Greg de la Cruz works at NCR Corp's R&D center in the Philippines. He is interested in economic history and current world financial affairs.
What Is a Golden Handshake?
Losing one’s job is a painful experience—but apparently, not for everyone.
High-ranking company executives, during the course of negotiating their compensation or their employment terms, enter into a “golden handshake,” what James Chen of Investopedia defines as a stipulation in an employment agreement which provides that the employer will offer a significant severance package if the employee loses his or her job.
Just how much the total compensation in favor of the exiting exec is, has varied, but an unintended benchmark because of the Deficit Reduction Act of 1984 which revised the tax code to deny tax breaks to severance packages equal to or more than three times one’s base compensation, has legitimized an exec’s claim to enter into a golden handshake worth as much as 2.99 times his base salary.
Golden handshakes and golden parachutes were once intended to protect both the executive’s and the shareholders’ interests. They gained popularity in the 1980s as a win-win solution to make sure a CEO or any high-ranking company executive would promote the interests of the shareholders whenever a sale of the company (usually a hostile takeover) would be beneficial for the good of the company despite the likely consequence that the CEO or executive would be booted out.
However, golden handshake agreements and golden parachutes have gained notoriety in the past two decades for rewarding poor performance, on top of being highly excessive. In a report written by Paul Hodgson, who is a Senior Research Associate at Governance Metrics International, 21 CEOs received severance packages worth more than $100 million through the years 2000–2012. The total value of these severance packages amounted to almost $4 billion.
Golden Handshake vs. Golden Parachute
A golden parachute is not much different from a golden handshake. Richard Buslepp of Crain’s Detroit defines the term as “a contractual provision contained within an employee’s employment contract [that] provides significant financial compensation in the event of employment termination following an acquisition of the company.”
The term golden parachute is said to have originated as early as 1961 when creditors attempted to oust Howard Hughes from Trans World Airlines. The creditors provided Charles Tillinghast, Jr. an employment contract with a “golden parachute” that would pay him money in the event that he lost his job.
Golden parachutes became even more popular in the 1980s when there were several takeovers and M&As. But it was in 2008 that the media paid special attention to golden parachutes, when, despite the global recession, there were several CEOs reported to have received retirement packages exceeding $100 million.
The rise and normalcy of excessive executive payouts has convoluted the very purpose of golden parachutes. Ousted CEOs of poor-performing companies leave with massive payouts (in the form of cash, stock options, benefits, a combination of each or all of these) in addition to guaranteed pensions. This, while laid-off workers are left with barebones unemployment insurance (sometimes none at all) and whatever’s left of their compensation.
Similar to golden handshakes and golden parachutes, although not very popular, there are so-called “silver handshakes,” which usually apply to non-executives. For some luckier and savvier folk, they enter into employment agreements that contain a stipulation of an extraordinary severance package.
In the Philippines, the minimum statutory benefit when an employee is fired for reasons beyond his or her control comes in the form of separation pay which amounts to the employee’s monthly salary multiplied by years of service, either rounded up or down depending on the case.
Caroline Banton of Investopedia describes a silver parachute as a clause in a hiring contract outlining special compensation arrangements paid to specific employees when they leave a company or their position is made redundant or when laid off.
Silver parachutes and silver handshakes are incredibly rare, and they’re usually intended for rare people. If someone is an especially sought-after talent, he or she has some leverage when it comes to entering into these special agreements. To have these stipulated in an employment contract requires some boldness and some knowledge of the uniqueness of his talent.
Employment agreements for non-executives usually follow a standard template—follows the job grade scale, fixed amount of paid time off, near-minimum statutory benefits—and never get talked about in the open for the fear that more people would assert their right to negotiate.
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The Board’s Responsibility When Executing Golden Handshakes
According to Paul Hodgson’s 2012 report, the board of directors of a corporation is entrusted with the following responsibilities when it comes to golden handshakes executed with CEOs:
- To make sure that CEOs are not being incentivized to take short-sighted risks;
- To not encourage CEOs to arrange a merger simply because their severance package means that they could earn more by selling the company than trying to make it a success; and,
- To not allow CEOs to depart with millions in shareholder capital when mergers fail.
