CandleFocus

Golden Parachute

Candlefocus Editor
A golden parachute is a generous financial package offered to a high-level company executive when their employment ends involuntarily. Such agreements reward executives for the company's success and protect them against potential financial consequences of the job loss, regardless of performance. Typically, the package includes a large lump sum payment or the granting of substantial shares in the company's stock and options. Other incentive measures may also be included, such as income security through future payments, executive healthcare coverage, pension benefits, and more.

In today's corporate environment, firms are devising increasingly large and attractive golden parachutes for their top brass, particularly CEOs. This is seen as a way of attracting, retaining, and motivating an executive as well as providing an incentive for taking on risk. In this way, the company can ensure that the executive will stay with the company for a longer period and be more interested in seeing the firm succeed.

Golden parachutes have been the subject of considerable controversy in recent years. Critics charge that the large sums paid out to executives of failed firms amount to nothing more than legalized theft. Furthermore, they see the payoff as reinforcing bad behaviour and rewarding failure. Others counter that severance packages allow executives to exit gracefully, punishing them as little as possible for a company's failure – a sort of socially responsible approach to firing someone.

It is clear that golden parachutes play an important role in how top executives are compensated. For companies, they need to consider the potential legal and public image ramifications of awarding such large termination packages. At the same time, executives should understand their responsibilities and act accordingly in order to ensure that such packages do not reward failure, but rather incentivize long-term success for the good of the company.

Glossary Index