GOLDEN PARACHUTE
An agreement that provides key executives with generous severance pay and other benefits in the event that their employment is terminated as a result of a change of ownership at their employer corporation; known more formally as a change-of-control agreement.
Golden parachutes are provided by a firm’s
board of directors and, depending on the laws of
the state in which the company is incorporated,
may require shareholder approval. These agree-
ments compensate executives in the event that
they lose their job or quit because they have suf-
fered a reduction in power or status following a
change of ownership of their employer corpora-
tion. Some golden parachutes are triggered even
if the control of the corporation does not change
completely; such parachutes open after a certain
percentage of the corporation’s stock is
acquired.
Golden parachutes have been justified on
three grounds. First, they may enable corpora-
tions that are prime takeover targets to hire and
retain high-quality executives who would other-
wise be reluctant to work for them. Second,
since the parachutes add to the cost of acquiring
a corporation, they may discourage takeover
bids. Finally, if a takeover bid does occur, execu-
tives with a golden parachute are more likely to
respond in a manner that will benefit the share-
holders.Without a golden parachute, executives
might resist a takeover that would be in the
interests of the shareholders, in order to save
their own job.
As golden parachutes have grown increas-
ingly lucrative, they have come under criticism
from shareholders who argue that they are a
waste of corporate assets. These shareholders
point out that managers already have a fiduciary
duty to act in the best interests of their share-
holders and should not require golden para-
chutes as an incentive. Especially suspect are
large parachutes that are awarded once a
takeover bid has been announced. Critics charge
that these last-minute parachutes are little more
than going-away presents for the executives and
may encourage them to work for the takeover at
the expense of the shareholders.
As the practice of offering golden parachutes
became more and more common in the 1980s,
efforts to place restrictions on the agreements
increased. Many of these efforts stemmed from
the realization that the practice, which had once
showed a positive stock return for shareholders,
was now producing negative stock returns.
On February 6, 1996, the FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC) issued a final
rule that restricted troubled banks, thrifts, and
holding companies from making golden para-
chute payments. Exceptions to the rule are
allowed for individuals who have qualified for
PENSION and retirement plans.Other exceptions
permit the FDIC to enforce the spirit of the law
by allowing legitimate payments but stopping
payments that might be considered abusive or
improper. The rule also prevents FDIC-insured
institutions from paying the legal expenses of
employees who are the subject of related
enforcement proceedings. The rule went into
effect on April 1, 1996.
106 GOLDEN PARACHUTE
WEST’S ENCYCLOPEDIA OF AMERICAN LAW, 2nd EditionFURTHER READINGS
Mogavero, Damian J., and Michael F. Toyne. 1995. “The
Impact of Golden Parachutes on Fortune 500 Stock
Returns: A Reexamination of the Evidence.” Quarterly
Journal of Business and Economics 34: 4.
“New Powers: FDIC Cuts Down Golden Parachutes.” 1995.
