A Golden parachute is largely viewed as yet another corporate defence measure to prevent hostile takeovers (we have already covered macaroni defense and poison pill), but there is much more behind the colourful expression .
In generally, a golden parachute is an agreement for the compensation of top executives in the event of change of control of their employer corporation, whether by merger and acquisition, takeover, or other business restructuring.
The parachute is usually agreed by the company’s Board of directors (depending on the laws of the state in which the company is incorporated, it might further require shareholders’ approval) to provide executives with a substantial compensation (including bonuses, stock and stock options), in case their employment is terminated or the change of control results in a reduction in power or status (lower job position). With some golden parachutes having the clause to be ‘opened’ when a certain percentage of the corporation’s stock is acquired, or even simply in an event of an executive leaving a company.
The term is probably based on the older golden handshake one, originating in Britain in the mid-1960s, offering high-ranking executives generous benefits in case of employment termination or in exchange for early retirement, where the ‘parachute’ stands as a metaphor for the safe landing of the affected employees.
The first recipient of a golden parachute is credited to be the former president and CEO of Trans World Airlines, Charles Tillinghast Jr, with his 1961 contract including a clause that would pay him money if he lost his job with TWA.
The incentive expanded greatly in the early 1980s with the increase in the number of takeovers and mergers, justified on the grounds of retaining high-talent executives and their financial protection, along with stimulating them to remain objective and work in the best interests of the investors during takeover process, and overall discouraging hostile takeover bids by adding to the cost of acquiring.
Opponents, though, argue that top executives should not need an extra payout to do the best thing for their company, and those payouts could be, indeed, substantial; with Steve Wynn, CEO of Wynn Resorts, for example, coming at the top of the list with a $358 million golden parachute.
And it is not that only CEOs and top executives are covered by such severance agreements, as after the golden parachute, next come the silver and tin parachutes, typically included as a clause in a hiring contract, to include severance pay, stock options and bonuses for a larger pool of employees who lose their jobs through certain corporate restructuring.
In contrast to a golden parachute, silver and tin parachutes are smaller, but a more broadly based group of employees is eligible to receive a certain healthy exit package and a safe landing in case of employment termination.