Golden Handshake Meaning
Golden Handshakes are clauses in employment contracts that provide for a severance package in the event that an employee loses their job. This is usually offered only to top executives of a company who may lose their job through retirement, layoff or even firing. The compensation may be in the form of cash or stock options. Considering the fact that 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 that comes with its risks. To compensate for the level of risk undertaken, a suitable golden handshake package is entered into by the company with its executives.
Related Terms of Golden Handshake
#1 – Golden Handshake vs. Golden Parachute
A Golden ParachuteGolden 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. 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 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..
#2 – Golden Handshake vs. Golden Handcuffs
A golden handshake provides benefits to an employee at the time of leaving an organization. In contrast, a golden handcuff is provided to an employee to ensure that he/she remains with the organization. Golden handcuffs 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 virtue of the large benefits packages offered to them.
- To perform all senior-level tasks requires immense effort from the employees and involves various levels of risk-taking. To compensate for the same, organizations offer hefty golden handshake packages to induce the employees to work for the company.
- While choosing an organization, an employee would be prone to choose one which offers not only a good salary package but also one which provides good severance benefits. Organizations may use attractive these packages to lure high ranking employees from its rival companies.
- It helps the employees in a way that it provides financial security during their period of instability and unemployment. It helps the employees to look for better opportunities without having to worry about immediate fund requirements.
Although the intent of the was risk compensation and to encourage top executives to stay with the organization, they have been many instances of negative impacts. 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 the tenure of their employment. 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. Sometimes, the executives may be induced to collect the package at an early stage and may perform activities that negatively impact the company.
For instance, an executive may purposefully ensure that the company declares losses, which results in the reduction of its share prices. It may result in a merger or a takeover of the company, and at the time of change of control, 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 objectives of the company; rather, it encourages negative and selfish behaviors.
#3 – Golden Shove
Companies may push for early retirement of their employees due to many reasons – to cut rising costs of operations, to reduce labor force and its related costs 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 golden handshakes have been used by the companies to layoff older or senior employees – ‘the Golden Shove.’ Organizations are of the opinion that they are a generous alternative to layoffs. The practice not only compensates the older employees at the time of their employment termination but also, simultaneously, provides opportunities for new and younger employees 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.
Considering the rising number of negative incidents relating to golden handshakes, shareholders have been given a say in the valuation of the benefits packages to the employees. Although shareholders do not take part in the day to day operations or in talent acquisition, the company ensures that they are kept informed regarding the packages offered to the employees during their periodical shareholders meetingShareholders 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..
Golden Handshakes, originally intended to lure employees into taking up top positions with a company, has many controversies surrounding it. It needs to be regulated properly and implemented rightly in such a way that it benefits not only the employees but also the organization.
This article has been a guide to what is Golden HandShake and its meaning. Here we discuss differences between a golden handshake, golden parachute, and golden handcuffs along with advantages & controversies. You can learn more about financing from the following articles –