In our endeavor to find out and share as much information as possible about the recruitment industry, today, the LZBlog is exploring the concept of the Golden Parachute. Recruitment and retention have become the keys to building successful teams, departments, and even companies, and, while not every facet can be used by every business, understanding the ins and outs is integral to moving forward.
Golden parachutes share some of the same characteristics as golden handcuffs, and these were discussed late last year (please see our post from November 15, 2023, for a more in-depth analysis). Upon closer inspection, though, they are not the same. While golden parachutes are seen as a way of attracting and recruiting top employees, they are structured to retain an executive employee after they are hired. Out of all the things offered as a form of compensation benefits to specific employees, only the golden parachute provides a soft landing for those same employees if something happens to the company itself.
“Baby, I will be your parachute…”
The history of the golden parachute can be traced back to 1961. Stemming from the battle for control of the renowned Trans World Airlines company between Howard Hughes and Charles C. Tillinghast Jr., it quickly became a touchpoint in the ensuing spar between the two. The eccentricities of Howard Hughes have been known for a great deal of time, but the relationship he shared with his many company boards is still being studied for the effects it had on the international economy. For TWA, much of the board wanted Hughes to relinquish control in his later years to Tillinghast, but the latter knew how powerful Hughes had been in the industry for decades. He wanted something to fall back on if Hughes managed wrested control of the company back from Tillinghast, something to protect him from a sudden loss of income. Therefore, the golden parachute was drawn up, named, and given to him.
So, what exactly is a golden parachute? In its most basic iteration, “a golden parachute is a contractual agreement between an organization and a high-ranking executive that specifies the benefits the employee will receive in the event of termination.” In essence, with the nature of business being to grow and take over competitors, executives who take jobs at companies in volatile positions are looking for protection, in case the worse should happen and their jobs are cut by a new company owner. Their contracts are written to include payouts or other financial benefits that they may not normally qualify for as an unusual unemployed person.
While there are many examples of golden parachutes out there right now, the most famous at this time are the ones paid out by Twitter. As most everyone is aware, in 2022, Elon Musk bought Twitter for $44 billion, and then he fired the company’s executive management team. After the dust settled from the original purchase, the price tag had ballooned from $44 billion to an additional $120 million in contractual golden parachutes. That included $57.4 million to the previous CEO, Parag Agrawal. For Musk, the sticker shock of the first price had to be nothing compared to the money that had to be paid out to those he sacked in the immediate aftermath.
Better than “Freefallin’”?
Like with any other tool in the recruitment and retention industry, golden parachutes come with many advantages and disadvantages. Delving into the pros, golden parachutes were created as a way to attract and recruit top executives to companies. Making these a part of a diverse compensation package attracts the level of executive needed to run a large business, one who would be otherwise wary to take such a volatile position. On top of that, golden parachutes ensure that the goals of the management team and the shareholders remain the same. With the “safety net” of the parachute available, executives can make decisions that will improve the company’s future, even if it means eliminating their own positions.
The opponents to golden parachutes have been becoming much more vocal about the disadvantages of them in recent years. Referencing the example of Musk’s purchase of Twitter shows that golden parachutes can cost a company millions in payments to fired executives, which can harm any business’s bottom line and affect workers all the way down the chain. It also happens that employees are sometimes dissatisfied with how management is handling their company’s golden parachutes and find that they feel “deprived, ignored, and less fortunate” when these business deals go through. Later, that disappointment will trickle down into their work, which will also hurt the future of the business.
Finally, golden parachutes can wreak havoc on a company that might already be dealing with scandalous management choices. As concerns with the size of these parachutes grow, so do their costs to those having to deal with the fallout. Alongside Musk’s purchase of Twitter, Activision Blizzard ended up in the middle of a controversy when they were purchased by Microsoft. Due to Activision Blizzard’s golden parachutes, the ousted CEO ended up with a $15 million payout, alongside of millions in shares of the new stock, to the tune of over $600 million. It made headlines around the world as one of the most expensive firings in business history and stirred outrage amongst workers, shareholders, and gamers worldwide.
Conclusion
Golden parachutes are not something that every company can use. However, if a business wants to be able to offer them to attract top executives, it is wise to be apprised of all the aspects of the tool before implementing it. The goal of the golden parachute should be to attract, retain, and temper the executive management team and remind them of their responsibilities to the workers and shareholders that are depending on the top-tier bosses to make the right decisions for everyone. Boardagenda.com has found research stating that, since January 2020, corporations have received over 60 shareholder proposals concerned with the sizes and forms of the golden parachutes in place for executives. Some of these proposals have led companies, such as Alaska Air (before their more current airplane issues) to put a cap on how much their severance packages and golden parachutes could pay out. Spirit AeroSystems followed with a similar agreement shortly after.
When considering golden parachutes, it is important to remember that these should only be providing a safety net to management in the worst case scenario of being let go by new company ownership. They should not be considered blanket permission to act without regard for the business or the workers and shareholders that make up that company. Don’t forget, while exploring all of the recruitment and retention options for your business, check out our LZBlog for the tips and insights to help your company succeed!
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Meaghan Goldberg covers recruitment and digital marketing for Lionzone. A Patterson, GA native, after graduating from both Valdosta State University and Middle Tennessee State University, Meaghan joined Lionzone in 2018 as a digital recruitment strategist before becoming the social media manager.
Resources:
https://corporatefinanceinstitute.com/resources/valuation/golden-parachute/
https://www.gartner.com/en/human-resources/glossary/golden-parachute
https://www.careerprinciples.com/resources/golden-parachute
https://boardagenda.com/2023/11/15/golden-parachute-concerns-take-flight-in-the-us/
https://www.linkedin.com/pulse/future-golden-parachute-payments-trends-predictions-eqvista
https://comptool.com/golden-parachute/
https://www.linkedin.com/pulse/golden-parachute-claw-back-hemant-patil
