SpaceX and Tesla CEO Elon Musk acquired the micro blogging platform Twitter earlier this week after a battle that stretched for months. While the $44 billion deal was an expensive affair even for the world’s richest man, experts believe that it may have become more expensive with the ‘golden parachute’ provision, especially after his latest firings. As the world eyes Musk’s next move for Twitter, people are now interested in understanding what exactly the viral word 'golden parachute' means and what it has to do with the firing of the former Twitter CEO Parag Agrawal.
For the unversed, just a few hours after the Twitter takeover was completed, Musk fired the company’s top executives, including CEO Parag Agrawal, Chief Financial Officer (CFO) Neg Segal and head of legal, policy and trust Vijaya Gadde. It was then that the news came out that even though the top executives have been fired, they would not leave empty ended as they are entitled to the golden parachute compensation.
According to a report in The Guardian, this clause entitles Agrawal, Segal and Gadde to $122 million in compensation. This will be for previous share awards, a year’s salary and some insurance payments, as per the deal.
As far as the trending search on Parag Agrawal’s golden parachute compensation goes, Reuters reported that the Indian-origin CEO is expected to receive the largest pay-out estimated at $42 million. A report in The Guardian adds, “The three executives also hold a cumulative 1.2m shares, which are likely to be bought by Musk as is standard in any takeover. Those payments would be worth $8.4m to Agrawal, $22m to Segal and $34.8m to Gadde.”
What is a Golden Parachute – Explained
Cambridge Dictionary defines the term ‘golden parachute’ as, “a large payment made to someone who has an important job with a company when that person is forced to leave their job.” In essence, a golden parachute is a contract or a provision that entitles the top executives to several substantial benefits, in case they lose their jobs in the event of either a merger, takeover or an acquisition.
Since mergers/acquisitions/takeovers are messy and expensive affairs, the top brass often run the risk of losing their jobs in the process. In such cases, a golden parachute provision, if already in place, entitles the exiting executives to an elaborate severance package. This package usually comprises of stock options, medical benefits, severance pay and so on, though the components may vary from one company to the other.
The original purpose of the golden parachute dates back to the 1970s when it was used to protect CEOs and other top officers in the event of takeovers, according to Britannica.com records. With this, the top executives can enjoy security in a market where similar positions may not be easily available. This provision may better side with the interests of CEOs than with those of the shareholders. However, in some cases, the golden parachute serves as a poison pill against hostile takeovers as the one acquiring has to experience the brunt of making hefty payments to the exiting employees.
As per a report in corporatefinanceinstitute.com, the term golden parachute was first used in 1961 when Charles C. Tillinghast Jr., former president and CEO of Trans World Airlines became the first recipient of such a compensation. In this case, the company was trying to get control away from Howard Hughes. Here, if the latter regained control of the company and sacked Tillinghast, the company gave a clause in the former CEO’s contract that provided him with a substantial sum of money in the event of him losing his job.
In the present world, while many experts believe that a golden parachute is now seen as an expected part of a pay package of a C-suite, others see it as a disproportionate payoff. As Parag Agrawal and others walk out of Elon Musk led Twitter, the golden parachutes are there for their swift landing.