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Golden Parachute

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A golden parachute is an employment agreement that guarantees a key executive of a company lucrative - even excessive -- compensation in the event the firm is taken over. The benefits a golden parachute may provide include a huge, one-time cash bonus, stock options, and pension. More than a few people view a golden parachute as simply another way senior executives enrich themselves. But a golden parachute can actually serve several, sometimes conflicting, purposes. A golden parachute may attract and hold senior executives who might otherwise be reluctant to work for a possible takeover target. And because senior executives are compensated upon sale, a golden parachute may make them more willing to protect shareholder interests by selling the company. But a golden parachute can also discourage corporate takeovers: After adding in the costs of a golden parachute, a potential suitor may decide to drop a takeover bid. Recognizing the biases a golden parachute can engender, in 1984 Congress amended the IRS code to discourage golden parachute plans. But a golden parachute feature is still included in many executive contracts.

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