Definition
A golden parachute is a contractual severance benefit paid to senior executives upon termination of employment following a change in control. Typical components:
- Multi-year cash severance (often 2–3x salary plus bonus)
- Acceleration of unvested equity
- Continued benefits coverage
- Tax gross-ups (now rare due to investor pushback)
Why it matters
Originally intended to align management incentives in M&A by removing the personal financial penalty of being acquired. Critics argue parachutes can blunt management’s incentive to seek the highest price.
Regulatory issues
- Tax — IRC §280G imposes a 20% excise tax on “excess parachute payments” exceeding 3x the executive’s average compensation
- Best-price rule — golden parachute payments are generally excluded from “consideration paid for tendered securities” under the 2006 SEC amendments, eliminating a previously common litigation theory
Variants
- Tin parachute — broader, lower-value severance for non-executive employees
- Lead parachute — minimal severance, common in smaller companies