Understanding the Golden Parachute Clause

If you have been asked to sign an employment contract with a golden parachute clause, you may be unsure as to the true golden parachute meaning. For, it is an odd phrase that seems too colloquial to be used in employment documents. Here, we define golden parachute so you can be comfortable with what such a condition in a contract really is.

Golden parachute refers to a payment agreement for officers and management if they lose their jobs or face major changes to their jobs due to a sale of their company.

Often when a public company faces a hostile takeover, the officers and management will lose their jobs. The golden parachute gives the officers and management security in these situations, but these payments are highly controversial.

What is a Golden Parachute?

A golden parachute is the term used when a contract stipulates that a company employee who is let go as a result of a merger, will receive a financial payout. How high that compensation is, is up to the parties to negotiate before an employment contract is signed.

Given the complexities that a merger or takeover involves, and the fact that there will only be one top job once the transaction is completed, a CEO golden parachute clause is often the most common type of parachute. That is not to say however, that company executives like CFOs and COOs will not be offered this payment plan.

How Does a Golden Parachute Work?

Usually, golden parachutes are not agreed at the time when a merger or takeover is just about to happen. Instead, they are negotiated prior to that event - likely at the start of an executive’s tenure at a company. But that does not always have to be the case.

What is interesting about them, is that while they help protect top executives at a firm should a takeover occur, they do also help prevent takeovers.

On the other side of a merger, if a CEO or other top ranking executive has a golden parachute outlined in their contract, they are known as poison pills. The compensation can be so large that a golden parachute can deter other companies attempting to merge or takeover a business with executives that will require eye watering payouts upon their termination.

Payouts do not have to be cash based, but instead can be stock options instead as well as a continued enrollment in a company pension plan or comprehensive private health insurance.

Advantages of a Golden Parachute

The advantages to a golden parachute are mainly on the side of the executive. It means that should they have to leave a company, earlier than they perhaps wanted, they will still receive a hefty remuneration package for their service to a firm.

For that reason, it can also benefit a company to offer a golden parachute as - not only can it prevent takeovers as previously mentioned - but it can also help attract the top talent to fill high ranking roles.

If a takeover does occur, golden parachutes can stop the leaving executive from suing a company and thus can make the process that little bit more amicable and straightforward.

On the one hand, golden parachutes allow companies to make better offers to skilled officers, encourage present officers to pursue beneficial takeovers, and can be used as part of a poison pill strategy.

However, golden parachutes also can cost hundreds of millions of dollars, arguably over-compensate officers, and discourage beneficial change.

Contractbook and Golden Parachute

Golden parachute payouts can be complex. Getting the terms and conditions that surround it written down in black and white, and signed by both parties involved is critical - just like every other clause in an employment contract.

Contractbook can help with that through its contract generating software that helps create contracts in plain language that can be negotiated easily through effective collaboration tools. As a result, the nuts and bolts of a golden parachute clause can be agreed upon far more quickly than without our software.

Golden Parachute: Pros and Cons

The table below summarizes the advantages and disadvantages of golden parachute agreements:

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