The golden handshake is a popular method of firing or dismissing senior members of your workforce.

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 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 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

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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A golden handshake is a clause in employment contracts that provides a severance package if an employee loses their job. It is usually offered only to top executives who may lose their job through retirement, layoff, or even firing. The compensation may be in the form of cash or stock options. Because this privilege is offered to high-ranking executives, the severance package is substantial and valued highly.

These are offered to employees to protect their interests for taking up a high-profile post with its risks. In addition, to compensate for the risk level, the company has entered a suitable golden handshake package with its executives.

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#1 – Golden Handshake vs. Golden Parachute

A Golden ParachuteGolden parachute refers to the clause in the employment contract whereby the top-level executives entitled to receive significant benefits if the company faces a merger or takeover. Such benefits comprise liberal severance pay, cash bonus, retirement packages, stock options, etc.read more provides for severance benefits to an employee in the event of termination of employment due to a merger or takeover, often called “change in control benefits.” It is, therefore, more limited in its scope, whereas a golden handshake provides benefits even in the event of scheduled retirement. Both the benefits packages include cash and stock optionsStock options are derivative instruments that give the holder the right to buy or sell any stock at a predetermined price regardless of the prevailing market prices. It typically consists of four components: the strike price, the expiry date, the lot size, and the share premium.read more.

#2 – Golden Handshake vs. Golden Handcuffs

A golden handshake provides benefits to an employee when leaving an organization. In contrast, a golden handcuff is delivered to employees to remain with the organization. Golden handcuffsGolden Handcuff is referred to the employer offering a valuable incentive to the employee to bind them and stay in the company for an extended period. For an employee to stay with an employer, the latter should provide a financial incentive, and the former should be in a position to accept the incentive.read more are benefits provided to the employees of an organization to discourage them from shifting to a different organization. Golden handcuffs ensure that high-value, skilled employees remain with an organization by the large benefits packages offered.

Advantages

• To perform all senior-level tasks requires immense effort from the employees and involves various levels of risk-taking. As a result, organizations offer hefty golden handshake packages to induce the employees to work for the company to compensate.
• When choosing an organization, an employee would be prone to choose one that offers a good salary package and one that provides good severance benefits. Organizations may use these attractive packages to lure high-ranking employees from rival companies.
• It helps the employees provide financial security during their instability and unemployment. In addition, it allows the employees to look for better opportunities without worrying about immediate fund requirements.

Controversies

Although the intent was risk compensation and encouraged top executives to stay with the organization, many negative impacts have been. Some of the controversies relating to golden handshakes are elaborated below: –

#1 – Not Performance-Based

Golden handshakes are provided to employees upon the termination of employment. There is no stipulation in the contract, which provides that the employees should have performed well throughout their employment tenure. Even if the executives were fired on the grounds of non-performance, they would still be eligible to claim the benefits under this package.

There have been instances wherein, even when the company was incurring significant losses under the leadership of a particular executive, and many people were laid off due to this poor performance, the executive was still awarded the golden handshake at the time of termination of his employment.

#2 – Conflict of Interest

Golden handshake packages are substantial in value. However, sometimes, it may induce the executives to collect the package early and perform activities that negatively impact the company.

For instance, an executive may purposefully ensure that the company declares losses, which reduces its share prices. It may result in a merger or a takeover of the company, and at the time of change of controlThe term "change of control" refers to a situation in which the majority ownership of a company, and thus its business decision-making powers, shifts from one person to another.read more, the executive will be awarded the package.

Thus, the practice of awarding this does not induce the executives to perform well, keeping in mind the company’s objectives. Rather, it encourages negative and selfish behaviors.

#3 – Golden Shove

Companies may push for the early retirement of their employees for many reasons – to cut rising costs of operations, reduce labor force and its related expenses at the time of takeover or a merger, or in response to a change in the business environment. For example, a drop in oil prices led to many organizations laying off their employees to cut costs.

It has been contended that the companies have used golden handshakes to lay off older or senior employees – ‘The Golden Shove.’ However, organizations believe that they are a great alternative to layoffs. The practice compensates the older employees at the time of their employment termination. It simultaneously provides new and younger employees opportunities to join the organization and take over such posts.

More often than not, employees feel coerced into taking up the benefits packages offered and leave the organization than being put in a situation where they would be fired without availing any benefits.

Conclusion

Regarding golden handshake, considering the growth of negative incidents, shareholders have been given a say in valuing the benefits packages to the employees. Although shareholders do not participate in the day-to-day operations or talent acquisition, the company ensures that they are informed about the employees’ packages during their periodical shareholders meetingShareholders Meeting means a meeting of the stockholders of the corporation wherein resolution are placed before the shareholders to discuss and approve the corporate matters and other matters required by the bylaws of the company.read more.

Golden handshake, originally intended to lure employees into taking up top positions with a company, has many controversies surrounding it. Therefore, it needs to be regulated properly and implemented to benefit the employees and the organization.

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