A golden parachute refers to a generous compensation package promised to a senior executive in the event that the executive leaves the company. It is a contractual agreement between the company and the employee. The contract stipulates the conditions under which the executive will receive it. Some of the conditions may include the following:
- Termination of employment due to a merger or an acquisition
- Termination for any other reason
The compensation package may include the following
- Cash bonuses
- Severance pay
- Stock options
- Other benefits
Advantages and Disadvantages
A golden parachute can make it easier for a company to attract and retain talented executives. A golden parachute can also discourage takeovers by increasing the cost of the takeover.
On the other hand, if they are dismissed due to poor performance, then companies still often provide excessive compensation for executives. Also, the cost of it may not discourage takeovers because it may be an insignificant cost compared to the overall cost of the takeover.
The golden parachute protects the company much like a CFO protects and guides the CEO. If you’re interested in becoming the trusted advisor your CEO needs, download your free How to be a Wingman guide here.
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