“Overgenerous severance amounts,” Hodgson says, “are the end result of policy permitted by the board, and the compensation committee in particular.” He sums it all up by noting the abuses that golden handshakes have turned into, saying:
“What went wrong was that the principles were applied too widely… In principle, to protect someone from financial harm if they lose their job to a merger, that executive needs a single year’s salary and bonus.
A CEO should not need three or even two years’ salary and bonus, plus immediate vesting of all equity and pensions, plus benefit and perquisite continuation… A CEO who is retiring should not need a severance package as well as a retirement package…”
5 Golden Parachutes That Rewarded Poor Performance
If you think it’s outrageous that high-ranking, high-salaried individuals get rewarded with lucrative severance packages when their employment ends prematurely—ultimately enriching them further—wait until you discover that there are people who leave with a lot of money in the bag despite their poor performance.
Yes, there were CEOs who got away with massive paychecks by being awful at their jobs. It’s counterintuitive and morally perverse to incentivize someone for causing more harm than good, but apparently, such things are common among higher-ups in big companies.
Bonuses and performance incentives are normally given to people in respect and acknowledgment of the benefit or value they add to the company. But these five people prove that incentives, in this case, golden parachutes, can be given to people who were bad at their jobs, or to prevent further damage from their leadership.
1. Robert Nardelli (Home Depot)
Golden Parachute Package: $210 million
Impossible not to mention when it comes to golden parachutes, the ex-CEO of Home Depot, Bob Nardelli spent six years as the top executive of the world’s largest home improvement store chain. And what did he accomplish while he was there? During Bob Nardelli’s tenure, Home Depot’s stock value dropped by 8%, while the company’s top competitor Lowe’s increased by 180%.
According to equities analyst Barry Henderson, Nardelli made two big mistakes—he alienated employees and angered stockholders. He fired long-time Home Depot executives while bringing in General Electric alumni. He damaged employee morale by hiring several less-knowledgeable part-time workers, which angered full-time employees and diminished the quality of customer service.
His pay package alienated shareholders because it was far in excess of any of his peers. It may have seemed that Nardelli did a great job based on the raw revenue and income numbers from 2006 to 2007, but investors were skeptical whether the company’s growth was sustainable and that the numbers came at the expense of customer service.
But ultimately, the ones responsible for Nardelli’s golden parachute were the board of directors, who were responsible for hiring him and giving him such a lucrative package.
2. Hank McKinnell (Pfizer)
Golden Parachute Package: $188 million
Imagine running the world’s biggest pharmaceutical company for seven years and turning the company’s stock price from $50 per share when you got hired into $30 per share (nearly half as much as it used to be) before you left. Will you be asked by your employer to give them back all that lost money, or will they pay you almost $200 million in “early retirement”?
For Pfizer, the latter choice seemed to be what the shareholders wanted to do. They gave Hank McKinnell his own version of a golden parachute—this, despite ultimately losing the whole company an equivalent of $140 billion during his tenure.
Whatever happened to using the golden parachute to promote shareholders’ interests? At the turn of the new millennium, this exit package seems to have turned into a means to appease shareholders and investors. Usually, when a poor-performing CEO gets let go, there’s an uptick in the company’s stock price—a sign that investors are happy with the board’s decision.
Hank McKinnell’s golden parachute story just proves to everyone that you can be very bad at your job—deliver the exact opposite of what you were brought on to do in the first place—and still get away with millions.
3. Adam Neumann (WeWork)
Golden Parachute Package: $445 million
Perhaps the most recent infamous golden parachute was the one WeWork gave to its founder Adam Neumann. For someone who founded a company whose business model was being a middleman between landlord and tenant, the almost half-a-billion dollars in take-home pay sounds a lot like the work of an evil genius.
