Debitoor's accounting dictionary
Golden parachute

Golden parachute - What is a golden parachute?

A golden parachute is an agreement between a company and an employee (usually top executives), which specifies that the employee will receive significant benefits in the event that their employment is terminated.

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In other words, a golden parachute is a compensation package, which is typically specific to situations where an employment contract is terminated as a consequence of a merger or acquisition.

The evolution of golden parachutes

It’s no secret that the attitude towards golden parachutes have become more ‘lenient’ or ‘flexible’ over time, one might say.

Golden parachutes were designed to protect shareholders and top executives, from the uncertainty of being fired due to a takeover, merger, or the similar. The initial intention was never to ‘reward’ an executive or shareholder who merely chose to walk away.

In the late 1970s, firms began adopting the golden parachute payout-package concept, and throughout the 1980s the use of golden parachutes expanded greatly due to the wave of corporatetakeovers during this time. More and more companies began adopting the golden parachute concept, and it became a fairly standard part of compensation packages across not only large but also smaller companies too.

The payout package or compensation from a golden parachute covered both cash payouts as well as other benefits and bonuses.

The idea behind

Needless to say, the golden parachute agreement was a sort of insurance or security for companies to retain their highly qualified employees.

In effect, the cost of a takeover or merge by another firm was significantly increased due to the costs associated with these contracts. In some way, it almost acted as an anti-takeover measure taken by the company, to discourage this acquisition.

The good, the bad, and the ugly

The topic of golden parachutes has been in the news many times. There are a number of critics that argue against the concept, and there is much debate around the use of golden parachutes.

Many cases involving it’s use have caused caused outrage from investors, and the general public, as some believe the agreement has been abused, and is deterring the motivation from the true focus.

However, it is also important to keep in mind that all employees are legally obligated to act in the best interest of the company, and not their own personal interests.

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