A golden parachute is an employment contract provision in which a company’s executives are granted large financial compensation in the event of termination of their employment, usually due to a merger, acquisition, or other change in company control. The intention of a golden parachute is to soften the financial blow for the employee in the event of such a change.
Although golden parachutes sound very generous, they are most often used to retain highly valued employees whose expertise and competencies are needed for the company’s success. For example, if a company is being acquired, a golden parachute may be offered to incentivize a particular executive or department head to remain with the company and help in the transition.
The Origins of the Golden Parachute
The term “golden parachute” was first used in the 1940s by economists and later popularized in the 1970s. The “parachute” part of the term came from the idea that a company’s executives aren’t simply landing on the ground after their employment is terminated; they are landing on a “lifeline” of financial security provided by the company. Today, the phrase is commonly used in finance, business, and law.
The Pros and Cons of Golden Parachutes
Golden parachutes create incentives for key employees to remain with a company and can assist with a smooth transition if there is a change in ownership. However, golden parachutes are also controversial, as they can also be seen to reward failure. For example, a CEO might be rewarded for poor performance or even mismanagement with a generous golden parachute, which can cause public backlash if it is seen as excessive.
For these reasons, companies must tread carefully when awarding golden parachutes. It’s important to ensure the payment amounts are fair and reasonable, and that they are approved by the company’s board of directors and shareholders so that there is transparency around their use.
Conclusion
At its core, a golden parachute is a compensation package used to incent employees to remain with a company during a corporate transition. They are typically reserved for executives and other high-level personnel, and can provide important financial security if the company or the employee’s role is undergoing major change. Although controversial, if awarded in moderation and within reason, golden parachutes can be an important tool for ensuring a smooth transition.