Golden parachute is the term used for an agreement between an employer and a high-level employee that ensures certain special benefits, should the employee be terminated. This is usually given to top-level executives only.
Benefits included in golden parachutes would typically include severance pay, bonuses, pension, and stock options, among others. The reasons for termination do not always have to be specified, but normally, these are documented. In certain cases, specific conditions must be met, such as a change of company ownership, a merger, redundancy, and so on.
The golden parachute is an easy target for criticism, as it appears to be an excessive tool for self-enrichment, at least by senior executives. After all, executives already enjoy many benefits, in addition to ample compensation packages.
Still, it can, in many cases, provide certain advantages. For one thing, it is a good incentive for senior executives to join and stay in companies, especially those for which the takeover risk seems particularly high.
Also, since they are already well-compensated and will receive even greater compensation should a takeover occur, they can remain calm and objective, thus protecting shareholder interests. Lastly, a golden parachute may be a deterrent for takeovers, if the cost of parachutes turns out to be too high.
These benefits, however, are debatable. After all, senior executives are already aware of the market’s volatility and the existence of termination risks in any company. They are already paid much, so a golden parachute seems unnecessary to secure their objectivity. Also, in case of a takeover, the cost of golden parachutes may not be significant enough to outweigh the potential gains a suitor foresees.