A golden parachute is a clause in a top executive’s employment agreement. It defines the payout the individual will receive should they be terminated or forced out of an organization before the end of their contract. For many people, this payout can be quite substantial. Here’s what you need to know about negotiating executive severance and golden parachute packages.
Typically, top executives are recruited with a variety of incentives and benefits. This includes base compensation, stock options, potentially overblown bonuses, and the assurance that if their employment is terminated, they won’t be financially disadvantaged. There are advantages and disadvantages of offering golden parachutes to executives. Therefore, they should be negotiated very carefully.
There are significant differences between severance packages and golden parachutes. If an organization is downsizing or merging, there will probably be employee layoffs. In this case, organizations may offer a severance or termination fee to employees. This ranges from one to two weeks of pay for every year the employee worked for the company. Additionally, severance packages can extend to the executive ranks. Some executives may be offered six to twelve months’ salary and a pro-rated bonus in the event of termination.
Golden parachutes are much heftier packages. They often contain benefits such as stock and option grants, multiple years’ worth of full compensation with bonuses, full vesting in retirement packages, and even extended health coverage. It provides an exceptionally soft financial landing for a terminated executive, hence its name.
Golden parachutes are a way to recruit high profile, experienced executives to an organization. Offering this clause helps allay concerns of risks or failure, minimize potential conflicts of interest, and ensure the executive longevity that is essential to success with long range strategies.
On the other hand, there are some negatives that come with these executive agreements. For example, the size of the payout is often monumental and can lead to concerns with the shareholders and employees about the disproportionate treatment of one group over the other. Additionally, the agreements seem to reward failed executives. Many times, executives terminated for poor performance or in some cases unethical behavior, are still allowed to receive their golden parachute payout.
Executives and companies considering golden parachute packages should speak with an attorney to carefully negotiate these clauses. To learn more, please contact Cook, Craig, and Francuzenko today.
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