Professor James Lange
During the financial collapse of the economy that Americans have been dealing with for the past 5 years, Golden Parachutes have become a controversial topic. A Golden Parachute is defined as an agreement between an employee (in most cases an upper level executive) and a company that offers the employee specified additional benefits if the employee is terminated. In the past, most Golden Parachutes required that the termination was as a consequence of a merger or acquisition. But more recently the phrase has described executive severance packages unrelated to a change in the ownership of the company. This may include additional bonuses, stocks, severance pay, or other benefits. While high profile CEOs are justly compensated during their tenure and no further compensation is justified at separation, a Golden Parachute is not only a way of compensating a talented CEO for the millions of dollars in revenues they have brought to the company and its shareholders, but it can also protect a company from an unwanted takeover.
Like most executive level severance agreements, a Golden Parachute is intended to provide the manager with a source of income while he or she searches for a new job. Some corporations feel that adding a Golden Parachute provision to the corporate bylaws, acts as a deterrent to unwanted takeover attempts, since these executive payments make it very expensive for a new owner to change the corporation's management team (Kloeffler, D. 2012).
CEOs have satisfied their obligations and generated value for shareholders during their tenure, some have increased company value by millions of dollars, and therefore these severance packages serve a purpose. In most cases, the profit and added value that a talented CEO can bring to a company, leverages the payout received at separation from the company. For example, Peter Cuneo who served as the CEO for Marvel Entertainment from July 1999 to December 2002, Mr. Cuneo joined the company just after it came out of bankruptcy. At the time Marvel was over leveraged, had limited liquidity and company moral was reported to be at low levels. Mr. Cuneo made the expansion of Marvel’s global marketing and developing a licensing model him primary focus. “Movies based on its characters became blockbusters. When Cuneo took the reins of Marvel, the company's stock price was 94 cents; 10 years later (with Cuneo as vice chairman) the company was sold to Walt Disney (DIS) for more than $4 billion, or $54 a share ” (Naziri, 2012). Certain types of businesses, such as financial companies, airlines, and pharmaceutical companies tend to be more prone to mergers. Offering a severance package or Golden Parachute as an incentive makes it easier for these types of companies to hire and retain executives.
In some cases, public knowledge may be that a company is going to be entering a merger or bankruptcy and the company needs to hire an executive to manage the company through the process. In most of these scenarios, the executive is not paid a salary during their employment and the severance package is the bonus at the end of the job or assignment. Golden Parachutes may help an executive remain objective about the company during a merger or through a corporate takeover.
Golden Parachutes are needed in order to attract and recruit talented executives to a company. During a merger or takeover of a company, CEOs and other top executives are the most vulnerable to lose their job. It is therefore, important for CEOs and executives to take into consideration what will happen to them if they are let go because of a merger with another company, or if the company is sold. Consequently, in order to recruit top executives, company’s need to add pre-negotiated Golden Parachutes as part of the offering package (Kloeffler, D. 2012).
The media tends to make a large severance package...
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