By: Keith Kefgen and Rosemary Mahoney - Dec, 1997
Glancing at any of the recent trade magazines, it is obvious that merger
and acquisition activity is on the
rise. The predictions for industry consolidation seem to be coming
true. In fact, active buyers are paying billions in order to consummate
deals. It is no wonder that executive pay has been scrutinized so closely
in some of these deals. One of the critical topics has been the applicability
of golden parachutes. Below we have analyzed the role of the golden parachutes
in today's heated M&A environment.
Many people confuse golden parachutes with severance payments. According
to Section
280G of the Internal Revenue Code, a golden parachute payment is
a payment that is contingent of a change (1) in the ownership or effective
control of the corporation, or (2) in the ownership of a substantial portion
of the assets of the corporation." The traditional use of a golden parachute
is to offer company executives financial security in the event of a takeover.
In essence, a form of "layoff insurance," meant to protect against a sudden
loss of employment.
| Eligibility | ||
| Golden Parachutes | Officers Only | |
| Severance | Corporate Managers & Above | |
|
|
|
|
|
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| Golden Parachutes | 0 Years of Total Compensation | 2 Years of Total Compensation | 5 Years of Total Compensation | |||
| Severance | 0 Years of Total Compensation | 8 Months of Total Compensation | 2 Years of Total Compensation | |||
| Source: HVS Executive Search | ||||||
Beyond the IRS defined benefits, golden parachutes provide a number of other advantages. One is that they assist in attracting and retaining top management talent. The security of a golden parachute makes it easier to attract executives to a takeover target, and in times of heavy M&A activity that includes just about every company. As golden parachutes become more prevalent in employment agreements, not offering them will put com-panies at a strict disadvantage.
Another quality of golden parachutes is that they act as a deterrent to anti-takeover tactics. The presence of a parachute allows management to evaluate a takeover bid more objectively. Without a golden parachute provision in place, executives might selfishly implement costly defensive tactics to save their jobs, regardless of what is in the best interest of shareholders.
A third argument is that golden parachutes actually dissuade takeover attempts by creating a change of control liability that renders the takeover financially unsound. Historically, this has simply driven up the cost of parachute payments. According to our HCE survey of lodging corporations, the average parachute is now equivalent to approximately two years of total compensation and is extended to only the top 10 to 15 executives in the organization.
Whether a golden parachute dissuades a takeover or not, it can benefit
a corporation by attracting top executives, thwarting costs associated
with takeovers and promoting stability.
For additional information contact the firm at