Golden Handshake (Explained: All You Need To Know)

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What is a Golden Handshake?

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What Is Golden Handshake

In business, a golden handshake refers to a severance package offered to corporate executives or key employees in the event they lose their job.

Typically, a golden handshake refers to a contractual provision in the company executive or key employee’s employment contract entitling them to stock options or cash payments when their employment contract is terminated.

The term was originally coined by Frederick Ellis who was the mid-1960s city editor of the Daily Express in Britain.

The employment contract will specify the “events” that will trigger a payout to the employee. 

For instance, a top executive can receive cash or stock options in the event of a layoff or retirement.

In some cases, company executives may even receive a payout if they are terminated for negligence.

A golden handshake is a negotiated severance payout when the employee’s employment contract is terminated involuntarily.

In some cases, the general public may consider that a golden handshake was well warranted, but in many cases, people are outraged when top company executives receive large payouts although they did not perform well.

Keep reading as I will further break down the meaning of a golden handshake and tell you how it works.

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Why Is A Golden Handshake Important

Although golden handshake payouts are controversial, many companies agree to pay their executives severance payouts when their employment contract is involuntarily terminated.

The main reason why companies will agree to offer golden handshakes is to be able to attract top talent to lead their company.

Many executives may not want to take on a risky executive role where layoff or termination could be highly probable.

To entice top executives to take the job, companies offer golden handshakes to reward someone should their employment be terminated against their will.

Another reason why golden handshakes are important is that it allows companies to encourage their executives to facilitate and remain integral to a merger or acquisition even though their jobs may be at risk.

In other words, company executives will be given the incentive to remain with the target company during an acquisition process so they could potentially receive a large payout.

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Golden Handshake Advantages

There are several key benefits to negotiating golden handshakes with top company executives.

The most important benefit is that companies are able to have the company executives handle high-risk tasks that may result in them losing their job.

For example, some executive mandates could be to facilitate an acquisition, corporate reorganization, merger, or restructuring.

Another advantage is that companies are able to recruit better talent in senior leadership roles by offering golden handshakes in their employment contracts.

Corporate executives also benefit from getting the financial security they need to work for a company that may not be financially stable or has a negative future outlook.

Ultimately, the main advantage of golden handshakes is to provide corporate executives an important financial incentive to accept an employment offer or to remain on board with a company even if the person can potentially lose their job.

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Golden Handshake Disadvantages

Although golden handshakes can help companies recruit and keep leadership talent, you must also be aware of their main disadvantages.

The most important disadvantage is that golden handshakes are highly controversial.

The general public and many investors can get very upset when a company executive pockets millions of dollars when the company has taken significant losses.

Many companies were heavily criticized for offering astronomically high golden handshakes to their executives while the company was not doing well and forced to lay off thousands of employees.

The public perceives golden handshakes as a reward to executives that failed to do their jobs properly.

Another important disadvantage is that golden handshakes can get very expensive for companies.

Large companies often agree to golden handshakes that are worth millions of dollars.

Over the past few decades, there have been many instances where companies had paid large sums of money to corporate executives in highly controversial ways.

As a result, many companies have adopted a “say on pay” policy when looking to grant important payouts to their executives.

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Golden Handshake Controversies

There are many instances when the payout of golden handshakes has been heavily criticized and controversial.

Although companies will accept golden handshake clauses to recruit top talent and have them remain on board even though their job may be at risk, there are perverse consequences that can result from such severance payouts.

One perverse consequence of golden handshakes is that the executive leadership can be included to delay the accounting of revenues, immediately account for expenses, and actively attempt to show lower profitability figures for the company.

A lower profitability reporting can lead to a drop in the company’s share prices, exposing the company to becoming the target of a hostile takeover.

When the takeover goes through, the company executives receive a large severance payout.

Since corporate executives have access to sensitive information relating to the company, they may act in such a way as to reap the benefit of their golden handshakes rather than acting in the best interest of the corporation.

Even in situations when a company executive legitimately receives tens of millions of dollars in golden handshake payouts, the public gets angry.

When every employee in the company has contributed to its success, it’s difficult to justify why a few executives are entitled to reap astronomical rewards while everyone else is left out.

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Takeaways 

So there you have it folks!

What is a golden handshake in business?

In a nutshell, a golden handshake refers to a contractual clause in an executive contract where the company offers a severance package in the event the executive loses their job.

The events that could lead to the payout of a golden handshake could be a planned retirement or the involuntary termination of the employment contract.

One of the main reasons why companies offer golden handshakes to executives is to have them assume a very risky job where it is very likely that they may lose their job.

It also helps companies attract top talent.

On the other hand, golden handshakes are heavily criticized by the general population as they see it as rewarding the executive’s failure.

Now that you know the meaning of the golden handshake and how it works, good luck with your research!

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