Golden Parachute - Explained
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Table of ContentsWhat is a Golden Parachute?Controversy Surrounding Golden ParachutesAcademic Research on Golden Parachutes
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.
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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.
Academic Research on Golden Parachutes
- Golden parachute as a compensation-shifting mechanism, Choi, A. (2004). Journal of Law, Economics, and Organization, 20(1), 170-191. This paper explains that by partially transferring the managerial compensation burden to the buyer during the takeover, the golden parachute may improve the target shareholders net return. The paper shows that the golden parachute will contingent on a change -of-control and not solely on the managers layoff. It further shows that golden parachute will be promised early and the shareholders would like to extend the benefit to other employees and the amount of the golden parachute benefit can be much higher than the executives annual salary. The paper also analyzes how the managerial incentive scheme gets affected by the golden parachute.
- The Golden Parachute Provisions: Time for Repeal, Wolk, B. A. (2001). Va. Tax Rev., 21, 125. The paper argues in favor of repealing the golden parachute provisions from the employment agreement of the top ranked executives.
- Golden Parachute Agreements: Reasonable Compensation or Disguised Bribery, Hood, E. T., & Benge, J. J. (1984). UMKC L. Rev., 53, 199. This paper examines whether including the provision of golden parachute in the employment agreement is a reasonable decision or is it simply a bribe to attract and retain the talented employees as top-level executives.
- Business ethics and the decision to adopt golden parachute contracts: Empirical evidence of concern for all stakeholders, Evans, J. D., & Hefner, F. (2009). Journal of Business Ethics, 86(1), 65-79. This paper argues in favor of the golden parachute and provides an economic and ethical justification for such agreement using a sample of S&P 500 firms. It attempts to establish that such contracts ensure efficient corporate governance and as a result the interest of all the stakeholders get secured. As an ethical justification of such agreement, the paper argues that a golden parachute agreement is advantageous for all the stakeholders as it encourages merger or takeover instead of bankruptcy.
- Golden parachute tax provisions fall flat: Tax gross-ups soften their impact to executives and square D overinflates their coverage, Hankinson, J. D. (2004). Stetson L. Rev., 34, 767. The paper analyzes the effect of Golden Parachute on shareholder wealth and it finds that, although golden parachute has some value-increasing effect on acquisitions but on average it has an overall negative impact on the shareholder wealth. It finds that the companies get negative abnormal stock returns in the time of adopting golden parachute and in subsequent period. The paper suggests, there is a need for additional work to identify the types of golden parachutes that help to spot the correlation between golden parachutes and declined value of shareholders.
- Golden Parachute Agreements: Cushioning Executive Bailouts in the Wake of a Tender Offer, Haggerty, J. F. (1982). John's L. Rev., 57, 516. This note analyzes whether the including the golden parachute clause is fair to the corporation and if it is justified to provide further benefits to the high-level executives for a duty already owned by the company. The note examines the tender offer as a mechanism for changing corporate control and discusses the characteristics of a typical golden parachute provision. It discusses the arguments both for and against the golden parachute and concludes the golden parachutes are not at all fair to the corporation.
- Takeover Protection for Executives: The" Golden Parachute", McMillan, J. D., & Reisinger, G. S. (1983). Compensation Review, 15(1), 34-43. This article analyzes the Golden Parachute provision and explore how it protects the executives during an acquisition.
- Opportunities and pitfalls in designing executive compensation: The effects of the golden parachute tax penalties, Krueger Jr, H. W. (1985). Taxes, 63, 846. The Tax Reform Act of 1984 imposed penalties on certain golden parachute payments in order to restrict the perceived abuses of such agreements. This article analyzes this penalty provisions and their impact on the design of the executive compensation plans. The article argues, the new penalties have implications for certain corporate transactions, and they will affect the negotiation of individual employment agreement and the design of various executive compensation plans.
- When the golden parachute rips, Coffin, B. (2008). Risk Management, 55(2), 27. The paper analyzes the case of Dr. William W McGuire, the ex-chief executive officer of UnitedHealthGroup. It discusses how McGuire managed to receive millions of dollars as part the golden parachute agreement and how he was forced to return those. This is one of the largest golden parachutes issued in the history.
- The Deflation of the" Golden Parachute" in Bankruptcy, Fabrizio, W. R., & Abrahams-John, L. V. (2004). American Bankruptcy Institute Journal, 23(9), 1.This article explores the impact of the famous case of Straus-Duparquet Inc. v. Local Union No. 3, 386 F.2d 649 (2d. Cir. 1967) on the laws
- regarding the Golden Parachute agreement. The article recommends the executives should avoid the rising opponency towards designating the termination pay as an administration cost.
- The effect of CEO control on compensation risk management through golden parachute adoption, Toyne, M. F., & Millar, J. A. (1998). Managerial Finance, 24(2), 14-29. The paper develops a hypothesis on the relationship between compensation risk and the control of the CEO and test the hypothesis against the data collected from a sample of Fortune 500/Fortune Service 500 companies from 1984 to 1989. It concludes that the relationship is piece-wise linear in nature. It establishes that in larger companies the CEOs generally have low control and higher salaries, the CEOs in middle control range are likely to have the highest of stockbased compensation and golden parachutes and those who belong to high control range posses the lowest proportion of stock-based compensation and golden parachutes. The paper concludes that a certain threshold of control CEOs are likely to manage to include the provision of golden parachutes and other compensation risks. However, it might negatively affect the shareholder returns.