Golden parachuteHuman Resource Management

Prepared By

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Manu Melwin JoyAssistant Professor

Ilahia School of Management Studies

Kerala, India.Phone – 9744551114

Mail – manu_melwinjoy@yahoo.com

Golden Parachute• A golden parachute is an

agreement between a company and an employee (usually upper executive) specifying that the employee will receive certain significant benefits if employment is terminated.

Golden Parachute• Most definitions specify the

employment termination is as a result of a merger or takeover, also known as "Change-in-control benefits", but more recently the term has been used to describe perceived excessive CFO (and other executives) severance packages unrelated to change in ownership (also known as a golden handshake).

Golden Parachute• The first use of the term

"golden parachute" is credited to a 1961 attempt by creditors to oust Howard Hughes from control of Trans World Airlines. The creditors provided Charles C. Tillinghast Jr. an employment contract that included a clause that would pay him money in the event that he lost his job.

Golden Parachute

• The use of golden

parachutes expanded greatly

in the early 1980s in

response to the large

increase in the number of

takeovers and mergers.

Golden Parachute• In Europe the highest "change-in-

control benefits" have been for

French executives, as of 2006

according to a study by the Hay

Group human resource management

firm. French executives receive

roughly the double of their salary

and bonus in their golden parachute.

Golden Parachute• News reference volume of the term

"golden parachute" spiked in late 2008

during the global economic recession,

and 2008 US Presidential Debates.

Despite the poor economy, in the two

years before 2012 a study by the

professional services firm Alvarez &

Marsal found a 32% increase in the value

of "change-in-control benefits" provided

to US executives.

Golden Parachute• In the 1980s, golden parachutes

prompted shareholder suits challenging

the parachutes' validity, SEC

"termination agreement disclosure

rules" in 1986, and provisions in the

Deficit Reduction Act of 1984 aimed at

limiting the size of future parachutes

with a special tax on payouts that

topped three times annual pay.

Golden Parachute• In the 1990s in the United States, some

government efforts were made to diminish

"change-in-control benefits". As of 1996,

Section 280G of the Internal Revenue Code

denies a corporation a deduction for any

excess "parachute payment" made to a

departing employee, and Section 4999

imposes on the recipient a nondeductible

20% excise tax, in addition to regular

income and Social Security taxes.

Golden Parachute• One study found golden parachutes

associated with an increased

likelihood of either receiving an

acquisition offer or being acquired,

a lower premium (in share price) in

the event of an acquisition, and

higher (unconditional) expected

acquisition premiums.

Golden Parachute• "Gratuitous" payments made to

CEOs on agreeing to have their

companies acquired (i.e.

payments made to CEOs by the

acquiring company not

mandated under the CEO's

contract at the time the company

is acquired) have been criticized.

Golden Parachute• A study investigating acquirer-paid

sweeteners at 311 large-firm

acquisitions completed between

1995 and 1997 found that CEOs of

the acquired companies accept lower

acquisition premiums when the

acquirer promised them a high-

ranking managerial post after the

acquisition.

Golden Parachute• On June 24, 2013, The Wall Street

Journal reported that McKesson

Chairman and CEO John

Hammergren's pension benefits of

$159 million had set a record for "the

largest pension on file for a current

executive of a public company, and

almost certainly the largest ever in

corporate America.

Golden Parachute

• A study in 2012 by GMI

Ratings, which tracks

executive pay, found that

60% of CEOs at S&P 500

companies have pensions,

and their value averages

$11.5 million.

Golden Parachute• On June 29, 2013, The New York

Times reported on research findings

suggesting that "despite years of

public outcry against such deals,

multimillion-dollar severance

packages are still common," and

they continue to become "more

complex and opaque."