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Golden Parachutes, Explained


It sounds outrageous, that some companies end up filing for bankruptcy restructuring, or even vanishing entirely, while their presidents and CEOs leave the companies with bonus severance packages of millions of dollars, a “golden parachute“.

It seems unfair to the workers, who are out of jobs, the investors and stock holders, and everyone else who gets nothing.

Why should an executive, who obviously failed everyone, whose very competence as a manager is in question, get enough money to retire on, while everyone else has to struggle a disastrous end to the venture?

It sounds terrible, that executives get huge bonuses when a company goes under, but this clause actually saves many companies in the first place.

It sounds terrible, that executives get huge bonuses when a company goes under, but this clause actually saves many companies in the first place.

 

 

Why on earth do companies offer them, in the first place? Especially the ones that are already struggling…shouldn’t they refuse to offer a big severance package when they’re likely to go under, anyway?

Well, in fact, the struggling companies don’t want to offer those packages.

What happens is that the company does know it’s struggling, and so it is looking for the best CEO it can find, someone who can save it when its last managers obviously were just making things worse. But when they call the best guy available, they run into two problems:

  • First, they can’t afford him, because they’re struggling. The money for his high salary could bankrupt them.
  • Second, he doesn’t want to risk his reputation. If the company turns out to be too far gone, he will definitely get blamed, even if he did all that was possible.

Fortunately, they can  solve both of these in one :

They can offer a lower salary now…what they and the executive agree they can afford, plus a huge severance package.

If the company is saved, then he’s earned it.

If the company goes under despite his great skill, then he gets compensated for his damaged reputation, and the pay cut he took during the time he worked there.

This means that a struggling company can hire a better executive, therefore increasing the company’s chances of surviving, if it offers a golden parachute. 

So it’s actually better for the workers, shareholders, investors, and customers if a company does offer a golden parachute. Not just struggling companies, either…because it can always improve the executive a company can hire, therefore improving the company’s future.

Now there are other, obvious benefits to having golden parachutes.

Golden parachutes also help protect companies from hostile takeovers, because the executives of the taken-over company, inevitably all fired, will cost millions to the devouring company. 

Really, any way you look at it, companies being able to offer golden parachutes is good for all involved. Including the regular employees.

December 18, 2008 Posted by | Economy, Politics | , , , , , , , | 3 Comments

   

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