What Is Golden Handshake?
A golden handshake is a substantial severance package provided to an employee, typically a high-ranking executive, upon their departure from a company. This payment is generally negotiated as part of the initial employment contract and can be triggered by various circumstances, including retirement, redundancy, restructuring, or even dismissal for reasons other than gross misconduct30, 31. As a component of executive compensation, golden handshakes aim to provide significant financial security during the transition period for the departing individual.
History and Origin
The term "golden handshake" originated in Britain in the mid-1960s, coined by Frederick Ellis, the city editor of the Daily Express. While the broader concept of large exit payments to executives can be traced further back, the phrase captured the public imagination in an era of increasing corporate activity. The practice expanded significantly in the early 1980s, particularly in response to a surge in mergers and acquisitions (M&A) and increased public scrutiny of executive pay practices. The objective was often to attract and retain top talent, especially in industries prone to M&A or high executive turnover29. For instance, Charles C. Tillinghast Jr., former president and CEO of Trans World Airlines, is often cited as an early recipient of a similar arrangement (more commonly referred to as a "golden parachute") in 1961, designed to protect him if Howard Hughes regained control of the company and terminated his employment26, 27, 28.
Key Takeaways
- A golden handshake is a pre-negotiated severance package, typically for executives, paid upon termination of employment, including retirement or dismissal.
- The package often comprises a lump sum payment, stock options, and extended benefits.
- Golden handshakes are designed to attract and retain high-level talent and can facilitate smooth leadership transitions.
- They are often controversial, drawing criticism for potentially rewarding underperformance or negligence.
- The terms of a golden handshake are part of the executive's employment agreement.
Interpreting the Golden Handshake
A golden handshake signifies a company's commitment to financially secure its departing senior personnel, reflecting the perceived value of their service or the potential disruption their departure might cause. The size of a golden handshake is usually substantial, often negotiated before the executive joins the company. For shareholders, understanding the terms of such agreements is crucial, as they directly impact company finances and can influence perceptions of corporate governance. The justification behind offering a golden handshake often includes incentivizing top talent to join a company, particularly one facing challenges or a high-risk environment, and to ensure a smooth exit without litigation or disruption24, 25.
Hypothetical Example
Imagine "TechInnovate Inc." appoints a new CEO, Sarah Chen. Her employment contract includes a golden handshake clause. This clause stipulates that if her employment is terminated for any reason other than gross misconduct within the first three years, she will receive a severance package equal to two times her annual base salary plus the immediate vesting of all her unvested restricted stock units.
Two years into her tenure, TechInnovate Inc. undergoes a significant strategic shift that leads to a change in leadership. The Board of Directors decides to replace Sarah to align with the new strategic direction, a decision unrelated to her performance. According to her golden handshake agreement, Sarah receives a significant cash payment calculated from her salary, along with the accelerated vesting of her equity awards, providing her with substantial financial resources as she transitions out of the company.
Practical Applications
Golden handshakes are prevalent in high-level corporate employment agreements across various industries. They serve as a crucial tool for companies to attract and retain experienced executives who might be taking on high-risk roles or joining companies in volatile sectors. Beyond retention, these agreements can facilitate orderly departures, especially during periods of corporate restructuring or leadership changes, preventing potential disputes or disruptions that could harm the company's operations or reputation22, 23.
From a regulatory standpoint, particularly in the United States, the Securities and Exchange Commission (SEC) mandates detailed disclosure of executive compensation, including certain termination payments. For instance, Item 402(t) of Regulation S-K requires companies to disclose information about compensation arrangements that are based on or relate to a merger, acquisition, or similar transaction21. This ensures transparency for shareholders regarding potential payouts related to a takeover or other change in control events. Such disclosures are part of broader SEC requirements aimed at providing investors with a clear and complete picture of executive pay20.
Limitations and Criticisms
Despite their intended benefits, golden handshakes frequently draw criticism. A primary concern is that they can be perceived as rewarding failure, especially when executives receive large payouts after poor performance or short tenures. Critics argue that such payments may not align the interests of executives with those of shareholders, particularly if the executive is compensated handsomely while the company's shareholder value declines or employees face layoffs18, 19.
Another criticism is that these agreements can entrench existing management, potentially deterring beneficial takeovers by increasing the cost of an acquisition16, 17. A study found that generous golden parachute provisions could encourage CEOs to accept lower acquisition premiums, prioritizing their personal gain over the best interests of their company and its shareholders15. Furthermore, the sheer size of some golden handshake payouts, sometimes reaching millions of dollars, often sparks public outrage and concerns about corporate excess. In some cases, these payments have been subject to special excise taxes in an attempt to curb their size13, 14.
Golden Handshake vs. Golden Parachute
While often used interchangeably in casual conversation, "golden handshake" and "golden parachute" have distinct nuances in the context of executive compensation.
A golden handshake generally refers to a substantial severance payment given to an executive upon their departure for various reasons, including retirement, voluntary resignation, or dismissal not tied to a change in company control12. It acts as a general termination benefit, often recognizing years of service or facilitating an amicable separation.
A golden parachute, on the other hand, is specifically triggered by a "change in control" event, such as a merger or acquisition or a takeover9, 10, 11. These agreements are designed to ensure that executives remain objective during M&A negotiations, as they are guaranteed compensation even if their roles are eliminated after the transaction. A key difference lies in the triggering event: golden parachutes are contingent on a change in company ownership or control, whereas golden handshakes can apply to broader scenarios of employment termination8. Both types of agreements typically include similar components such as cash, equity, and retirement benefits7.
FAQs
Why do companies offer golden handshakes?
Companies offer golden handshakes to attract and retain top-tier talent, especially for high-pressure or critical executive roles. They provide financial security for executives taking on significant risks and can help ensure a smooth, uncontested transition when a leader departs, whether due to retirement, strategic changes, or other reasons5, 6.
Are golden handshakes legal?
Yes, golden handshakes are generally legal. They are part of an employment contract negotiated between the company and the executive. However, their terms and disclosures are subject to regulations, particularly for publicly traded companies. The SEC, for example, requires detailed disclosure of certain termination payments in proxy statements, especially those related to changes in control3, 4.
How are golden handshake payments typically structured?
Golden handshake payments usually involve a lump sum payment of cash, often a multiple of the executive's annual salary and bonus. They can also include accelerated vesting of stock options and other equity awards, continued health benefits, and retirement benefits1, 2. The specific components and amounts are tailored to each executive's contract.