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What is a Golden Parachute?

What is a Golden Parachute?

Golden parachutes, also known as severance packages, are certain benefits which are related to the employee's termination from employment. Let's discuss in more detail what a golden parachute is...
Stephen Rampur
Companies find it very hard to retain employees, especially top-level executives, as a result they implement special policies which induce employees to remain in the same company for a longer duration. Nowadays, several organizations are implementing the policy of golden parachutes in their top-management recruitment drive. If you have been working as a top management executive, like a Managing Director or a Chief Executive Officer (CEO) in several companies, you would probably have an idea what a golden parachute is.

Golden Parachute - Explained

The employment contract of an executive who is recruited for participating in the top management activities includes various employment clauses. It also includes a set of benefits that come into focus when the executive's relation with the company gets over. These benefits are known as golden parachutes.

They include all benefits which are due from the company to the officer when his employment is terminated as a result of a change is the organization's ownership. In a majority of cases, the reason for the officer's termination is not exactly specified. The benefits can be many, the common ones are cash incentives, shares, and stock market valuations. They are exclusively intended for maintaining good relations with the executives.

These are the facilities provided to the management executives, which enable the executives to secure their financial condition if they happen to lose their job. Such benefits may be rendered under various circumstances, and evidently are supposed to be the most lucrative. Most of the time, conditions mentioned in golden parachutes comprise the availability of the benefits only if the organization is taken over by another company, which in turn leads to the executive losing his job.

If a majority of the people in a specific company are covered with golden parachutes, the potential parent company will give the 'company takeover' a second thought. The prospective parent company will not be able to afford the benefit due to all executives that have been promised the golden parachutes.

The benefits may allow employees to buy a large number of shares at a discounted rate, or make them eligible to receive disburses which may also be up to a million dollars. Some companies are worried about their employees supporting the takeover due to the benefits they would be eligible for. For precluding such situations, the company has to take proper care about the clauses mentioned in golden parachutes, as it may also allow the benefits to be received by an executive who is fired due to low performance.

Golden parachutes also turn down the interest of current and potential investors for this very reason. To cut back on unnecessary expenses, companies are making it a point only to provide golden parachute facilities to top officers who are productive and efficient.

Golden parachutes are not to be confused with 'golden handshake', which is also a set of benefits, but given to long-time workers to encourage them to retire early, after which the company may be able to recruit employees with a lower pay scale.

A majority of well-known firms have been successfully using the concept of golden parachutes to retain their smart-working efficient top level officers.