what is Golden Parachute

Golden parachutes are severance agreements that provide significant benefits to company executives in the event of a merger, acquisition, or other major corporate changes. These agreements are designed to protect executives and provide them with financial security during uncertain times, which can help in retaining key talent and deterring hostile takeovers. However, they can also be controversial due to their potential cost and impact on shareholder interests.

1. **History and Use**:
- Golden parachutes originated in the 1960s, with the term coined in 1961 in relation to Howard Hughes and Trans World Airlines.
- They became more prevalent in the 1980s during the wave of hostile takeovers, serving as part of anti-takeover strategies, often referred to as "poison pills".
2. **Components and Benefits**:
- Benefits typically include severance pay, cash bonuses, stock options, and sometimes continued health and retirement benefits.
- These packages can be substantial, with some executives receiving multiples of their annual salary.
3. **Controversy and Critique**:
- Critics argue that golden parachutes can be excessive and unjustly costly to the company, potentially breaching fiduciary duties to shareholders.
- There is also controversy around their impact on corporate governance and the potential for executives to prioritize their own financial gain over the best interests of the company.
4. **Legal and Tax Considerations**:
- The legality of golden parachutes is generally allowed as long as shareholders agree to the payment packages, but there are tax implications to consider.
- Excess parachute payments are subject to a 20% excise tax under Internal Revenue Code Section 280G, intended to curb abusive compensation practices.
5. **Impact on Mergers and Governance**:
- Golden parachutes can influence the decision-making of executives during mergers, potentially leading to more favorable outcomes for them but possibly at the expense of shareholder interests.
- They can also affect the overall stability of a company during transitions, as executives may be more willing to support deals that provide them with substantial payouts.
6. **Strategic Considerations for Companies**:
- Companies may use golden parachutes as a tool to attract and retain top talent, especially in industries prone to mergers and executive turnover.
- However, companies must balance the use of golden parachutes with the need to protect shareholder value and ensure that executive compensation aligns with corporate success.

In conclusion, while golden parachutes serve to protect and compensate executives during corporate upheaval, their implementation must be carefully considered to avoid excessive costs and to ensure alignment with the company's long-term interests.