Golden Parachute

Quick Facts

Typical value: 2-3x base salary plus bonuses and accelerated equity

Trigger: Change of control (acquisition or merger)

Tax treatment: Subject to 20% excise tax if exceeds 3x base compensation (IRC Section 280G)

A golden parachute is a contractual agreement that provides substantial benefits to top executives if they lose their jobs following a change of control—typically an acquisition or merger. These packages often include cash severance, accelerated stock options, and continued benefits.

In Plain English

A golden parachute is essentially a guaranteed soft landing for executives when their company gets acquired. Even if they're fired the day after the deal closes, they walk away with millions. It's controversial because it rewards executives during the very event that may cost other employees their jobs.

How It Works

Executive signs employment contract with change-of-control provisions
Acquisition or merger occurs (the "change of control")
Termination happens (either fired or "constructive dismissal")
Parachute deploys — executive receives severance package

Typical Components

Cash severance: Usually 2-3x annual base salary
Bonus payments: Pro-rated or full-year bonuses
Accelerated vesting: All stock options and RSUs vest immediately
Benefits continuation: Health insurance, life insurance for 1-3 years
Tax gross-ups: Company pays executive's excise taxes (increasingly rare)

Single vs. Double Trigger

Single Trigger

Executive receives payout simply because a change of control occurred—no termination required. Increasingly rare due to shareholder backlash.

Double Trigger

Executive must be terminated (or resign for "good reason") within a period after the change of control. Now the standard at most public companies.

Famous Examples

Bob Iger at Disney (2019)

When Disney acquired 21st Century Fox, Fox executives received golden parachutes totaling over $100 million. The packages were negotiated as part of the $71 billion deal.

Marissa Mayer at Yahoo (2017)

When Verizon acquired Yahoo, CEO Marissa Mayer received a $23 million golden parachute despite presiding over years of declining performance.

Dick Fuld at Lehman Brothers (2008)

Lehman's bankruptcy voided Fuld's golden parachute, but he had already received nearly $500 million in compensation over the preceding years—sparking public outrage during the financial crisis.

Why Companies Offer Them

Attract talent: Top executives demand protection before joining
Reduce conflicts: Executives won't block beneficial deals to protect their jobs
Align incentives: Encourages executives to negotiate best price for shareholders
Retention: Keeps leadership focused during uncertain M&A process

Criticism

Rewards failure: Executives get paid even if they ran the company poorly
Excessive amounts: Payouts can reach tens of millions of dollars
Misaligned incentives: May encourage executives to sell too cheaply
Unfair to employees: Regular workers rarely receive similar protections

Tax Treatment

The IRC Section 280G imposes penalties on excessive parachute payments:

Payments exceeding 3x the executive's base amount face a 20% excise tax
Company loses tax deduction for "excess" parachute payments
Some contracts include "gross-up" provisions where the company pays the executive's excise tax (now rare)

Shareholder Response

Say-on-pay votes: Shareholders can vote on executive compensation (non-binding)
Proxy advisory opposition: ISS and Glass Lewis often recommend against excessive packages
Institutional investor pressure: Large funds push for reasonable limits
Clawback provisions: Some companies can reclaim payments for misconduct

Practical Takeaways

For founders: Golden parachutes can help you recruit experienced executives, but keep them reasonable. Excessive packages invite shareholder backlash and may signal misaligned incentives to acquirers.

For investors: Check the proxy statement (DEF 14A) for change-of-control provisions. Excessive golden parachutes—especially single-trigger or with tax gross-ups—are red flags for governance quality.

Poison Pill — Another takeover defense that protects the board
Hostile Takeover — The event that triggers golden parachutes
Break-Up Fee — Another cost that affects M&A deal economics