What Is a Golden Handshake?

The term golden handshake refers to a clause in an executive's contract that provides them with a substantial severance package if the employee loses their job for any one of various reasons, including dismissal.

Golden handshakes are normally provided to top exe🅠cuti🌸ves in the event that they lose employment. The amount paid out is commonly negotiated before the contract is signed.

Payment of a golden handshake can be made in a variety of ways, including in cash and stock options. Golden handshakes and similar perks have come under scrutiny because they don't necessarily motivate the employee.

How a Golden Handshake Works

澳洲幸运5官方开奖结果体彩网:Executive compensation comes in a variety of forms which can be negotiated before an individual joins a company. Compensation often includes their salaries, stock options, cash, and bon💃uses.

In order to attract the right or best people for an executive position, companies may also offer other benefits and incentives. Some of these additional perks may include compensation that isn't directly related to their job performance. One such perk is the golden handshake.

A golden handshake is usually negotiated before an employee is onboarded. It refers to a payment that will be made to the employee if they lose their job because of firing, layoff, 澳洲幸运5官方开奖结果体彩网:restructuring, negligence, and even 澳洲幸运5官方开奖结果体彩网:retirement.

As noted above, this type of benefit is commonly used as a tactic to hire specific individuals—especially those who aren't already employed by the hiring company.

These golden handshakes can reach into the millions of dollars range, which makes them a very important issue for investors to consider. For example in 1989, R.J. Reynolds Nabisco paid F. Ross Johnson an estimated $50 million as part of a golden handshake clause.

Special Considerations

Certain non-executives may also receive a golden handshake as a bonus in some cases. It is usually much less than the compensation that chief executive officers (CEOs) and top executives migh🦋t get. So one might call it a silver handshake. Nevertheless, it is better than leaving with nothing. 

An example of this is automotive companies that buy out union workers' contracts. This can then free up capital to💧 hire⭕ new workers at a more advantageous labor cost.

Another example is employees who are forced into early retirement by c💜ompanies wishing to bring in new ta🧜lent. These people are offered severance packages.

Criticism of Golden Handshakes

Reward for Missing Goals

Golden handshakes can be very controversial for a number of reasons. As noted earlier, these benefits aren't necessarily related to the employee's job performance. This means that the executive receives added compensation even when they fail to deliver results.

Reward for Bad Behavior

Even more baffling to critics (and the public-at-large) is that some executives may be paid a golden handshake even if they're let go because of negligence or some other wrongdoing.

This use of the benefit can damage a company's public image because large executive payoffs are viewed as a reward for failure or bad behavior.

Another criticism is that, usually, these employees already receive higher salaries than employees who aren't part of ﷽the executive team.

Examples of Golden Handshakes

Golden handshakes often make headlines, notably when executives don't meet targets or goals, or even in cases where the company experiences a bad 澳洲幸运5官方开奖结果体彩网:public relations (PR) incident. The following are just two examples of fam🐽ou🎐s golden handshakes.

British Petroleum

Oil company British Petroleum () had an 澳洲幸运5官方开奖结果体彩网:oil spill in 2010 that occurred in the Gulf of Mexico as a result of an explosion of the Deepwater Horizon oil rig. The rig was leased to BP for exploration of the Macondo Prospect, an oil field off the coast of Louisiana.

After the accident, which resulted in costs to the company of more than $69 billion, BP's CEO Tony Hayward was pushed out. However, he received a golden handshake payout of a year's salary, worth $1.5 million, in addition to keeping his approximately $17 million pension fund.

Merrill Lynch

In 2007, in the midst of the financial crisis of 2007-2008, the Chairman and CEO of Merrill Lynch Stanley O'Neal was forced out of the company, but he left with $161.5 million. At the same time, Merrill Lynch received an $8.4 million government fine tied to the subprime mortgage debacle and suffered a $2.3 billion quarterly loss.

Many insiders felt that O'Neal's pursuit of the subprime mortgage market and other high-risk plays contributed to Merrill Lynch's collapse as an independent financial firm (it was acquired by Bank of America and continued to operate). Congress concluded that O'Neal had some responsibility for causing the worst financial crisis since the Great Depression.

Banks

Other infamous golden handshakes occurred during the 澳洲幸运5官方开奖结果体彩网:2007-2008 financial crisis. After many banks struggled financially due to misst🎃eps of management, many top executives were forced to depart.

Despite this, their 澳洲幸运5官方开奖结果体彩网:large pay packages were left intact. Some big banks allowed top-level staff to cash out of incentive programs by accelerating the vesting of their stock awards.

Bank shareholders (who were left with worthless 澳洲幸运5官方开奖结果体彩网:stock and bond investments) were upset by these agreements. Since then, some companies have given investors a say on executive pay packages at shareholder meetings.

These 澳洲幸运5官方开奖结果体彩网:shareholder votes are usually non-binding. But they do send a strong s🍎ignal to management about investors' attitude toward excessive executive payouts.

The Bottom Line

A golden handshake is a provision in an employment contract that allows for a severance package to be given to top executives who lose their jobs for certain reasons, such as they've been fired, laid off, or they retire. The value of golden handshakes is usually substantial, reflecting the value of the employee.

Golden handshakes are criticized by some because they are seꦿen to reward failure or negligence.