A Business Encyclopedia

Golden Parachute

Definition: The Golden Parachute is an agreement between the company and the top executive(s), that he will be paid lucrative benefits in the event when a company is taken over by the other firm, and his employment gets terminated, as a consequence of merger or acquisition.

In other words, golden parachute is a clause in the employment contract, generally of top key executives, that employee will receive certain significant benefits as an inducement for early employment termination from the company due to a takeover. Benefits given to the employees include stock options, severance pay, cash bonuses or other benefits.

The golden parachute is a disputed concept. Supporters believe that this clause helps in hiring or retaining the top level executives, due to the lucrative benefits attached to it. These benefits enable an individual to remain objective in the firm, in case a firm is involved in a merger or takeover activities.

Also, the golden parachute contracts can be used as an anti-takeover measure taken by the company to discourage the takeover or a merger by any other firm, due to the huge cost associated with these contracts.

But however, opponents believe that it is the legal duty of every employee (including top executives) to act in the best interest of the company and, therefore, should not be given additional benefits to remain objective and perform activities that are advantageous for the company. Also, the top executives are already paid handsome salaries and should not be given any extra benefits in case of their early termination from the company.

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