3 Things to Know About 'Golden Parachutes' — Plus 6 Examples of Executives Who Got One

Perhaps you’ve heard of a golden parachute, and have become enraged as a result; after all, there’s something purely anti-meritocratic about the idea of receiving incredible benefits as the result of being fired from a high-paying job. How could that CEO have struck such a good deal? you might fume, thinking of your own severance package with chagrin. Indeed, golden parachute benefits can seem almost regal in comparison to the treatment you’re likely to get if you are dismissed from your post for any reason. Perks can range from cash payouts to permanent dental insurance, from stock holdings to free lifelong first-class airfare. All things considered, this luxury treatment seems pretty unfair in comparison to the rest of the working world. So how did golden parachutes come into being, exactly, and how do they work? 

Why do golden parachutes exist? 

In the 1980s, the junk bond market grew so popular that no company was safe from takeovers, pleasant or hostile. This made exec jobs more fragile than they had been in previous years, so companies started writing golden parachutes into the contracts of high-earning employees in order to guarantee some semblance of a safe "landing" if the company were to be suddenly sold and their jobs were to disappear. Originally, of course, the golden parachute was simply a precaution against total destitution, but the trend took off — after 1990, almost every Fortune 500 company offered golden parachutes to their top earners — and this popularity galvanized companies to offer better and better deals to potential employees. Now, a typical golden parachute includes much more than the money necessary to keep you on your feet for a little while.

How does a golden parachute work?

A golden parachute is written into your contract. Usually, it stipulates exactly what you’ll receive in the event of release from your contract before it has expired. Unlike a severance package, it is not simply a lump sum of money representing gratitude for how long you’ve worked in a job; rather, a golden parachute offers significant benefits in addition to cash that can add up to a truly astronomical total value. Many companies strive to be more discerning with the terms of their contracts, specifying that a golden parachute will only be available in the event of a merger or a takeover. Others choose to include ethics clauses that dictate how serious an infraction must be for the exec in question to not receive the parachute, in order to prevent scandals that reflect poorly on the company itself.

Why do companies give golden parachutes? 

There are pretty large incentives for companies to dole out golden parachutes to their high-earning executives. Firstly, a job with a golden parachute written into its contract is a more appealing option for business-minded risk takers, the exact type of worker that companies want in positions of power. Also, the existence of a golden parachute can help ensure clear-minded, unbiased thought when it comes to debating a merger. In those situations, an exec with no golden parachute might be interested in retaining their own job, allowing self-interest to cloud their judgment and possibly even incentivize them to work against the wellbeing of the company as a whole. Those with golden parachutes laid out for them, on the other hand, have the capacity to make measured decisions about the future of the company without considering risks to their own lifestyle. Plus, execs with healthy golden parachutes are more likely to leave their posts amiably and aren’t prone to blurting out private company business in a fit of rage.

Examples.

• William Agee, Bendix: In 1983, this CEO lost his job after a takeover and received a $4 million payout (~$10 million in today’s USD). This aggressively large reward led to the first big golden parachute scandal, when people began to question why CEOs were being rewarded so highly for failure. 

• Henry McKinnell, Pfizer: Pfizer, the pharmaceutical company, was having financial trouble in 2005 when McKinnell, the CEO, decided to give himself a 72% pay raise. His greed was met with his own termination — along with an $83 million pension and a plane that circled the company with a banner that read, “Give It Back, Hank!”

• John Hammergren, McKesson: Hammergren is still in his position as CEO of McKesson, a health care service company. On his termination, he is slated to receive $182.6 million, most of which will be tied up in stocks; in 2014, he almost lost $140 million of this promised wealth due to new conversations about how to spend company money going on in the board room. 

• Jack Welch, General Electric: Despite the fact that Welch was discovered to have been dishonest about how he spent company money — his infractions included purchasing expensive tickets to countless sports stadiums and an NYC apartment with a rent of $80,000/month — he retired with a whopping $417 million and a promise of $9 million/year for the rest of his life. 

• Tony Hayward, British Petroleum (BP): Hayward was CEO of BP during a huge oil spill in 2009, and the public was not pleased with his arrogant response to the disaster, calling for his removal. Sure enough, he got fired, but he still received his $1.6 million severance package plus a $600,000/yr pension. 

• Ken Lay, Enron: Lay was both CEO and founder of Enron, and ran the company into bankruptcy in 2001. He had a parachute awaiting him that would ensure him over $25 million, but he stayed with the company ‘til the bitter end, when he was taken to trial and found guilty of 10 counts of security fraud. He died before he could hear the sentence — 45 years in prison. 

Controversy.

It’s not surprising that there are many critics of the golden parachute system. Putting aside the illogical nature of profiting off being dismissed from a job, there is a rather cogent argument that the supposed risk-takers who companies want at the helm aren’t actually incentivized to take risks once they’ve secured their golden parachute. Instead, they can slack off, knowing that the worst outcome of their negligence would be a secured life of luxury. In addition to that, in the event of a merger or takeover, there is a possibility that other company employees may begin to feel hostile toward the exec, whose fate is not decided by the merger, and animosity of that sort in the office can cause bigger problems down the line, with more workers asking for similar benefits. 

The most gutting critique of the golden parachute system is the claim that the existence of parachutes only affirms the fact that the employee is more interested in their own individual wellbeing than the wellbeing of the company or its success. The parachute waiting for them ensures that they think of themselves as entirely separate entities from their employers, instead of members of a team.

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