What is a Golden Parachute?

A golden parachute is an agreement between a company and its top-level executives which specifies that the executive will receive substantial benefits in case of termination. These are frequently instated to protect the executive during the company's acquisition or merger. This is a measure taken by a firm to discourage an unwanted takeover attempt or to attract and retain talent at top executive positions. This is also used as part of a poison pill. The benefits may include stock options, cash bonuses, generous severance pay or other non-cash benefits. The first use of golden parachute" was attempted in 1961 by the American business magnate, Howard Hughes in Trans World Airlines, where he provided the chairman of the company Charles C. Tillinghast Jr., with an employment contract that included a clause that would pay him money in the event that he lost his job. In the 1980s the golden parachute was increasingly used due to the surge in the number of mergers and acquisitions.

Controversy Surrounding Golden Parachutes

While many supporters believe that golden parachutes make it easier to hire and retain top executives in merger-prone industries, it is also believed that these worthwhile benefits allow executives to remain objective if the company is involved in a takeover or merger. Opponents of golden parachutes argue that executives are already highly paid and should not be rewarded for being terminated. They argue that it is already the responsibility of the executive to act in the best interest of the company. In 2010, the United States Dodd-Frank Act mandated shareholder votes on the adoption of golden parachutes by publicly-traded firms. In Switzerland, a referendum was issued which gave shareholders the power to veto executive pay plans, including golden parachutes.