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Richard Buslepp discusses Golden Parachutes vs. Golden Handcuffs for Crain’s Detroit Business

March 10, 2021

Golden Parachute

A golden parachute refers to a contractual provision contained within an employee’s employment contract. It provides significant financial compensation in the event of employment termination following acquisition of the company.

It’s not uncommon for top executives of a target company to be terminated following the closing of an acquisition. To induce executives to stay with the target company through the sale process, and to incentivize them to work towards accomplishing the sale, a target company will sometimes amend the employment contracts of key executives, providing additional compensation, should they be terminated following the acquisition. This is popularly known as a golden parachute. While it can take many forms, it typically comes as a bonus, severance, stock options ore retirement benefits.

The primary purpose is to provide the executive with a soft landing should they be terminated following the acquisition.

Such clauses can also provide several benefits to a target company, including:

  • Attract and retain talented executives – Companies ripe for sale, or industries prone to mergers, can be at a competitive disadvantage when it comes to recruiting and retaining executives. Offering a golden parachute may help attract top-level talent.
  • Reduce conflict of interest during a merger – Executives are conflicted between working hard to accomplish a merger and concerns over losing their job, should the merger occur. Providing a golden parachute can help insure the executive works in the best interest of the target company and its shareholders.
Golden Handcuffs

While the purpose of a golden parachute is to provide executives with a soft landing, the objective of golden handcuffs is to encourage a key employee not to terminate their employment before a set time.

Golden handcuffs come in a variety of forms, however the most popular are phantom stock or stock options that only vest after a certain number of years of employment and bonuses which either vest over time or must be repaid if the employee terminates before an agreed upon date.

Golden handcuffs are typically used for employees who may have a unique talent or skill, or if the demand for a particular skill set outpaces supply. While golden handcuffs can be expensive, they are used only when the cost to replace an employee exceeds the expense of the benefit provided.

This piece first appeared in the March 1, 2021 edition of Crain’s Detroit Business.

Richard C. BusleppClose up of Richard C. Buslepp, attorney at Kerr Russell is a Certified Public Accountant as well as an attorney. He focuses his practice on business and corporate law, mergers and acquisitions, tax, opportunity zones and qualified opportunity funds, estate planning, and real estate. Richard specializes in structuring, negotiating, and consummating complex domestic and cross-border transactions such as stock and asset sale transactions, leveraged buyouts, mergers, recapitalizations, divestitures, take-privates, joint ventures, debt and equity finance transactions, management led buyouts, real estate transactions and restructure transactions for private equity, public, non profits, and family owned clients.

 

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