Working of Golden Parachute
The primary purpose of golden parachutes is to encourage top executives to agree to mergers or acquisitions that may not be in the best interests of shareholders but may benefit executives personally. Typical components of a Golden Parachute package include:
1. Severance Pay: Executives receive substantial severance pay, often calculated as a multiple of their base salary and bonus. This payment provides financial security if they lose their job due to a merger or acquisition.
2. Stock Options and Grants: Executives can receive accelerated vesting of stock options and grants, allowing them to cash in on their equity holdings before a change in control occurs.
3. Continuation of benefits: Benefits like health insurance, retirement plan contributions, and other benefits may continue for a certain period after the merger so that the executives do not face a sudden loss of these benefits.
4. Consulting contracts: Some golden parachute contracts include consulting contracts that guarantee higher payouts or benefits for executives who agree to stay for a certain period to help with the transition.
5. Non-competition agreements: Senior executives may also receive non-competition agreements that prevent them from joining competing companies for a certain period after they leave the company.
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