Definition of golden, tin and silver parachutes

A ‘golden parachute’ is the term used for the special compensation arrangements, for example, cash, a special bonus, stock options or vesting of previously awarded compensation, between a company and its senior executives in case the company is acquired or if an individual is fired or made redundant.

Sometimes any acquisition will trigger the golden parachute, but in other cases it is only activated when the deal is hostile.  Often the golden parachute is exercisable only if the manager is dismissed, sometimes as a result of the merger or acquisition.

Usually, the golden parachute award will be significant in comparison to the executive’s normal compensation.  Silver parachutes refer to similar awards granted to lower level executives and even senior managers.  Tin parachutes refer to similar awards that are granted to all employees below the executive level.

Example
One of the most famous golden parachutes was received by Stan O’Neal, the chairman and chief executive of Merrill Lynch at the time of the financial crisis of late 2007.  When he was ousted in October of that year, he received a severance payment of approximately $160 million.

Another chief executive's golden parachute was received by Frank Newman in 1999 after his company, Bankers Trust, was acquired by Deutsche Bank.  In this instance, it was reported that he received $100 million and that the Bankers Trust's chief financial officer, Richard Daniels, received $25 million.

Following an unsuccessful attempt in 1998 by The Bank of New York to purchase Mellon Bank, one of the defences erected by Mellon Financial to fend off another hostile purchaser was the creation of golden, silver and tin parachutes for all Mellon employees.

Depending on their level, each senior manager could receive two or three times their base salary plus a bonus.

The tin parachute for all of the other employees specified that anyone made redundant within three years of a change of control - merger or acquisition -would receive one year’s salary plus two weeks for each year’s service up to 52 weeks.

The Mellon equity plans also provided special vesting in the case of a change of control.  These became significant issues for Mellon’s 17,000 employees when the bank agreed to a friendly merger with The Bank of New York in 2006. [1]

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