Golden Parachute

Definition

An agreement between a company and an employee which states that the employee will be entertained with certain benefits if his employment is terminated is known as a golden parachute. Golden parachute is provided mostly to executive employee and benefits are significant and noteworthy. In some cases, this termination of an employee is due to a merger of companies or takeover of a company while in other cases golden parachute may depict packages for executive officers like CEO as a result of separation or termination of partnership and is not related to changes in the ownership.

Benefits of Golden Parachute

The benefits under golden parachute may include cash bonus, stock options, severance compensation or other. It is also believed by some people that golden parachute provides profound advantages to stockholder like:

• For industries which are more like to get mergers, parachutes make it easier for stockholder to get hired and retain their executive positions.
• During takeover of a company, it helps the executive to remain impartial and keep their position.
• A significant benefit of golden parachute is that it increases the cost of takeover and thus reduces the chances of a takeover.

Limitation

It is widely accepted that golden parachute is very beneficial but some critics don’t consider golden parachute a beneficial option due to following reason:

• In any organization dismissal is a risk and executive officers may not need any protection against such risk and are already availing good compensation packages.
• Executive need not to be provided with additional incentives to stay objective. They already have fiduciary responsibility to the company.
• Due to low cost of golden parachute in comparison to takeover costs, it may not reflect expected outcome.

Conclusion

Looking at the benefits and limitations of golden parachute, it can be easily stated that limitations or weakness are not very evident. Therefore, it may be concluded golden parachute should be appreciated and adopted by companies.