Difference Between Golden Handshake and Golden Parachute

Every organization would want to attract and retain the best-talented individuals. The same is true especially with the high-risk executive jobs where executives are entrusted with making risky decisions for the sake of the company. Companies give lucrative incentives to achieve this outcome in the highly competitive job markets. Two of the main packages present today are the golden handshake and the golden parachute. Both are golden perks, but what distinguishes one from the other? In this article, we explore the differences between the two.

Golden Handshake

Golden handshake refers to an executive employment contract that gives the executive a significant severance package in case the executive loses their job through firing, restructuring, or even scheduled retirement. It can be in the form of cash, equity, or other benefits. 

The term originated in Britain in the mid-1960s. It was invented by the city editor of the Daily Express, Fredrick Ellis. It later found its way into New Zealand in the 1990s after some top state executives’ controversial departures.

Advantages of a Golden Handshake

• Protects against risks- Working as a high executive in a company involves taking on certain risks. To compensate for the same, companies offer hefty golden handshakes to these executives to act as an incentive and cover.
• Attracts employees to a company- An employee would choose the company that offers not just a good salary but better packages. Companies may use attractive packages to win top executives from their rival companies.
• Provides financial security- It helps the employee in that it provides financial stability during the time of unemployment. It helps the executive look for other opportunities without worrying about financial needs.
• Caters for retirement- The golden handshake involves a good package for retirement whether one is forced into early retirement or goes for their scheduled retirement.

Disadvantages of a Golden Handshake 

• The golden handshake is not often performance-based- The contract does not stipulate that the executive has to be productive throughout their employment. This can result in losses for the company.
• Conflict of interest- The amount offered in a golden handshake is hefty and this could cause an executive to deliberately engage in activities that will be detrimental for the company just to receive this package.
• Forced retirements- The company may drive employees to retire early before their time to cut costs of operations.
• Non-compete clause- Executives who have taken the golden handshake have to accept the non-compete clause in the severance package that states that they cannot open a rival business for a predefined time once their employment is terminated.

Golden Parachute

Golden parachute refers to a contract between a company and an executive employee, stating that the employee will get certain benefits if there is a termination of the employment. These benefits may include severance pay, cash bonuses, stock options, or other benefits. 

The conditions under which the executive may receive the package include:

• Termination of employment due to a merger or an acquisition
• Termination for any other reason

During the time of mergers and acquisitions, many top executives lose their jobs to allow new management to take over. The executives hence receive severance packages in the form of the golden parachute to cater to the risks thus enabling a smooth transition for the stakeholders.

The term was first used in 1961 by creditors who attempted to drive out Howard Hughes from the control of Trans World Airlines. The creditors gave Charles C. Tillinghast Jr. a contract that included a clause that he would be paid if he lost his job.

The use of the phrase golden parachute gained the populace in the 1980s with the increase of mergers and takeovers.

Advantages of a Golden Parachute

• It can make it easier for a company to attract and retain talented executives
• A golden parachute can discourage takeovers by increasing the cost of the takeover.

Disadvantages of Golden Parachute

• If the executives are dismissed due to poor performance, the company still provides excess compensation to the executives
• Its cost may not discourage a takeover as it may be of little significance compared to the overall cost of the takeover.

Similarities between Golden handshake and Golden Parachute

• Both are given to company top executives
• Both are given in form of cash, equity, stock, or other benefits.
• Both can be used to attract employees to a company.
• Both are not performance-based.

Differences between Golden Handshake and Golden Parachute

Retirement Benefits

Even if the golden handshake and the golden parachute are very similar, they differ in that the golden handshake package includes retirement benefits. The golden parachute includes other benefits similar to the golden handshake.

Heftiness of the package

As a result of the inclusion of the retirement benefits in the golden handshake, the golden handshake is heftier, attractive, and more rewarding.

Golden Handshake vs. Golden Parachute: Comparison Table

Golden Handshake vs. Golden Parachute: Summary

Now you know the difference between the golden handshake and the Golden Parachute. The golden handshake is a package that is given to top executives in companies in case of loss of job, firing, or retirement. It includes retirement benefits. The golden parachute, on the other hand, is a package that is given to executives in companies as a result of the termination of a job and does not include retirement benefits. 

FAQS

What is the point of a golden parachute?

A golden parachute acts as security or compensation for top executives in a company in case a company goes into acquisition or takeover with new management. The executives are let go with a severance package that stands for them as they seek other opportunities.

What is called a golden handshake?

The golden handshake is a package given to top executives in a company in case of loss of job, firing, or retirement and it includes retirement benefits.

Are golden parachutes good?

Yes, golden parachutes are good.

Are golden parachutes bad?

No, golden parachutes are not bad.

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