golden parachute

noun
Updated on: 26 Jul 2017

Definition of golden parachute

  1. :  a generous severance agreement for a corporate executive in the event of a sudden dismissal (as because of a merger)

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The Gilded History of golden parachute

In 1981 an employee of a major company undergoing a corporate merger referred cynically to the huge severance packages given ejected executives as "golden parachutes." It isn't clear whether the employee actually coined the term, but it is well documented that both "golden" and "parachute" were already part of corporate parlance by that time. Since the 1960s, the business world had been using "golden handshake" for a compensatory package accompanying a termination or forced retirement. The image of the parachute, evoking a comfortable and painless landing, may have been inspired by the popular book about career change by Richard Bolles, titled What Color Is Your Parachute?

First Known Use of golden parachute

1981


Financial Definition of GOLDEN PARACHUTE

golden parachute

What It Is

A golden parachute is an agreement between a company and an employee (usually a high level executive) that provides significant financial benefits to the employee upon termination.

How It Works

For example, upon a change in ownership or a shake-up in management, a golden parachute clause in an executive's employment contract might specify that the executive will be granted special severance pay, bonuses, stock options, or other non-cash benefits upon his departure from the organization.

[InvestingAnswers Feature: 10 Shortest CEO Tenures of All Time]

Theoretically, since the executive's own financial future is protected, he or she is free to make decisions about reorganizations, mergers or sell-offs that are in the long-term best interests of the company, even though such actions may lead to his or her dismissal.

Why It Matters

Golden parachutes are meant to help companies hire and retain top talent.  At the same time, golden parachutes have increased compensation costs, which can pose an obstacle to a transaction.

Average direct severance payments for golden parachutes in 2007-2008 were estimated at over $16 million per executive.  With bonuses, often irrespective of company performance, they can total up to two-and-a half times that amount.  As a result, golden parachutes are sometimes perceived as "poison pills." Transactions, if they involve the dismissal of top executives, can be perceived as too expensive even if they will benefit the company overall.


GOLDEN PARACHUTE Defined for English Language Learners

golden parachute

noun

Definition of golden parachute for English Language Learners

  • : a large amount of money that a company pays to an executive who is being forced to leave the company


Law Dictionary

golden parachute

noun gold·en para·chute

Legal Definition of golden parachute

  1. :  an agreement providing for generous compensation to an executive upon dismissal


Seen and Heard

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