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Golden Handshake

Updated on May 23, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Golden Handshake Meaning

A golden handshake clause in employment contracts 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.

Golden Handshake

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Because this privilege is for high-ranking executives, the severance package is substantial and highly valued. These are offered to employees to protect their interests in taking up high-profile posts with risks. In addition, to compensate for the risk level, the company has entered a suitable golden handshake package with its executives.

Key Takeaways

  • A golden handshake clause is included in employment contracts to provide a severance package to high-ranking executives who may lose their job due to retirement, layoff, or termination. 
  • This compensation package, which can consist of cash or stock options, is typically substantial and valued, reflecting the executive’s position and importance to the organization. 
  • While the golden handshake was initially designed to attract top talent to key positions within a company, it has generated controversies. As a result, proper regulation and application are necessary to ensure employees and organizations benefit from this provision.

Golden Handshake Explained

A golden handshake is a condition in the employment contract of executives in which a severance package is mentioned and used in case of job loss due to retiring, restructuring, firing, or any other situation.

Regarding the golden handshake, shareholders have been given a say in valuing employee benefits packages, considering the growth of negative incidents. 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 meeting.

Golden handshake agreement, originally intended to lure employees into taking up top positions with a company, in return for a golden handshake retirement, 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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Golden Handshake Video Explanation

 

Example

Let us assume AB Ltd is a company in the automobile sector which has reached a stagnation stage. The management feels that the company needs some new and innovation minds who can put the latest technology in the company operation and help it to stay competitive as well as move forward.

Thus, it decided it terminate the service of John, who is a senior employee who still has two more years of service and replace him with a young professional who is aware of the latest trend in the automobile market and has the knowledge regarding implementation.

Thus, the company offers a golden handshake retirement to John, which is monetary compensation of quite a heavy amount and terminates his job.

Advantages

  • To perform all senior-level tasks requires immense employee effort and involves various risk-taking levels. As a result, organizations offer hefty golden handshake payment to induce the employees to work for the company to compensate.
  • When choosing an organization, an employee would be prone to choose one with a good salary package and one with 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.

Limitations

Although the intent was to risk compensation and encourage top executives to stay with the organization, many negative impacts have been. Some of the controversies relating to golden handshake payment are 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. Many people were laid off due to this poor performance. Yet, the executive was still awarded the golden handshake at the time of termination of his employment.

#2 – Conflict of Interest

Golden handshake agreement 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. At the time of change of control, the executive will be awarded the package.

Thus, awarding this does not induce the executives to perform well, keeping the company’s objectives in mind. 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 the labor force and its related expenses at the time of a takeover or a merger, or respond 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 handshake calculation 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.

Often, employees feel coerced into taking up the benefits packages offered and leaving the organization rather than being put in a situation where they fire without availing any benefits.

Golden Handshake Vs Golden Parachute

golden parachute provides 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 scope, whereas a golden handshake provides benefits even in the event of scheduled retirement. Both the benefits packages include cash and stock options.

Golden Handshake Vs Golden Handcuffs

A golden handshake calculation and payment provides benefits to an employee when leaving an organization. In contrast, a golden handcuff is delivered to employees to remain 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 through the large benefits packages offered.

Frequently Asked Questions (FAQs)

1. Are golden handshakes taxable? 

Whether golden handshakes are taxable depends on the specific jurisdiction and tax laws in place. In many countries, golden handshakes or severance payments are subject to taxation. These payments are often considered income and may be subject to income tax. 

2. Where did the golden handshake originate?

The term “golden handshake” originated in the United States and became popular in the mid-20th century. It refers to a financial arrangement between an employer and an employee, typically during a significant event such as retirement, termination, or resignation. The employer provides a substantial financial package or payment to the employee as a form of gratitude or compensation.

3. Is golden handshake ordinary time earnings? 

Whether a golden handshake is considered ordinary time earnings depends on the specific circumstances and the definition of ordinary time earnings in the applicable jurisdiction. In some cases, golden handshakes may be considered as part of ordinary time earnings, especially if they are provided as compensation for services rendered during regular working hours. 

This article is a guide to guide to Golden Handshake and its meaning. We explain it with examples and differences with golden parachute and golden handcuff. You can learn more about financing from the following articles: –

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