Difference Between Golden Handshake and Golden Parachute

Explanation of Golden Handshake and Golden Parachute

A golden handshake is a form of financial compensation offered to an employee, usually a high-level executive, when they leave a company voluntarily, due to retirement or other reasons. The purpose of a golden handshake is to provide a financial safety net to the employee after they leave the company. The payment may be a lump sum or a series of payments over time.

On the other hand, a golden parachute is a type of severance agreement that provides financial compensation to an employee if they are terminated from their job due to a merger, acquisition, or other change in control of the company. The payment is usually structured as a lump sum and may include additional benefits such as stock options or a continuation of benefits.

Both golden handshake and golden parachute are designed to provide financial security to executives or other high-level employees, but they differ in their purpose and the circumstances under which they are offered.

Importance of understanding these terms

Understanding the terms “golden handshake” and “golden parachute” is important for both employees and investors in a company. For employees, knowing about these benefits can help them negotiate better compensation packages when they join a company or negotiate their exit terms if they decide to leave. They can also help employees plan their financial futures and determine their next career moves.

For investors, understanding these terms is important because they can have a significant impact on a company’s financial health. Both golden handshake and golden parachute payments can be expensive for a company and affect its profitability, especially if they are given to a large number of employees. This information can help investors make more informed decisions about investing in a company and its potential risks and returns.

In addition, the use of golden handshakes and golden parachutes has been a topic of debate in recent years, with some questioning whether these benefits are excessive and promote a culture of executive entitlement. Understanding these benefits can help individuals and organizations make informed decisions and engage in discussions about the appropriateness and fairness of executive compensation.

Golden Handshake

I. Definition and explanation

A. A golden handshake is a form of financial compensation offered to an employee, usually a high-level executive, when they leave a company voluntarily, due to retirement or other reasons.
B. It is also known as a severance payment, and it is intended to provide a financial safety net to the employee after they leave the company.
C. The payment may be a lump sum or a series of payments over time, and it is usually based on the length of the employee’s service with the company.

II. Common uses and reasons for offering a golden handshake

A. To incentivize executives to leave the company voluntarily, rather than face termination.
B. To recognize the employee’s contributions to the company and provide a financial reward for their service.
C. To reduce the risk of legal action or reputational damage by the employee after their departure. D. To facilitate a smooth transition of leadership and avoid disruption to the company’s operations.

III. Examples of golden handshake deals

A. In 2017, the CEO of General Electric, Jeffrey Immelt, received a golden handshake worth $211 million when he retired from the company after 16 years of service.
B. In 2018, the CEO of Qualcomm, Steve Mollenkopf, received a golden handshake worth $160 million when he retired from the company after 14 years of service.
C. In 2019, the CEO of Ford, Jim Hackett, received a golden handshake worth $17.4 million when he retired from the company after three years of service.

IV. Pros and cons of a golden handshake for the employee and the company

A. Pros for the employee:

1. Provides a financial safety net after leaving the company.
2. Rewards the employee for their service and contributions to the company.
3. Helps the employee maintain their standard of living while they look for new opportunities.

B. Cons for the employee:

1. The payment may be subject to taxes and other deductions, reducing its value.
2. The payment may be contingent on certain conditions, such as a non-compete agreement, which can limit the employee’s future job prospects.

C. Pros for the company:

1. Encourages executives to leave the company voluntarily, reducing the risk of litigation or damage to the company’s reputation.
2. Facilitates a smooth transition of leadership and avoids disruption to the company’s operations.

D. Cons for the company:

1. The payment can be expensive, especially if it is given to multiple employees.
2. It can be seen as excessive or unfair by other employees or shareholders.

Golden Parachute

I. Definition and explanation

A. A golden parachute is a type of severance agreement that provides financial compensation to an employee if they are terminated from their job due to a merger, acquisition, or other change in control of the company.
B. The payment is usually structured as a lump sum and may include additional benefits such as stock options or a continuation of benefits.
C. The purpose of a golden parachute is to provide financial security to executives who may lose their jobs as a result of a change in ownership or control of the company.

II. Common uses and reasons for offering a golden parachute

A. To incentivize executives to support a merger or acquisition that may be in the best interest of the company, even if it results in their job loss.
B. To attract and retain top talent by providing a safety net in the event of a change in control.
C. To provide a sense of stability to the company’s workforce during a period of transition.
D. To avoid litigation or other legal disputes that may arise as a result of executive terminations.

