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Sterling Employment Law

What is a golden parachute clause in an employment contract?

In simple terms, a golden parachute is simply a severance package. However, it is unlike almost all severance agreements because the value of a golden parachute is typically substantial. Entry-level or even mid-level employees will probably never be offered a golden parachute in their employment contracts. This clause is reserved for top, executive-level employees only.

The basic purpose of golden parachutes in employment contracts is to recruit top-level executives. In addition to more ordinary incentives like base compensation, stock options and bonuses, the inclusion of a golden parachute is an effective way of enticing new executives into a company. These clauses may go into effect for a regular termination or in the event of a business merger in which an executive loses his or her job.

There have been many widely publicized golden parachute recipients over the last two decades. Former chief executive officer (CEO) of British Petroleum, Tony Hayward, received $1 million along with a pension of nearly $12 million after he was terminated for "poor leadership" following the Deepwater Horizon oil spill of 2010. The employment contract of Carly Fiorina, former chairperson and CEO of Hewlett Packard, entitled her to more than $65 million upon her dismissal in 2005. She lost her job due to "performance related issues."

As you might expect after learning about golden parachute payouts, these clauses are somewhat controversial additions to executive employment contracts. If you have been offered unusual incentives in your Michigan employment contract, consider letting a lawyer review the contract. This will help you identify whether your contract is sound, legal and beneficial for your needs. Doing so can also help you determine if the golden parachute offered in your contract will cover your financial needs in the event of a termination.

Source: Money Crashers, "Golden Parachute Clause Definition – Examples of Payments," Kalen Smith, accessed March 16, 2017

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