TLDR:
A golden parachute is a lucrative compensation package for senior executives that is triggered upon termination following a company acquisition or merger, designed to attract and retain top talent.
Shareholder and Board Reactions to Golden Parachutes
Golden parachutes are frequently controversial with shareholders because they can create perverse incentives — executives may be motivated to support an acquisition (which triggers their parachute) even when doing so isn’t in shareholders’ best interests. In the US, say-on-pay “golden parachute” advisory votes are required for public companies under the Dodd-Frank Act, though these votes are non-binding. Proxy advisory firms like ISS and Glass Lewis routinely recommend “against” excessive golden parachute packages, and large institutional shareholders increasingly vote against such arrangements.
Golden Parachutes in Startup Contexts
Structure and Triggers
Golden parachutes typically pay out on involuntary termination following a change of control, sometimes with single-trigger payments (on change of control alone) or double-trigger payments (change of control plus subsequent termination). Payments commonly include lump-sum cash equal to one to three years’ base salary plus target bonus, accelerated equity vesting, continued health benefits for one to three years, and tax gross-ups for excise taxes under IRC Section 280G.
Shareholder Pushback
Golden parachutes have attracted significant shareholder criticism, particularly when paired with poorly-performing executives or with payouts disproportionate to company performance. Many public companies have eliminated tax gross-ups under shareholder pressure, with proxy advisors (ISS, Glass Lewis) recommending against compensation packages that include them. Say-on-pay votes and golden-parachute say-on-pay votes (required under Dodd-Frank Act) have given shareholders direct voice on these arrangements.