Golden Parachute Clauses: What They Mean in Your Contract

A golden parachute is a contractual provision in an executive employment agreement that provides substantial financial benefits if the executive is terminated or resigns under certain circumstances, most commonly following a change of control (merger, acquisition, or corporate takeover).

How Golden Parachutes Work

Golden parachute provisions typically include one or more of the following benefits triggered by a qualifying event:

• Cash severance: A lump sum or series of payments, often calculated as a multiple of base salary and bonus (commonly 2-3x annual compensation).
• Accelerated equity vesting: Stock options, restricted stock units (RSUs), and other equity awards vest immediately rather than continuing on their original schedule.
• Continued benefits: Health insurance, life insurance, and other benefits continue for a specified period after termination.
• Outplacement services: The company covers executive job search support.
• Tax gross-up: Some agreements include a provision where the company pays an additional amount to cover the executive's excise tax liability (though these have become less common).

Trigger Structures

• Single trigger: Benefits are paid upon a change of control, regardless of whether the executive is terminated. This is more favorable to the executive.
• Double trigger: Benefits are paid only if there is both a change of control AND the executive is terminated or constructively terminated (e.g., significant role reduction, relocation). This is more common and generally considered better corporate governance.

Tax Implications

Under Internal Revenue Code Sections 280G and 4999, "excess parachute payments" exceeding three times the executive's base amount trigger a 20% excise tax on the executive and loss of tax deductibility for the company. This is why some agreements include:

• Tax gross-up provisions: The company pays the excise tax (less common today)
• Best net cutback: Payments are reduced to avoid the excise tax if the executive would net more money after the reduction than they would receiving full payment and paying the tax

When to Consult a Lawyer

Golden parachute provisions involve complex compensation and tax issues. If you are negotiating an executive employment agreement with these provisions, or if a change of control event is anticipated, consider consulting both an employment attorney and a tax advisor.

This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.