WeWork, like most companies in the commercial real estate industry, took a hard hit during the COVID-19 pandemic. But obviously, WeWork’s problems were already existent with or without COVID-19 hitting the economy.
Neumann tried to take WeWork public in 2019, leading investors to believe that the company was worth $47 billion. But the SPAC merger in 2021 with BowX Acquisition Corp. gave WeWork a value of just $9 billion. After WeWork’s botched IPO in 2019, the company had to sell some of its assets, including a wave pool business.
Of the $445 million that Neumann got from his exit, he got $200 million in cash. And compare his going-away present to the financial suffering the company had to endure: the scale of losses incurred from buying up companies during Neumann’s tenure as CEO showed that WeWork sold off ten companies worth $759 million, for just $164 million. And they also had to sell off a $63 million company jet.
4. John Stumpf (Wells Fargo)
Golden Parachute Package: $130 million
It’s wrong to say that everyone suffered because of the 2008 global financial crisis because, as it turns out, some people walk away with $130 million. Movies such as Margin Call and The Big Short give us, albeit fictitiously, an inside look of how people in high places leave a crisis unharmed—and with a pot full of cash. In the case of the 2008 recession, it was the top executives of investment banks who were left off the hook.
Wells Fargo may have survived the Great Recession and fared better than other banks such as Lehman Brothers which went bankrupt and Merrill Lynch which was bought by Bank of America, but this didn’t prevent Wells Fargo from resorting to dubious tactics to look good to investors.
Wells Fargo got engulfed in a fake account scandal, which was documented by the Wall Street Journal as early as 2011. And an LA Times investigation in 2013 showed that bank managers were under immense pressure to turn out sales “mathematically impossible” quotas. Because of the company’s high demands, employees would open accounts for customers without their consent—opening as many as 1.5 million checking and savings accounts and more than half a million credit cards.
More than 5,000 employees were fired because of the fraudulent sales, and then-CEO Stumpf accepted responsibility. But despite the scandal breaking in 2016, he indicated that he had no plans to leave. Less than a month after being subjected to a Senate hearing and fines by the Consumer Financial Protection Bureau (CFPB) imposed, he finally resigned. But his resignation made him $130 million richer, though.
5. Scott Thompson (Yahoo)
Golden Parachute Package: $7 million (but no severance package)
This last real-world golden parachute example is a bonus to the reader and wouldn’t have been mentioned if I didn’t think it was funny enough to include on this list. Yes, $7 million sounds like peanuts compared to the first four on this list, but know this—Scott Thompson’s tenure at Yahoo was just four months.
How did a nobody who lied about having a degree in computer science (the school he attended did not offer a computer science degree during his time there) end up with $7 million?
Well, Thompson negotiated his bonus of $1.5 million in cash and $5.5 million in restricted stock when he accepted these from Yahoo as a “make-whole” bonus to pay for the cash and stock he left eBay’s PayPal subsidiary to join Yahoo. He didn’t get a severance from Yahoo, but his separation agreement did stipulate that he got to keep those bonuses while waiving his claim to any other form of severance.
Even if Scott Thompson took home the lowest amount on this list in golden parachute terms, it seems like it would be the dream scenario for anyone to join one company for less than half a year and take home several million.
Unintended Consequences of Golden Handshakes
Clearly, what was once a concept to create a win-win for both top executives and shareholders alike, morphed into something that was a win-win just for the executive. Knowing that there’s a golden parachute that softens his landing even if he screws up only invites more risk-taking.
Investors can lose their money, thousands of workers can lose their jobs, and the company can suffer for years, all because someone bad at his job was in charge—and he gets to leave with millions on hand, and probably with a pension that sets him up for life.
The next time you feel awful and lose sleep at night knowing that you made some mistake at your job that cost your employer a lot of money, remember these five examples (and hundreds more you can find online) of people who lost their company millions but still got away with a hefty reward.
Don’t stress too much about messing up—you might just get a lucrative early retirement package.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2022 Greg de la Cruz