The Golden Parachute: Shielding Executives with Investors

In recent years the term golden parachute has become more popular with investors. If you are an investor, you need to understand how a golden parachute can affect you negatively.

Golden Parachute

A golden parachute is a term that is used to describe a benefits package that is provided to an employee in the event that they are terminated. This is typically a treatment that is reserved for upper-level executives in the company. For example, an executive might have a clause in their contract that provides them with millions of dollars worth of severance pay and stock options if they are fired.

Impact on Investors

This is a technique that is often used to help avoid a corporate merger. If you do not want a company to come in, take over, and fire all of your executives, you could put these clauses into employment contracts. From the perspective of the executives, this provides you with job security or a lucrative payout. From the perspective of the investors, this prevents you from making money. When a corporate merger takes place, the price of stock in the company typically goes up substantially. Therefore, you want to see a merger takes place as an investor. However, with the golden parachute, this option is usually eliminated.

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