Golden Parachutes
Also called
golden handshakes or
change-in-control payments, a golden parachute is a large sum of money -- or a combination of cash, stock options, consulting contracts and other benefits -- to be paid to one or more executives in the event of a takeover or change in ownership of a company. The practice became popular in the 1980s, and now golden parachute arrangements are in place for almost 80 percent of companies in the S&P 500 [
ref]. Golden parachutes were initially intended to guarantee compensation to an executive should he or she be fired after a merger or takeover. Now some CEOs get large pay packages in mergers and still remain in control of the new company. An example is former Gillette CEO James Kilts, who received a $165 million pay package after orchestrating the sale of Gillette to Procter & Gamble in 2005. He was particularly criticized by members of the Boston media, where Gillette was based; critics claimed he benefited financially at the expense of shareholders and the 6,000 jobs that were cut from the combined company.
Some executives also receive golden handshake-type severance packages when they resign. In January 2007, Home Depot CEO Bob Nardelli resigned and received a severance package worth roughly $210 million. However, other executives have declined opportunities to receive large payouts, claiming that their regular compensation is sufficient and that executives should match company performance and align with shareholders interests [
ref].
Severance payments more than 2.99 times an executives average annual compensation are subject to a 20 percent tax, but further regulation and government oversight may happen in the future.
Some shareholder groups have begun lobbying to allow shareholders a greater say in executive compensation, and many companies are responding, usually by allowing their stockholders to submit non-binding resolutions on executive pay.