1961. It started during a fight over Trans World Airlines. Creditors tried to remove Howard Hughes from control of the airline. They gave Charles C. Tillinghast Jr. a contract with a special clause. This clause paid him money if he lost his job. The use of these deals grew in the 1980s. By 1981, 15% of the 250 largest U.S. companies had them.

Many laws have been made to manage these payments. In 1984, the Deficit Reduction Act added a tax on large payouts. In 1996, new rules made it harder for companies to get tax breaks for these deals. The Dodd-Frank Act in 2010 required shareholders to vote on these plans. In Switzerland, voters even voted to outlaw them in 2013. Some leaders still receive huge amounts. In 2013, John Hammergren of McKesson Corporation had a pension worth $159 million.

People have different ideas about if these deals are good. Supporters say they help companies hire great leaders. They say it helps a leader stay fair during a takeover. It can also make a takeover more expensive for the buyer. Critics say these deals are not fair to other workers. They say leaders are already paid a lot of money. They also note that other people might lose their jobs during a takeover.

A golden parachute is a specific employment agreement between a corporation and an upper executive. This contract ensures the employee receives significant benefits if their employment is terminated. These benefits often include severance pay, cash bonuses, or stock options. Most definitions specify that the termination occurs because of a merger or a takeover. A merger happens when two companies join together into one entity. A takeover occurs when one company buys another company. This arrangement is also known as "change-in-control benefits."

The mechanism of a golden parachute works by creating a financial safety net for leaders. When a change in control occurs, the executive triggers the clauses in their contract. This process results in the immediate payout of promised assets or cash. Sometimes, these agreements are used as a "poison pill" strategy. This means the parachute makes a takeover more expensive for the buyer. By increasing the cost of the acquisition, the company may discourage outsiders from trying to take control.

There are different ways these benefits are categorized and applied. Some people use the term "golden handshake" to describe severance packages unrelated to a change in ownership. Others refer to "gratuitous" payments made during a deal. These are payments made by the acquiring company that were not required by the original contract. Some lawyers have even suggested that these act as private "kickbacks" to ensure a deal is completed. Such payments can be used to secure a manager's agreement to a merger.

History shows that the term originated from a specific corporate conflict in 1961. During this time, creditors attempted to remove Howard Hughes from Trans World Airlines. To help, they provided Charles C. Tillinghast Jr. with a contract including a payout clause. The practice expanded greatly during the hostile takeover wave of the early 1980s. By 1981, approximately 15% of the 250 largest U.S. corporations had these agreements in place. In Europe, French executives have historically received the highest change-in-control benefits. As of 2006, French executives received roughly double their combined salary and bonus amounts in their parachutes.

The scale of these payouts can be massive and often draws public attention. In 2011, USA Today reported several CEO retirement packages exceeding $100 million. In 2013, John Hammergren of McKesson Corporation had a pension worth $159 million. This was considered the largest pension for a current executive in corporate America. A 2012 study by GMI Ratings found that 60% of CEOs at S&P 500 companies have pensions. The average value of these pensions was approximately $11.5 million. Even during the 2008 economic recession, the value of these benefits rose by 32% in the U.S.

Governments have created various rules to regulate or limit these large payments. The Deficit Reduction Act of 1984 added a special tax on payouts exceeding three times an annual salary. In 1996, Section 280G of the Internal Revenue Code denied companies tax deductions for excess parachute payments. This same year, Section 4999 imposed a 20% excise tax on the person receiving the payment. The 2010 Dodd-Frank Act in the United States mandated shareholder votes on future golden parachutes. In Switzerland, a 2013 referendum allowed voters to outlaw golden parachutes entirely.

There are ongoing debates regarding the impact of these agreements on a company. Proponents argue that parachutes help companies hire and retain talented executives. They claim it helps leaders remain objective during a takeover process. Critics, however, argue that these payments create "perverse incentives." They believe executives are already well compensated and have a responsibility to the company. There is also concern that while executives receive large payouts, other employees may face layoffs.

Research has also looked at how these deals affect a company's market value. One study found that firms using golden parachutes often had a lower market value compared to their assets. The value of these firms sometimes continued to decline after adopting the practice. Another study found that CEOs might accept lower acquisition premiums if promised a high-ranking post later. This shows how these complex financial tools connect to broader ideas of corporate governance and shareholder wealth.