Golden Parachute as a Compensation-Shifting Mechanism
Posted: 29 Feb 2008
There are 3 versions of this paper
Golden Parachute as a Compensation Shifting Mechanism
Golden Parachute as a Compensation Shifting Mechanism
Date Written: April 2004
Abstract
We demonstrate how a golden parachute can be used to improve the target shareholders' net return by partially shifting the managerial compensation burden to the buyer through a higher acquisition price. Consistent with the empirical observations, we show that (1) the golden parachute will be contingent on a change-of-control rather than solely on the manager's layoff, (2) the golden parachute will be promised early, for example, at the time of the manager's employment, not just in the face of a takeover or a merger, (3) the shareholders would want to extend its coverage to other employees, and (4) the size of the parachute can be much larger than the manager's annual compensation. We also examine the effect of a golden parachute on the managerial incentive scheme.
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