A golden parachute is a compensation agreement offered to upper-level executives which provides them with benefits beyond the standard two-weeks’ notice and pay. These separation agreements can include large cash payments, stock options or other benefits, so top talent can feel more secure in accepting a job.
Many companies offer executives at all levels some form of severance, usually a cash amount equal to two weeks’ worth of the executive’s pay. The larger the company, the larger the severance package, potentially equaling months of pay and/or other benefits. These payments or benefits might end when the employee finds other employment. In some cases, an employee agrees to a non-compete clause, receiving a larger severance payout in exchange for agreeing not to work for a competitor or start a competing business either in a certain geographic location or for a specific period of time.
Golden parachutes provide terminated executives with more compensation than just a few weeks’ worth of cash that allows them to pay their bills while they look for a job. Many executives bring value to a business that lasts well beyond their tenure. To prevent a company from hiring an executive, using his talent or connections, then terminating the executive when his efforts begin to bear fruit, the executive negotiates a significant buyout. Some include retirement packages in the definition, while others use the word "parachute" to refer only to those "bailing out" during difficult times or after a successful merger.
Common Golden Parachute Benefits
A golden parachute can include cash, stock, continuation of benefits, the company car the employee drove while working for the company, or the residence she lived in if the company provided it. If a company is considering a merger or sale, the parachute might include a guaranteed position for the executive, part ownership of the new company or stock in the new business.
Businesses offer golden parachutes for a number of reasons, including increasing their ability to attract top talent, motivating an executive to improve a business and reducing wrongful termination lawsuits. Top executives often have multiple options for employment and are more willing to take riskier jobs if they know it will not hurt them financially. If a business is planning a merger or is preparing for sale, a golden parachute gives the executive a reason to join the company, even though his job might be in jeopardy after the merger or sale. As part of golden parachute agreement, a business might stipulate that the employee loses his severance package if he sues the company for wrongful termination.
- Digital Vision./Photodisc/Getty Images