Golden Parachute Meaning: What Is a Golden Parachute?

A golden parachute is an agreement between a key executive and a public or private company specifying the compensation package the senior-level staff member will receive upon job termination or if there is a change in ownership. Golden parachutes typically include severance payments, stock options, shareholder votes, cash bonuses, and other perks. This “parachute” offers a soft landing for high-ranking employees.

Trans World Airlines’ Charles C. Tillinghast, Jr., was the first recipient of a golden parachute in 1961. The airline offered Tillinghast an enticing package if businessman Howard Hughes, a majority shareholder, gained control of the company and terminated him.

Golden parachutes are a form of executive compensation given to high-ranking employees to guarantee they will receive healthy severance pay and other benefits in the case of termination. Stepping into senior-level roles, such as a chief executive officer or chief financial officer, can sometimes be risky due to the threat of mergers, layoffs, or takeover attempts. Thus, these pension plans and payouts incentivize people to take these volatile, time-intensive positions.

Golden parachutes, handshakes, and handcuffs refer to financial agreements between high-level staffers and companies, but there are key differences. Learn more about each term:

• Golden handcuffs: This refers to a unique set of incentives a key employee will enjoy if they stay at the company or don’t leave before a specific date.
• Golden handshake: This leave agreement offers higher pension benefits than golden parachute agreements and generally applies to employees who are laid off, retire, or otherwise leave while in good standing with the employer (for example, after decades of quality service).
• Golden parachute: This term refers to the financially beneficial package someone receives when exiting a company. Historically, golden parachute clauses specified retirement packages only in the event of a change in control (through a merger or hostile takeover, for example).

Giving golden parachutes to high-ranking executives does have some benefits from a business strategy standpoint. A golden parachute can:

1. 1. Attract top talent: Offering golden parachutes as part of an employment package can help attract quality job candidates when your company has positions to fill.
2. 2. Incentivize good work: These financial agreements can help incentivize employees to make high achievements in the company's name instead of for personal gain.
3. 3. Support amicable relationships: Golden parachutes help ensure a more amicable off-ramp and cordial relationship during job termination.

The use of golden parachutes can invite some criticisms and drawbacks. A golden parachute might:

1. 1. Breed resentment: The benefits of golden parachutes can be so titanic it makes other employees feel second-tier.
2. 2. Incentivize underperformance: A top-level employee might underperform, lose their job, and still collect their golden parachute package, which equals a win for the employee but a big loss for the company.
3. 3. Displease shareholders: Shareholders tend to be anti-golden parachute because they feel the exit package is not a fair use of their money and investments.

Golden parachute recipients must pay a 20 percent excise tax on top of the standard income tax per Section 4999 of the IRS. Corporations cannot deduct golden parachute payments. This tax law can detriment the buyer and seller in a merger.

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