Golden Parachute or Golden Handcuffs?
January 12, 2021
By: Colin A. Walker
Golden parachute. Golden handcuffs. These terms are associated with a posh executive position that is a no-lose and highly beneficial situation for a C-Level executive. But is it really?
A golden parachute usually refers to a generous severance package such as a year of salary (or more), plus healthcare benefits, and the services of an outplacement firm. However, it often comes at a cost, such as a lengthy and strict non-compete agreement. An executive may have to sell stock back to the company, often at a price very favorable to the company. The executive may have to forfeit stock options. Furthermore, an executive may be subject to significant additional tax liability under Section 409A of the Tax Code (the subject of a future post) if the deal is not structured right.
Golden handcuffs commonly refer to compensation structures that are so lucrative that an executive feels he/she cannot leave even if he/she doesn’t enjoy the work, the company is dysfunctional, or there are significant risks associated with the job. Again, a difficult choice for the executive (and maybe the employer too if it has to put up with a highly-skilled but disagreeable, dysfunctional, executive a la “Mad Men”).
So, which is it, a golden parachute or golden handcuffs? It all depends on your goals, your needs, and your tastes.
Smart executives will not become bedazzled by the promise of a shiny golden parachute and will negotiate aggressively to keep their stock and reduce post-employment restrictions. The most powerful executives have been known to turn down heavenly severance packages to take even more heavenly positions with other companies (if their employment contracts allow it). Savvy employers will not offer such packages unless the executive is highly skilled and agrees to contract provisions that secure and maximize the employer’s investment.
And once you reach a deal—whether you are an executive or an employer—you had better make sure it is set forth very clearly in an enforceable contract, because where there’s gold, the stakes are high and there’s plenty of reason to fight out a dispute.