Golden parachute

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For the CSI: Miami episode, see Golden Parachute (CSI episode).

A golden parachute is a non-contractual agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is unspecified. These benefits may include severance pay, cash bonuses, stock options, or other benefits. They are designed to reduce perverse incentives.

Proponents of golden parachutes argue that they provide three main benefits:

  1. Golden parachutes make it easier to hire and retain executives, especially in industries more prone to mergers.
  2. They help an executive to remain objective about the company during the takeover process.
  3. They dissuade takeover attempts by increasing the cost of a takeover.

Critics have responded to the above by pointing out that:

  1. Dismissal is a risk in any occupation, and executives are already well compensated.
  2. Executives already have a fiduciary responsibility to the company, and should not need additional incentives to stay objective.
  3. Golden parachutes costs are a very small percentage of a takeover's costs and does not affect the outcome.

The use of golden parachutes have caused some investors concern since they don't specify that the executive had to perform successfully to any degree. Their concern is understandable since many golden parachute clauses can promise executive compensation benefits well into the millions. In some high-profile instances, some executives such as Carly Fiorina cashed in their golden parachute while under their stewardship their companies lost millions and thousands of workers were laid off as a result.

The first known use of the term "golden parachute" dates back to when creditors sought to oust Howard Hughes from control of TWA airlines. The creditors provided Charles C. Tillinghast Jr. an employment contract -- dubbed a golden parachute in likely reference to the protection a parachute offered -- with protection against the almost definite job loss Tillinghast would have faced if famed aviator Howard Hughes had successfully maintained control of TWA.

The use of golden parachutes expanded greatly in the early 1980s in response to the large increase in the number of takeovers and mergers.

According to a 2006 study by the Hay Group human resource management firm, the French executives' golden parachutes are the highest in Europe, and equivalent to the funds received by 50% of the American executives. In contrast, the French standard revenues for executives located themselves in the European average. French executives receive roughly the double of their salary and bonus in their golden parachute.[1][2]

[edit] References

  1. ^ Les PDG français, champions des " parachutes dorés ", La Tribune, 12 June 2007 (French)
  2. ^ Les patrons français sont les champions du "parachute doré", Le Monde, 12 June 2007 (French)

[edit] See also

[edit] External links

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