Golden parachutes

A golden parachute is a term used to define a clause or an agreement between the company and the employee which states that the employee will be eligible to receive benefits in case he/she is terminated. However, the term relates mostly to terminations in case of mergers and acquisitions, and such offers are made to only to top executives.

Golden parachutes first became popular during the takeover boom era of 1980s. These are called so because they serve as a safety net and allow the employees to land safely in hostile situations. The benefits include hefty cash payments along with stock option schemes and other lucrative benefits.

Golden Parachutes makes it easier for companies to hire top executives in hostile situations. This makes sense since top executives are often head hunted. Since Golden parachutes cushions top executives against possible terminations it allows them to evaluate potential mergers and encourage favourable deals and discourage any takeovers which might be against the interest of the shareholders. The other side of the coin states that CEOs and other top executives are already well compensated so they should not be eligible for any other benefits just to perform their duties in best interest of the shareholders. Golden parachutes can further increase chances of a takeover since the top executives will not be affected, at least financially, by the possible acquisition.

For example, James Kilts the former CEO of The Gillette Co., was given more than $165 million pay-out when Procter & Gamble absorbed Gillette in 2005. In 1999, Fran Newman reportedly received more than $100 million after Bankers Trust was acquired by Deutsche Bank.

Continued criticism, regulations and shareholder protests have gathered up a lot against golden parachutes. But these benefits continue to thrive even though there may be a slight decline in the benefits offered in the recent times.

Similar to golden parachutes are silver parachutes. These carry less benefits but are accessible to more no of employees across the organisation such as lower level executives. A tin parachute may be used to define similar benefits to which all other employees of the organisation may be eligible.

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