A golden parachute is a large payment to a senior manager of a business, which is triggered by the takeover of the business and termination of the manager's employment. United States tax law states that a golden parachute arrangement is considered to be one that pays an individual at least three times his or her base compensation in the event of a change in control of a business. A golden parachute arrangement may include a number of payment types, including the following:
Cash bonus payment
Cash severance payment
Extended benefit plans
There are two reasons for a business to institute golden parachute arrangements. One is to have such a large expenditure looming for prospective acquirers that they will be deterred from making a purchase offer; in effect, the prospective payment makes the target company less attractive. The second reason is to provide the prospect of so much additional compensation that executives will want to not only work for a company, but also to locate prospective acquirers of it. The latter is a particularly common reason for these payments in industries where there is a large amount of consolidation occurring via acquisition transactions.
There are major detractors of the golden parachute concept. They point out that senior managers are already very well compensated, and that they already have a fiduciary duty to shareholders to find the best possible price for a business, if a potential acquirer is interested in the business. From this viewpoint, a golden parachute arrangement is simply an attempt to extract all possible cash from an organization by management.
A golden parachute arrangement is also known as a change-in-control benefit.