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golden parachute

Contributor(s): Ivy Wigmore

A golden parachute is a clause in a severance agreement that provides an executive with a substantial package upon termination, usually in the event of a takeover or merger. 

Such a package might include severance pay, bonuses and stock options, among other possibilities. A golden parachute is more formally known as "change in control benefits."

Proponents of golden parachutes maintain that they are crucial for attracting the best executive candidates. Opponents, on the other hand, argue that the agreements may influence executives to use unscrupulous means to try to bring about a takeover or merger so they can collect. A study from Harvard's John M. Olin Center for Law, Economics and Business, titled "Golden parachutes and the wealth of shareholders," found that corporations that provided golden parachutes were more likely to be acquired and to have a lower market value and share price.

According to the Dodd-Frank Act, corporations must have shareholders vote on potential golden parachute pay-outs separately from other issues related to any merger or sale. 

See also: voluntary severance package

This was last updated in July 2013

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