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.
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 case 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.
The employment contract of Colin, the CEO of Company A, includes a golden parachute clause that guarantees him $100 million in severance pay, stock options, a retirement package, and medical benefits if he is 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 reap the benefit of having the golden parachute clause in his employment contract.
By providing golden parachute clauses to high-level company executives, companies are able to:
Golden parachutes given to company executives create controversies because they create the following circumstances:
Here is a list of the top 10 biggest golden parachutes in 2016:
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