Severance Plans and Arrangements

Golden ProvisionWith the $56 million Golden Parachute for Heinz CEO, and similar packages for the executives of companies like GE, Exxon, Mobil Corp., AT&T and Home Depot, Inc., being in the news recently, a lot of focus has been on these packages usually reserved for the highest paid in a corporation. But what exactly is a Golden Parachute?

A severance provision in an employment agreement, or a separate severance contract provides for specified compensation in the event the executive is involuntarily terminated (other than for “cause”).  It can be a golden parachute or a non-golden parachute contract as described below:

Golden Parachute
A Golden Parachute provides a generous severance package to top executives in the event of a change in control transaction; merger, acquisition, etc.  It can have a single trigger, allowing the executive to receive the severance package when the change in control occurs, even if the executive retains his/her position; or a double trigger where the severance is payable upon change of control and loss of employment.

A typical Golden Parachute payment may include a value of one year’s base salary, an award equal to a previous incentive compensation, and/or an amount equal to the number of vested and un-vested shares in a long-term stock option award multiplied by the “spread” calculated by subtracting the stock price under the terms of merger from the option exercise price.

Golden Parachutes are regulated by Code Section 280g, and have complicated requirements, so you should consult an attorney prior to negotiating.

Since Golden Parachutes have become  controversial and as evidenced by the recent SEC regulations regarding say-on-pay and the shareholder vote required  on Golden Parachutes, their use will likely decline. However, they do still have some advantages such as helping to retain key executives during a restructuring and some argue they help executives remain objective when considering a merger or acquisition that could lead to their termination.

However, what if you are not the Heinz CEO, can you get in on this “walk away” package?Maybe.

Silver ParachuteGolden Parachutes are mostly reserved for the highest officers of the corporation. A Silver Parachute however is a severance agreement that persons in management positions can negotiate for.  It has the similar single and double trigger options as the Golden Parachute, but with less generous benefits.

Tin ParachuteAs you can guess, the tin Parachute is the severance package for non-management positions and is typically less generous than those above.

Author: Jennifer Trowbridge, Stoecklein Law Group, LLP.

Photo Credit to http://www.suitsbysuits.com/Why_Golden_Parachutes

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