III. Examples of golden parachute deals

A. In 2019, the CEO of Bristol-Myers Squibb, Giovanni Caforio, received a golden parachute worth $15.9 million when the company completed its acquisition of Celgene.
B. In 2020, the CEO of Tiffany & Co., Alessandro Bogliolo, received a golden parachute worth $20.2 million when the company was acquired by LVMH.
C. In 2021, the CEO of Medtronic, Omar Ishrak, received a golden parachute worth $28.5 million when he retired from the company after a change in control.

IV. Pros and cons of a golden parachute for the employee and the company

A. Pros for the employee:

1. Provides a financial safety net in the event of a job loss due to a change in control.
2. Can help executives maintain their standard of living while they look for new opportunities.
3. May include additional benefits, such as stock options or a continuation of benefits.

B. Cons for the employee:

1. The payment may be subject to taxes and other deductions, reducing its value.
2. The payment may be contingent on certain conditions, such as a non-compete agreement, which can limit the employee’s future job prospects.

C. Pros for the company:

1. Encourages executives to support a merger or acquisition that may be in the best interest of the company.
2. Helps attract and retain top talent by providing a sense of security.
3. Can help avoid legal disputes that may arise as a result of executive terminations.

D. Cons for the company:

1. The payment can be expensive, especially if it is given to multiple employees.
2. It can be seen as excessive or unfair by other employees or shareholders.
3. It can be a barrier to change and innovation, as executives may be less willing to take risks or support change that may result in their job loss.

Differences Between Golden Handshake and Golden Parachute

I. Differences in purpose

A. Golden handshake

1. The purpose of a golden handshake is to provide a financial incentive for executives to retire or resign from a company voluntarily.
2. It is not tied to a specific event, such as a merger or acquisition.

B. Golden parachute

1. The purpose of a golden parachute is to provide financial security to executives who may lose their jobs due to a change in ownership or control of the company.
2. It is tied to a specific event, such as a merger or acquisition.

II. Differences in structure

A. Golden handshake

1. The payment is usually structured as a lump sum and may include additional benefits such as a continuation of benefits or stock options.
2. It is often negotiated on a case-by-case basis and may vary depending on the executive’s level of seniority and tenure.

B. Golden parachute

1. The payment is usually structured as a lump sum and may include additional benefits such as stock options or a continuation of benefits.
2. It is often predetermined and may be outlined in the executive’s employment contract or a severance agreement.

III. Differences in triggers

A. Golden handshake

1. The payment is triggered by an executive’s voluntary retirement or resignation from the company.
2. It is not tied to a specific event, such as a merger or acquisition.

B. Golden parachute

1. The payment is triggered by a change in ownership or control of the company, such as a merger or acquisition.
2. It is not triggered by an executive’s retirement or resignation.

IV. Differences in eligibility

A. Golden handshake

1. The payment is typically offered to executives who are nearing retirement age or have completed a long tenure with the company.
2. It is not offered to executives who are terminated from the company.

B. Golden parachute

1. The payment is typically offered to executives at all levels who may be impacted by a change in ownership or control of the company.
2. It is offered to executives who may be terminated from the company as a result of the change in ownership or control.

V. Differences in perception

A. Golden handshake

1. Golden handshakes are generally viewed more positively by the public and employees, as they are seen as a reward for long service or as a way to facilitate a smooth transition of leadership.
2. They may be criticized if the amount of the payment is seen as excessive or if it is given to executives who have not performed well.

B. Golden parachute

1. Golden parachutes are often viewed more negatively by the public and employees, as they are seen as a way for executives to be rewarded for job loss, even if they did not perform well or were responsible for the company’s struggles.
2. They may be criticized as excessive or unfair, especially if the company is struggling financially or if other employees are laid off as a result of the change in ownership or control.

Conclusion

The terms “golden handshake” and “golden parachute” are both types of compensation packages offered to executives, but they differ in their purpose, structure, triggers, eligibility, and perception. Understanding these differences is important for investors, employees, and the public as it can help them assess the fairness of compensation arrangements and hold companies accountable for their actions. While these compensation packages can be useful tools for attracting and retaining talented executives, it is crucial to ensure that they are structured in a way that aligns with the interests of shareholders and the broader community.

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