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Golden Parachute

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Definition: Golden parachute is the name give to the benefit provided, usually to top executives, that provides income when the person is terminated or forced out of the company before the end of a specific period of time.

Many employees have a severance provision as part of their employment contract. Often it is something like a week's pay for every year you worked for the company if you are laid off. Some executives will have larger severance guarantees, like six to twelve months salary, if they are let go. Generally, these are just called severance packages and not golden parachutes.

The term golden parachute usually is reserved for the large severance arrangement paid to a top executive. In an attempt to make a job offer more attractive to a top candidate the company may offer that executive a large salary, a big benefit package and a number of other incentives. One of those incentives often is a package of cash, stock, continuation of insurance and club memberships, and anything the executive requests that will be paid if the executive is terminated. This package is called a golden parachute.

The golden parachute is called that because it provides a "soft landing" for a terminated executive. Golden refers to the fact that it's money or other income.

Sometimes there is a legitimate concern that the executive might be forced out. For example, if the company is bought by another company the CEO will leave because the combined company doesn't need two CEOs. In such cases, the golden parachute makes sense. The size of the golden parachute may be out of proportion to the severance packages of employees or other executives, but there is justification for it to exist.

In other cases, the CEO is forced out because of poor performance of the company under his direction. In these cases, the golden parachute is still paid because it was part of the contract that was negotiated as part of the deal to hire that person. Executives love golden parachutes. Boards of Directors, comprised mostly of other executives, like them too. Shareholders generally don't like them because they can reward poor performance.

As a rule, regular employees have a provision in their contract that their severance won't be paid if they are fired for cause. That same provision should be in all golden parachute agreements, but it either isn't there or is ignored.

Also Known As: Severance package, Termination agreement

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