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When a CEO is fired, the Golden Parachute clause kicks in. What does it mean?

Akshata Kamath
Akshata KamathSep 23, 2022 | 08:00

When a CEO is fired, the Golden Parachute clause kicks in. What does it mean?

The Golden Parachute helps CEOs be safe during uncertain and turbulent times. (Illustration: Geetanjali Singh, DailyO)

The Golden Parachute clause helps a CEO (or any top leader of a company) sail through the balance period of his tenure, in case he is terminated before his term ends. Though this practice is now called unethical by some, it came into place to protect CEOs and investors from hostile takeovers.   

If your dad is a CEO of a multinational company or if you know a certain Mr Big Shot who is always on calls and meetings and is the CEO or Managing Director of a multinational company, there are high chances that his appointment letter has a unique clause. It's called 'The Golden Parachute' clause. 

Here's an analogy: The Golden Parachute clause allows corporate big shots to safely crash land on a safe territory if the plane in which they are traveling crashes down during the journey. What does this mean?

Well, if a company's CEO (or a certain Mr. Big Shot) has to leave his position, or is terminated from the company of employment (ie his plane crashes) due to certain foreseen or unforeseen reasons, Mr. Big Shot could be compensated for his loss of position with benefits (ie his golden parachute) which would be way over the standard severance packages in the industry. The compensation would include everything from fat severance packages, to benefits like stock options, cash bonuses, medical benefits, personal secretary, free flights and some more credit.  

When does this happen? 

  • Say company 'A' forcefully takes over company 'B' while all the top leaders of 'B' have a pre-agreed Golden Parachute clause in their employment agreement. Now if company 'A' wants to replace the existing Board of Directors (or the CEO or the MD) of 'B' post acquiring 'B', they would have to splurge thousands of dollars to compensate these top leaders of 'B' for their loss of jobs. 
  • Golden Parachutes in a way become an expensive barrier that makes aggressive companies think twice before taking over other companies in a hostile fashion. 

  • This Golden clause could also be executed when these leaders are ousted on account of harassment claims against them, if they are involved in fraudulent investigations, or if they do not deliver on their jobs. For eg: CEO Roger Ailes lost his Fox News job because of multiple sexual harassment cases that were levied against him. 

What kinds of benefits do they get? While the WeWork CEO Adam Neumann got $1 billion for stock (Rs 10,000 lakhs), a $185 million consulting fee (Rs 1,480 crore), and $500 million in credit (Rs 4,050 crore), many other Golden CEOs have got benefits like office space for the balance term of office, personal assistants, healthcare benefits, a cash bonuses, insurance payments, cars, airport parking, and even free flights! Coz the Boss gets it all. 

Now, why is this needed? Mr. Sreeni Nalagandla is the Co-founder and MD of High Places International and helps Fortune 500 companies hire top-notch leaders. He mentions that senior positions like that of the CEO are ''essentially high-risk, high-reward roles where there is a lot at stake''. Since CEOs are the face of the brand and a wrong move can get them a lot of negative press, they have a lot of pressure (ie to take care of the business, retain the best talent, and keep the operations well in shape)

''If something goes wrong with a global company and a CEO is ousted, the CEO losses his reputation. This CEO will now have to wait for at least 6 months to get hired at a similar position in another company. So if a company hires a CEO for 2 years and he is ousted in 6 months, the Golden Parachute is a way to help him sail through the balance 1.5 years and probably the next 2-3 years more.'' 

But why is it controversial now? Though the practice of handing out Golden Parachute clauses in contracts began in 1961, this was done to ensure that the top management is not fired and the investors' interests are protected. But the clause was never created to rescue CEOs from scandals or scams, which is happening in today's times. The Golden Parachute is drawing criticism because: 

1. The employees who do not get such packages can feel neglected, dissatisfied and less privileged. They would be like:

 

2. It rewards leaders even when they are unethical, wrong, or if they underperform, thus hurting the overall image of the company. Here Sreeni says: "Most companies do not execute this clause if the CEO is the real culprit behind situations like sexual harassment or misuse or embezzlement of funds''.

But some companies do not account for such future negative possibilities in their contracts. Thus they end up paying millions of dollars even when the CEO is in the wrong. 

For eg: In September 2019, When WeWork collapsed, WeWork CEO Adam Neumann was ousted by his Board of Directors because of his ''leadership style''. Adam too voted to get out of the role and walked out of the company with a golden parachute of $1.7 billion (Rs 13786 crore).

Though top leaders normally expect Golden clauses in their roles, it looks like shareholders and employees of failing companies need some silver parachute of their own to save themselves when the share prices crash while the leaders fly out. 

Last updated: September 23, 2022 | 10:54
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