Golden parachute

Golden parachute is a term used in business to refer to an agreement between a company and an executive where the executive will receive certain significant benefits if the company is taken over by another company, and the executive is terminated as a result of the takeover. These benefits can include severance pay, cash bonuses, stock options, or other benefits.

History

The concept of the golden parachute originated in the 1960s as a response to hostile takeovers. Companies sought to protect their executives from the financial consequences of such takeovers by providing them with a safety net in the form of a golden parachute. The first known use of the term "golden parachute" was in a 1961 SEC filing by the Trans World Airlines.

Structure

A golden parachute can take many forms, but it typically includes a combination of severance pay, cash bonuses, and stock options. The exact structure of the parachute is often determined by the executive's contract with the company. In some cases, the parachute may also include other benefits, such as health insurance or retirement benefits.

Criticism

Golden parachutes have been criticized for a number of reasons. Some argue that they reward executives for failure, as they can receive large payouts even if the company's performance under their leadership was poor. Others argue that they can create perverse incentives, encouraging executives to pursue risky strategies in the hope of triggering a takeover and the associated payout.

Regulation

In the United States, golden parachutes are regulated by the Internal Revenue Service and the Securities and Exchange Commission. The IRS imposes a 20% excise tax on certain parachute payments, and the SEC requires that companies disclose the details of their golden parachute arrangements in their proxy statements.

See also

• Executive compensation
• Hostile takeover
• Mergers and acquisitions