The Golden Handshake

The Golden Handshake - Should your organization have it?

By Garima Saxena, 3rd Eye Advisory Ltd
The Golden Handshake - Should your organization have it?

One of the recent mergers facilitated by Human resource experts of 3rd Eye Advisory was linked with the concept of Golden Handshake wherein the top management was hostile with their exit because of the acquisition. The Golden Handshake was provided as an addition to the employment letter of executives and was open only to those executives who have completed 50 years of age and 20 years of service on the date they accept the scheme. This entire activity targeted at least 15 top level executives. Once the terms of severance package were disclosed, the exit of white collar executives became cordial and things with in accordance with the determined agreement. This also protected the acquired organization from being maligned by its key personnel in the event of termination due to merger. One might be easily amazed by the strength of employees opting for this scheme popularly known as "Golden Handshake".

A golden handshake is a clause in an employee employment which provides the executivewith a significant severance package in case the executive loses their job through firing, restructuring, or scheduled retirement. They are bound by contractual terms to guarantee a substantial severance package in case the employee has to lose their job due to restructuring or retirement. Theseverancepackage tends to include a combination of cash, equity and beneficial stock options. Most of the times, senior leaders who bear a high degree of personal risk for a company's performance are likely to receive a golden handshake. They're used to attract star performers who may be reluctant to move to another company.

Golden handshakes are similar to golden parachutes except that handshakes include additional benefits. While Golden Parachutes and Golden Handshakes may make the high-level CEOs more inclined towards exit to receive the hefty package waiting for them, Golden Handcuffs act in the opposite way. They act as a disincentive for executives for leaving the company and joining the competitors. It is said that under the clause for Golden Handcuffs, executives have to give back the bonuses and rewards received if they leave before a stipulated period.

The possibilities of hostile takeovers are reduced with the clause of Golden Handshake being included in the contract. The acquiring company might not find it appealing to shed such an expensive package if it plans to ouster the key employees already in control. Golden Handshakes are rarely tied to performance and therefore provide no incentive to the executive to act in the organization's best interests. If the executives are attractive enough, they may also create perverse incentives for the executives to end their relationship with the company as quickly as possible, for example by facilitating a company sale or aggressive takeover. These golden handshakes are at times for millions of dollars, which makes them a very important issue for investors to consider.

In 1989, R.J. Reynolds Tobacco-Nabisco paid F. Ross Johnson over $53 million as part of a golden handshake. Some employment contracts, along with compensation, include non-competition clauses that state that once employment is terminated the employee is not allowed to open a competing business for a specified period of time.Hence, there should be a very valuable reason for providing a Golden Handshaketo any executive level employee and not just a reason to attract top talent to create significant amounts of value for the shareholders.

No organization can function if there is a conflict of interest at the key management level. While certain takeovers are hostile, some of them can even be beneficial for the company's future and growth. If the key personnel become insecure about their job, they may try to cause hindrances in the merger or takeover process. On the other hand, with Golden Handshake, employees can be secured about their compensation and offer complete co-operation the merger procedures.

In a research paper titled-"Golden Parachutes and the Wealth of Shareholders" by Lucian A. Bebchuk, Alma Cohen and Charles C. Y. Wang, it is stated that over the long-term, Golden Handshakemaybe harmful for shareholder value. Theorganizations which implement the Golden Handshakeobtain lower risk-adjusted stock returns as compared to their counterparts, in spite of the fact that the latter are more likely to be acquired. The research tells that Golden Handshakemake acquisition too easy for CEOs and they aren't afraid of being acquired. Therefore, they are not motivated enough for enhancing shareholder value.

Golden Handshake is indeed an intriguing concept and opinions continue to be divided on it. However, it has emerged as one of the most indispensable part of executive compensation package. While the clause seems important to appeal and retain enormously talented executives in the company, underlying ambiguity causes many to take undue advantage of the situation. Even though many provisions have been adopted to curb the blatant misuse of the Golden Handshake, unfortunately, they have not been realized to their full potential.

#ReadyBusinessPlan #ask3rdEyeAdvisory #LearnAt3rdEyeAdvisory #3rdEyeAdvisory

Article by: Garima Saxena, 3rd Eye Advisory Ltd