Golden Parachute

What is a Golden Parachute?

A golden parachute, in mergers and acquisitions (M&A), refers to a large financial compensation or substantial benefits guaranteed to company executives upon termination (from a merger or takeover). Benefits include severance pay, cash bonuses, and stock options.

 

Golden Parachute

 

History of Golden Parachute

The term “golden parachute” was first used in 1961. Charles C. Tillinghast Jr., former president and CEO of Trans World Airlines, was credited as the first golden parachute recipient when the company was trying to get control away from Howard Hughes. In the case that Hughes regained control of the company and fired Tillinghast, the company gave Tillinghast a clause in his contract that would provide him with a substantial amount of money if he were to lose his job.

 

Example of a Golden Parachute

The employment contract of Colin, the CEO of Company A, includes a golden parachute clause that guarantees a $100 million severance pay, stock options, a retirement package, and medical benefits if he were terminated. Due to fierce competition from rival companies, Company A gets taken over by another company and the management team at Company A is replaced. Colin, who is now forced to leave the company, will be able to realize the golden parachute clause in his employment contract.

 

Advantages of Golden Parachutes

By providing golden parachute clauses to high-level company executives, companies are able to:

  • Hire and retain top talent: Golden parachutes are used in attracting top talent. Executives want security – especially if the company is in an industry prone to M&A or if the company experiences a high executive turnover rate. Offering golden parachutes widens the pool of applicants and attracts high-level employees.
  • Reduce/Remove conflict of interest during a merger: Often during a merger, executives are nervous about their job security and can be tempted to delay or sabotage the merger through defenses such as poison pill, crown jewels defense, or Pac-man defense. A golden parachute guarantees compensation in the event of
  • Reduce hostile takeovers: Competitors looking to acquire a company with golden parachutes may think twice because they would be responsible for paying out the termination packages if they were to take over the company and replace the management team.

 

Controversies Regarding Golden Parachutes

Golden parachutes given to company executives create controversies because they:

  • Require the company to pay a lot of money: Golden parachutes require the company to pay substantial benefits and/or a large compensation when executives are terminated.
  • Moral hazard problem: Knowing that their termination would give them substantial benefits, executives with golden parachutes may have little to no incentive to do a good job. Executives with a golden parachute may not act in the best interest of shareholders.
  • May not deter hostile takeovers: Although golden parachutes may reduce hostile takeovers, they make up a small percentage of the overall cost of a merger. Therefore, golden parachutes may not inhibit hostile takeovers.

 

Top 10 Golden Parachutes

Here is a list of the top 10 biggest golden parachutes in 2016:

 

Top 10 Golden Parachutes
Source: Bloomberg

 

More Resources

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