Golden Parachute: Meaning, How it Works, and Examples

What is a Golden Parachute?

A golden parachute refers to an employee receiving a large compensation package upon termination. These compensation packages are often built for high-level executives, and benefits include large cash bonuses, stock options, severance pay, and more.

The term “golden parachute” refers to the comfort of receiving large financial benefits despite being in the critical position of being terminated from the company.

Examples of a Golden Parachute

Elon’s Twitter Acquisition

In 2022, Elon Musk acquired Twitter for $44 billion. Musk then proceeded to fire the company’s executive management team, including CEO Parag Agrawal, who, according to The Guardian, received a payout worth $57.4 million. Including other top executives, the golden parachute payouts for Twitter’s acquisition were worth over $120 million.

Microsoft’s Acquisition of Activision Blizzard

Microsoft’s ongoing acquisition of Activision Blizzard has brought attention to Activision’s CEO, Bobby Kotick, who is entitled to a $15 million payout if he is terminated from the company without cause. Additionally, Kotick owns or has the right to acquire 6.5 million shares of Activision Blizzard currently valued at $619 million when applying Microsoft’s buyout price of $95 per share.

Advantages and Disadvantages of Golden Parachutes

Advantages:

• Recruiting top talent: Golden parachutes are often used to attract top executives seeking a safety net in case of termination.
• Protection against hostile takeovers: When considering an acquisition, the acquiring company will have to reconsider the hostile takeover as it would be responsible for paying out the golden parachutes to all the executives it terminates.

Disadvantages:

• Conflict of interest: Executives may not have a high incentive to perform as they know their termination would result in a large compensation package.
• Profitability: Golden parachutes are often worth dozens of millions, which may hurt a company’s margins and profitability.

Controversies

Golden Parachutes are a controversial practice as underperforming executives are often paid massive sums despite not meeting expectations. A textbook example is that of Carly Fiorina, the former CEO of Hewlett-Packard (HP) from 1999 to 2005. During that time, the company had a large round of layoffs and a significant decline in market capitalization. When she was forced to resign in 2005, Fiorina was given $21 million in cash, and further benefits worth an extra $19 million. This eventually led to shareholders filing a lawsuit that was dismissed by a federal judge in 2008. In total, she received over $100 million in compensation during her 6 years at HP.

Golden Parachute vs. Golden Handcuff

Similar to the golden parachute, there is also an industry term known as the golden handcuff. This refers to a compensation structure that disincentivizes employees from leaving a company. This is often done to deter employees from moving to competing firms.

Common forms of golden handcuffs include offering stock, stock options, bonuses, and more. However, these offers come with terms and conditions. This includes only being paid after a certain period of time, or if offered upfront, compensation must be returned to the company if the employee leaves before a predefined date.

Overall, the main difference here is that a golden parachute is designed to attract an employee, while golden handcuffs are better structured for retaining an employee. Although both provide compensation benefits to an employee, golden handcuffs come with terms and conditions better suited to align the incentives between the employee and the company.

Additional Resources

If you want to learn more about corporate finance, consider checking out our Complete Finance & Valuation Course which has helped our students land roles at Goldman Sachs, Tesla, Bloomberg, and other great companies!

Other Articles You Might Find Helpful

• The Top 10 Highest-paying Investment Banks
• Precedent Transactions Analysis
• The Top 8 Most Important Excel Skills for Finance
• Build a Financial Dashboard