Posted by Carl Icahn July 18, 2008 : 11:50 AM
A golden parachute is a binding agreement between a company and an employee (most often a CEO but in some cases all the employees) detailing considerable benefits for the employee if the employee is terminated or retires. When executives retire, parachutes are sometimes known as "golden handshakes." "Golden parachute" payments may also benefit employees should there be a change in ownership or control.
The overwhelming flaw with this system is that they may secure an egregious level of compensation regardless of performance. This is absurd.
Proponents of this inane policy believe that golden parachutes make it easier to hire and retain executives, dissuade takeover attempts by increasing the price of the offer, or keep an executive objective when he or she is considering a proposal on the sale of their company. This does not make sense. First there are plenty of executives all over the world who would earn reasonable compensation, have been hired, retained and continue to do a great job. To address the second point: Surely, if you were about to receive a $400 million parachute by allowing the sale of the company you manage, you would sell to whomever at any price just to receive your flagrant benefits! This is clearly not in the interest of shareholders.
Typically, exit packages involve a cash severance of two or three times the salary plus bonus. Keep in mind - this is an executive's salary which has already ballooned. These agreements also often call for accelerated vesting of stock awards, option awards and pension benefits, quickly boosting the size of the total payment.
Get ready for this. If the golden parachute received upon a change of control is at least three times the executive's average annual compensation for the five preceding years, then the amount surpassing the average annual compensation cannot be deducted by the company against its taxable income. The executive pays a 20% excise tax for golden parachutes on everything over his or her average compensation for the preceding five years, though many companies offer to pay that tax for them, costing shareholders even more.
What is even more perplexing, and just utterly illogical are "golden coffins." As if "golden parachutes" were not enough, many executives will receive huge packages after they die, says the Wall Street Journal. Without an act of Congress, the only way these practices will change is if shareholders demand it. We should carry on the struggle for a new system. We must liberate the corporate stronghold. Give shareholders a voice!