Golden Parachute

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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.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
References in periodicals archive ?
Exceptions can be made if a credit union gets permission from its state or federal regulator or it uses a golden parachute to hire new executives to bring it back to sound financial health.
She is entitled to two golden parachute payments, one of $200,000 at the time of her termination and a second payment of $400,000 at a future date.
Under the proposed new commitments, the DPJ aims to eradicate dubious ties between the government and the private sector by totally banning senior bureaucrats from receiving golden parachutes that land them jobs at government affiliates and other entities.
It features articles such as "FDIC Regulation Alert--Restrictions on Golden Parachutes and Indemnification Agreements" and "How `GATT' Affects Your Retirement Plans." The Employee Benefits section features an alert comparing the Treasury's 2001 and 2000 limits for various types of benefit plans.
In their view it will take at least a generation or two to restore the trust that has been blown to smithereens by leaders absorbed in their own obscene bonuses and golden parachutes rather than the well-being of the people who make it all work.
But it is an abuse when there is reward for failure, like the golden parachutes which ensure that even if people are kicked out for incompetence they still take a very large amount of money.' Remuneration should be `clear, transparent and justifiable'.
Using an agency theory framework and data on 89 Fortune 500 firms, we assess whether the granting of golden parachutes to chief executive officers is the result of an economically rational process or determined by the social influence of the CEO.
NEVER mind the overpaid executives, so called stars, and dubious 'Golden Parachutes' ' for under performing senior employees.
Golden parachutes can help neutralize these conflicts, providing a payoff to executives after a change in control.
The NCUA's proposal to limit golden parachutes and indemnification payments is overbroad and would place unnecessary restrictions on credit union boards, according to comment letters filed by CUNA and NAFCU.
Departing Wachovia Corp executives are to receive up to USD225m in 'golden parachutes', a kind of severance pay, from the Wells Fargo deal.
Golden parachutes to reward failure would be completely unacceptable, so customers must protest loudly if the bank bosses are waved goodbye with small fortunes.