Golden Parachute

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Related to Golden Parachute: greenmail, poison pill, Silver Parachute

Golden Parachute

An agreement that provides key executives with generous severance pay and other benefits in the event that their employment is terminated as a result of a change of ownership at their employer corporation; known more formally as a change-of-control agreement.

Golden parachutes are provided by a firm's board of directors and, depending on the laws of the state in which the company is incorporated, may require shareholder approval. These agreements compensate executives in the event that they lose their job or quit because they have suffered a reduction in power or status following a change of ownership of their employer corporation. Some golden parachutes are triggered even if the control of the corporation does not change completely; such parachutes open after a certain percentage of the corporation's stock is acquired.

Golden parachutes have been justified on three grounds. First, they may enable corporations that are prime takeover targets to hire and retain high-quality executives who would otherwise be reluctant to work for them. Second, since the parachutes add to the cost of acquiring a corporation, they may discourage takeover bids. Finally, if a takeover bid does occur, executives with a golden parachute are more likely to respond in a manner that will benefit the shareholders. Without a golden parachute, executives might resist a takeover that would be in the interests of the shareholders, in order to save their own job.

As golden parachutes have grown increasingly lucrative, they have come under criticism from shareholders who argue that they are a waste of corporate assets. These shareholders point out that managers already have a fiduciary duty to act in the best interests of their shareholders and should not require golden parachutes as an incentive. Especially suspect are large parachutes that are awarded once a takeover bid has been announced. Critics charge that these last-minute parachutes are little more than going-away presents for the executives and may encourage them to work for the takeover at the expense of the shareholders.

As the practice of offering golden parachutes became more and more common in the 1980s, efforts to place restrictions on the agreements increased. Many of these efforts stemmed from the realization that the practice, which had once showed a positive stock return for shareholders, was now producing negative stock returns.

On February 6, 1996, the Federal Deposit Insurance Corporation (FDIC) issued a final rule that restricted troubled banks, thrifts, and holding companies from making golden parachute payments. Exceptions to the rule are allowed for individuals who have qualified for Pension and retirement plans. Other exceptions permit the FDIC to enforce the spirit of the law by allowing legitimate payments but stopping payments that might be considered abusive or improper. The rule also prevents FDIC-insured institutions from paying the legal expenses of employees who are the subject of related enforcement proceedings. The rule went into effect on April 1, 1996.

Further readings

Mogavero, Damian J., and Michael F. Toyne. 1995. "The Impact of Golden Parachutes on Fortune 500 Stock Returns: A Reexamination of the Evidence." Quarterly Journal of Business and Economics 34: 4.

"New Powers: FDIC Cuts Down Golden Parachutes." 1995. The Banking Attorney. 5: 12.

References in periodicals archive ?
After reviewing the different factors, the court concluded that part of the compensation was unreasonable and therefore were nondeductible golden parachute payments.
Consistent with these arguments, both Singh and Harianto (1989) and Knoeber (1986) found that the greater the concentration of stock ownership, the less likely the incidence of a golden parachute.
BRIAN Cowen would be in line for a golden parachute payment totalling more than EUR400,000 if he chooses not to contest the election.
CUNA Senior Vice President and Deputy General Counsel Mary Mitchell Dunn wrote that the board should permit credit unions to make golden parachute payments to former executives of insolvent or CAMEL 4 or 5 credit unions if the executive "was not involved in causing the loss.
There was more industrial unrest this week when Airbus workers at Nantes and Saint-Nazaire in western France extended a week of wildcat strikes over an annual bonus offer of 3-5 euros each, which they called derisory next to Mr Forgeard's golden parachute.
The FDIC's regulations on golden parachute payments (or any agreement to make any payment), found in 12 CFR 359, are discussed.
For an executive, a golden parachute is a very good severance package.
WHEN energy boss Sir Richard Giordano left BG Group, he didn't just get a golden parachute but an office to match.
Auditors examining these businesses will focus on nonqualified deferred compensation, stock-based compensation, the $1 million cap on deductions for compensation paid to public company officers, golden parachute arrangements, split-dollar life insurance, fringe benefits and the use of two "listed transactions" (those specifically identified by the IRS as tax-avoidance transactions or expected to produce the same or similar tax consequences).
But any self-regarding sacked executive would expect to receive at least that amount in one go, while a really useless boss would get at least three times as much with a golden parachute pension to boot.