Golden Handshake

What Is a Golden Handshake?

A golden handshake is a stipulation in an employment agreement which states that the employer will provide a significant severance package if the employee loses their job. It is usually provided to top executives in the event that they lose employment because of retirement, layoffs, or for negligence. However, payment can be made in several ways, such as cash or stock options.

How a Golden Handshake Works

Sometimes these golden handshakes are for millions of dollars, which makes them a very important issue for investors to consider. For example in 1989, R.J. Reynolds Nabisco paid F. Ross Johnson over $52 million as part of a golden handshake clause. Some contracts, along with compensation, include non-competition clauses, which state that the employee is not allowed to open a competing business for a specified period of time after they are terminated.

A golden handshake can also be referred to as a golden parachute.

Special Considerations

Occasionally non-executives receive a golden handshake as a bonus. It is usually drastically different than the compensation that CEOs and top executives get, so one might call it a "silver handshake." Nevertheless, it is better than leaving with nothing. 

An example of this is automotive companies that buy out union workers' contracts. This can then free up that capital to hire new workers at a more advantageous labor cost. Another example is people who are forced into early retirement. Often times companies want to bring in new talent so these people are paid severance packages.

Criticism of Golden Handshakes

Golden handshakes can be very controversial. They can damage a company's public image because large executive payoffs are viewed as a reward for failure. For example, in 2010 British the oil company BP had an oil spill that occurred in the Gulf of Mexico as a result of the explosion of the Deepwater Horizon oil rig.

The rig was leased to BP for exploration of the Macondo Prospect, an oil field off the coast of Louisiana. After the accident, which resulted in costs to the company of more than $69 billion, BP's CEO Tony Hayward was pushed out. However, he received a golden handshake payout of a year's salary, worth $1.5 million, in addition to keeping his approximately $17 million pension fund.

Other famous golden handshake controversies occurred during the 2008 financial crisis. After many of these banks got into financial trouble, top executives were forced to depart but left with large pay packages intact. Some big banks allowed top-level staff to cash out of incentive programs by accelerating the vesting of their stock awards. For example, Antonio Weiss, a former Lazard banker, acknowledged that he received up to $21 million in unvested income and deferred compensation following his departure.

Bank shareholders who were left with worthless stock and bond investments were upset by these agreements. Since then, some companies have given investors a say on executive pay packages at shareholder meetings. These shareholder votes are usually non-binding, but do provide a strong signal to management about investors' attitude toward excessive executive payouts.