Golden Handshake

Introduction

When it comes to executive compensation, one term that often comes up is the “golden handshake.” This financial arrangement, also known as a golden parachute or severance package, has gained significant attention in recent years. It refers to a substantial payout given to executives when they leave a company, usually due to retirement, resignation, or termination. While golden handshakes can be controversial, they are a common practice in the corporate world. In this article, we will explore the concept of golden handshakes, their purpose, their impact on companies and executives, and some notable examples.

What is a Golden Handshake?

A golden handshake is a financial agreement between a company and an executive that provides a significant payout upon the executive's departure. The purpose of this arrangement is to provide financial security to executives who may face uncertainty after leaving their positions. It is often seen as a way to attract top talent and incentivize executives to take on high-risk roles.

Golden handshakes typically include various components, such as cash payments, stock options, pension benefits, and other perks. The amount of the payout can vary widely depending on factors such as the executive's position, tenure, and the company's financial performance. In some cases, golden handshakes can amount to millions of dollars.

The Purpose of Golden Handshakes

Golden handshakes serve several purposes for both companies and executives:

• Retention and Recruitment: Offering a generous severance package can help companies retain top executives and attract new talent. Executives are more likely to take on high-risk roles or make difficult decisions if they know they will be financially protected in case of an unexpected departure.
• Smooth Transition: Golden handshakes can facilitate a smooth transition of power. By providing financial security, executives may be more willing to step down or retire, allowing new leadership to take over without resistance.
• Legal Protection: In some cases, golden handshakes are designed to protect companies from potential lawsuits. By offering a substantial payout, companies can discourage executives from taking legal action or publicly criticizing the organization.

The Impact of Golden Handshakes

While golden handshakes can provide financial security to executives, they often face criticism for their potential negative impact:

• Excessive Compensation: Critics argue that golden handshakes contribute to the growing wealth gap between executives and employees. The large payouts received by executives, especially in cases of poor performance, can be seen as unfair and unjust.
• Moral Hazard: Some argue that golden handshakes create a moral hazard by rewarding executives for failure. If executives know they will receive a substantial payout regardless of their performance, they may be less motivated to make decisions that benefit the company in the long term.
• Shareholder Dissatisfaction: Shareholders often express dissatisfaction with golden handshakes, as they believe the money could be better used to benefit the company or its shareholders. Excessive payouts can lead to negative publicity and damage a company's reputation.

Notable Examples

Several high-profile cases have brought the issue of golden handshakes into the spotlight:

• Wells Fargo: In 2016, Wells Fargo faced a major scandal involving the creation of unauthorized customer accounts. Despite the controversy, the company's CEO, John Stumpf, received a golden handshake worth $134 million upon his retirement.
• General Electric: In 2018, General Electric's CEO, John Flannery, was ousted after just over a year in the role. Despite the company's poor performance during his tenure, Flannery received a golden handshake of approximately $4.3 million.
• Verizon Communications: In 2016, Verizon acquired Yahoo and subsequently faced a massive data breach. As a result, Yahoo's CEO, Marissa Mayer, stepped down and received a golden handshake worth around $23 million.

Conclusion

Golden handshakes are a controversial aspect of executive compensation. While they serve the purpose of providing financial security and attracting top talent, they also face criticism for their potential negative impact on companies and society as a whole. The debate surrounding golden handshakes highlights the need for transparency and accountability in executive compensation practices. As companies continue to navigate the complexities of executive compensation, finding the right balance between rewarding executives and aligning their interests with those of shareholders remains a challenge.