Golden parachutes refer to the agreed promises made by organizations with their executives to offer benefits in case they are dismissed before the end of their employment contract. This offer provides a severance provision within executives’ employment contract. In most cases, the severance agreements as well as other packages are provided in order to attract competitive executives (McCann, 2009).
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The determination of golden parachutes varies among organization, although it is usually derived from a proportion of the packages received by executives in the course of their employment. For these reasons, most organizations have contentions with the provision of excessive golden parachutes.
The main reason for provision of excessive golden parachutes is because it goes in line with stakeholders’ interests. In this regard, shareholders get the right to hire and retain executives in organizations that are prone to mergers. Such organizations use the excessive golden parachutes to lure competitive individuals to their firms.
Through this process, unstable firms or firms facing stiff competition from other firms get the chance to have adorable leaders. In most instances, the provision of these services will attract candidates that have influencing characters on investors (Miller, 2007). For that reason, the investors will have confidence in the organization making it more profitable in the industry.
The case of Jack Welch, a former CEO of GE made him receive a golden parachute of four hundred and eighteen million dollars attributable to his effective management of the organization. Although the amount was excessive, the reward was in consideration to his contribution during his period of service (Rivlin, 2012).
At the same time, the executives are enhanced to focus on their goals regardless of chances of takeover when offered with excessive golden parachutes. In this case, the executives feel secure in their tenure even in the event of dismissal. For that reason, they will struggle to contain the challenges experienced in the turbulent industry.
In the event that the firm is subjected to acquisition or merger, the executives will not feel threaten of losing their jobs. This is attributed to the fact that they will receive lucrative compensation for any eventuality (McCann, 2009). Therefore, executives will appropriately represent the firm to the last moments.
Notably, most executive will contribute back to the shareholders by remaining objective during takeovers, which improve their returns. As a result, the executives will not threaten the shareholders, but address their issues as expected since they are covered.
A good example for this scenario can be represented by the case of Stanley O’Neil, the former CEO of Merrill Lynch, who ensured that the process of takeover gave meaningful returns to investors. Consequently, investors benefited from the increase in their value of shares after the company was acquired.
The process of issuing excessive golden parachutes to make executives objective in the event of takeovers has a great impact to shareholders. In this regard, the executives attempt to increase the cost of takeover in order to improve the overall returns of the shareholders.
During such an incidence, executives are driven by the level of golden parachutes to reach for the anticipated targets of shareholders (Sherter, 2012). Through such practice, the move becomes one of the poison bill strategies, which may limit the chances of accomplishing takeovers. For that reason, the interests of consumers are well represented, and their returns from the investments are enhanced.
Furthermore, if the takeovers are successful, the amount generated from the negations of executives could be used to cover for their golden parachutes. As a result, the cost directed to shareholders is declined significantly. The case of Edward E. Whitacre Jr., the former AT&T CEO, depicts the characters of responsible executives who effectively ensure that the company is under control even during periods of mergers. In this regard, they represent the interest of investors steered by the level of the golden parachutes.
Although golden parachutes are beneficial for the effective management of organizations, the executives might misuse this privilege. For that reason, executives may develop perverse incentives, which may cost the shareholders. This can be illustrated by the consideration of irresponsible leaders who take advantage of their positions to represent their interests (Miller, 2007).
Such a behavior will be triggered by the nature of excessive golden parachutes irrespective of meeting their objectives. Consequently, this implies that executives will be reluctant in addressing the objectives of the shareholders (McCann, 2009).
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The fact that executives will be rewarded may influence executives minimize their stay in the organization by triggering unproductive activities, which force shareholders to fire them. Following this scenario, they will get their golden parachutes and quit before maturity of their terms. For instance, the case of Stanley O’Neal, the former CEO of Merrill Lynch received a golden parachute of one hundred and sixty two million dollars for a poor job that led the company to its acquisition by Bank of America.
In addition, the provision of excessive golden parachutes cost the company, which implies executives should not be attributable to excessive golden parachutes since they are being paid to remain objective. This implies that executives could be reluctant with their responsibilities since there is compensation in case they are terminated from their employment.
Following this scenario, it is essential to ensure that executives do not misuse their responsibilities through the facilitation of takeovers which will enable them receive golden parachutes and stock options (Sherter, 2012). The case of Stanley O’Neal illustrates the nature in which executives could misuse their positions due to the provision of excessive golden parachutes.
Through this case, Stanley never addresses the issues of the organization as expected, and yet, he was being paid and had been allocated excessive golden parachutes (Rivlin, 2012).
The provision of excessive golden parachutes has immense influence on the performance of the organization and behavior of executives. Although, the practice of issuing excessive golden parachutes has been a trend in most organization, it is vital to consider the impact of its adoption in an organization. Through this critical analysis, the organization creates an ideal path to follow in addressing issues of the executives.
Nonetheless, it is crucial to evaluate whether the market conditions demand retention of competitive individuals who will steer organizations to great heights. For that reason, the organization will design measures that will limit executives from misusing their allocated golden parachutes. Based on these issues, the productivity of the executives will be enhanced while the interests of shareholders will be appropriately represented.
McCann, C. J. (2009). Golden parachutes: A theoretical and empirical investigation. Washington, D.C.: Macmillan.
Miller, D. K. (2007). Golden parachutes, managerial incentives, and shareholder wealth. New York, NY: McGraw-Hill.
Rivlin, G. (2012). New study shows how golden parachutes are getting bigger. The Daily Beast. Retrieved from https://www.thedailybeast.com/new-study-shows-how-golden-parachutes-are-getting-bigger
Sherter, A. (2012). How CEO “golden parachutes” hurt shareholders. Breaking News Headlines: Business, Entertainment & World News – CBS News. Retrieved from https://www.cbsnews.com/news/how-ceo-golden-parachutes-hurt-shareholders/