A “golden parachute” is when a company tries to avoid a hostile takeover and aims to protect its top employees. A clause is added to these top employees’ contracts that, in the event of a corporate takeover and the employees are demoted or terminated, the takeover company agrees to heavily compensate them. It’s called a “golden parachute” because the employees get extra “gold” for “parachuting” out of the company.
The term “golden parachute” has been cited in print since at least October 1, 1981. “Golden parachute” borrows from the title of a popular employment book at the time, What Color Is Your Parachute?: A practical manual for job-hunters and career changers (1970) by Richard Nelson Bolles.
Wikipedia: Golden parachute
A golden parachute is an agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated. Sometimes, certain conditions, typically a change in company ownership, must be met, but often the cause of termination is unspecified. These benefits may include severance pay, cash bonuses, stock options, or other benefits. They are designed to reduce perverse incentives — paradoxically (and ironically) they may create them.
Proponents of golden parachutes argue that they provide three main benefits:
1.Golden parachutes make it easier to hire and retain executives, especially in industries more prone to mergers.
2.They help an executive to remain objective about the company during the takeover process.
3.They dissuade takeover attempts by increasing the cost of a takeover, often part of a Poison Pill strategy,
although tin parachutes (giving every employee takeover benefits and/or job protection) are generally far more effective in this regard.
Critics have responded to the above by pointing out that:
1.Dismissal is a risk in any occupation, and executives are already well compensated.
2.Executives already have a fiduciary responsibility to the company, and should not need additional incentives to stay objective.
3.Golden parachute costs are a very small percentage of a takeover’s costs and do not affect the outcome.
The use of golden parachutes have caused some investors concern since they don’t specify that the executive has to perform successfully to any degree.
The first known use of the term “golden parachute” dates back to when creditors sought to oust Howard Hughes from control of TWA airlines. The creditors provided Charles C. Tillinghast Jr. an employment contract—dubbed a golden parachute in likely reference to the protection a parachute offered—with protection against the almost definite job loss Tillinghast would have faced if famed aviator Howard Hughes had successfully maintained control of TWA.
The use of the term “golden parachute” has significantly increased in 2008 because of the global economic recession, especially being used by news media and in the 2008 Presidential Debates.
The use of golden parachutes expanded greatly in the early 1980s in response to the large increase in the number of takeovers and mergers.
A clause in an executive’s employment contract specifying that he/she will receive large benefits in the event that the company is acquired and the executive’s employment is terminated. These benefits can take the form of severance pay, a bonus, stock options, or a combination thereof.
The Free Dictionary
An employment agreement that guarantees a key executive lucrative severance benefits if control of the company changes hands followed by management shifts.
Free Merriam-Webster Dictionary
golden parachute noun
Definition of GOLDEN PARACHUTE
: a generous severance agreement for a corporate executive in the event of a sudden dismissal (as because of a merger)
First Known Use of GOLDEN PARACHUTE
(Oxford English Dictionary)
golden parachute n. Comm. (orig. U.S.) a long-term contractual agreement guaranteeing financial security to senior executives dismissed as a result of their company being taken over or merged with another.
1981 Pittsburgh Press 4 Oct. b-9/3 Then there’s the *golden parachute. This refers to the protection top management may give itself when a corporate merger looms.
1983 Times 24 Feb. 17/2 Before the proposed merger with Vantona, an American-style ‘golden parachute’ clause was inserted in his contract, entitling him to automatic compensation for the full amount of his £75,000-a-year [etc.].
1990 N.Y. Times Bk. Rev. 21 Jan. 7/3 It wasn’t long before most of RJR Nabisco’s top executives ‘pulled the rip cords on their golden parachutes’.‥ Mr. Johnson’s alone was worth $53 million.
Wikipedia: What Color is Your Parachute?
What Color is Your Parachute? by Richard Nelson Bolles is a book for job-seekers that has been rewritten every year since 1970. Bolles initially self-published the book (December 1, 1970), but it has now been commercially published since November 1972, by Ten Speed Press, in Berkeley, California. Since 1975 it has been revised and updated annually, sometimes substantially. Nine million copies are in print, and it has been translated into fourteen different languages worldwide. To date, over ten million copies have been sold worldwide.
OCLC WorldCat record
What color is your parachute? a practical manual for job-hunters and career changers
Author: Richard Nelson Bolles
Publisher: Berkeley, Calif. : Ten Speed Press, ©1970-
Edition/Format: Book : English
1 October 1981, New York (NY) Times, “Sunbeam Protects Its Top Executives,” pg. D4:
The Sunbeam Corporation, battling a $451 million takeover bid by IC Industries, disclosed that its senior executives have awarded themselves the option of collecting lucrative severance pay if IC succeeds in its bid and then dismisses or demotes them. The plan also protects executives who decide to quit even if their status is unchanged.
Robert P. Gwinn, Sunbeam chairman, who earns $317,500 a year, could collect a lump sum payment as high as $635,000, before bonuses, under the termination plan.
The so-called “golden parachutes” were last used by executives of Conoco in a takeover battle against Joseph E. Seagram & Sons. The device is viewed as no real hurdle to determined bidders in a multimillion-dollar contest.
6 April 1982, New York (NY) Times, “‘Golden Parachutes’ for Ousted” by N. R. Kleinfield, pg. D1:
It’s becoming an all-too-familiar saga. The grapevine began to hum last year that the Superior Oil Company was a ripe takeover target. After management began, as on official put it, “to see its name in print,” a concerned Superior board approved “special termination agreements” sheltering all present and future officers of the company. If outsiders came in, any executive who was shown the door or quit would be consoled with two years’ pay.
“It’s just prudent business in today’s environment,” a functionary at Superior explained.
The prospect of an unwanted takeover bid scares the gold cuff links off some top executives, since if they do not hit it off with the new boss they may be cleaning out their desks.
It will not happen like that, though, for the growing number of key officers who have partaken of one of the hottest perks to reach the corporate suite: the “golden parachute.” Equipped with this safety device, an executive who is shoved out the door by a new owner will be cushioned by a tidy pile of cash.
Golden parachutes have gotten popular just in the last few years, merger brokers report, stimulated into being by the rash of hostile tender bids. One of the pioneer pacts was drawn up three years ago for the jittery managers of the Reliance Electric Company once Exxon started knocking on the door.
New York City • Banking/Finance/Insurance • (0) Comments • Sunday, February 20, 2011 • Permalink