The Effects of Golden Parachutes

By James Kwak

The indefatigable Lucian Bebchuk has written another empirical paper (Dealbook summary), this time with Alma Cohen and Charles Wang, on the impact of golden parachutes (agreements that pay off CEOs generously in case of acquisition by another company) on shareholder value.

Looking just at the question of whether a company is acquired and for how much, they find out that golden parachutes work about how you would expect. Companies whose CEOs have golden parachutes are more likely to get acquisition offers and are more likely to be acquired, presumably because their CEOs are les likely to contest takeovers. On the other hand, these companies tend to sell for lower acquisition premiums, again because their CEOs are more likely to be happy to be bought out.

“So far, so good,” Bebchuk writes. But the problem is that when you take a longer view, golden parachutes appear to be bad for shareholder value. Companies that adopt golden parachutes have lower risk-adjusted stock returns than their peers—despite the fact that they are more likely to be acquired. Some other factor is outweighing the positive effect (for the stock price) of more frequent takeovers.

Bebchuk proposes one explanation: Golden parachutes make being acquired relatively painless to CEOs. Therefore, they are less afraid of being acquired; and, therefore, they are less concerned about maximizing shareholder value in the first place.

Here’s another possibility: Companies are more likely to grant golden parachutes to their CEOs if they have: (a) CEOs who care more about maximizing their personal wealth than about their companies; (b) boards who are more concerned about doing favors for the CEO than about doing what’s right for the company; or (c) both. Those are not the kinds of companies you want to be investing in, since they’re likely to screw up all sorts of other things in addition to their executive compensation policies.

10 responses to “The Effects of Golden Parachutes

  1. @James Kwak “Companies grant golden parachutes to their CEOs… Those are not the kinds of companies you want to be investing in, since they’re likely to screw up all sorts of other things in addition to their executive compensation policies.”

    You’ve got to be kidding! I hope for your sake your pension fund does not follow this type of empty advice.

  2. Lucius Annaeus Seneca 4 B.C. – 65 A.D.

    “A great fortune is a great slavery.

    A great mind becomes a great fortune.

    A kingdom founded on injustice never lasts.”

  3. Who would have imagined that we would have the golden paratrooper of paratroopers running in a close race to be Our Nation’s President?

  4. As their control slips away, and the parachutes begin to fray. The temperature rises in the kitchen of compromise, and the true colors of the beneficiaries start showing more in the public arena than even the private.
    I can confirm that there are many desperate GOPer’s trying to set up there delegate count, like a drug dealer trying to keep the money straight now that they have so much liquidity but are still in a capital squeeze from the over supply of a debt hangover.

  5. @James Kwak “Companies whose CEOs have golden parachutes are more likely to get acquisition offers and are more likely to be acquired”

    That is not the casuistic relation. Companies which are more likely to be the target of an acquisition are more likely to offer golden parachutes when signing up a CEO.

  6. “Companies are more likely to grant golden parachutes to their CEOs if they have: (a) CEOs who care more about maximizing their personal wealth than about their companies…”

    My guess is that includes about 95% of non-founder CEOs. Such folks are uber employees. They may like their company, enjoy what they do, like any other employee – but are not going to put the company’s or shareholder’s interests above their own. That’s why paying them like they’re “founders” is such a bad trend.

  7. Aren’t the parachutes inflated even in the event of abysmal and gross mis-management, and failure of the company as an enterprise?

    This can’t be a worthy incentive, except to the lying-clown CEO who ruined the company.

  8. If you were about to give up a good job as a CEO in one company to enter into another one likely to be the target of an acquisition you would also ask for a golden parachute. If then someone gives you an excessive golden parachutes that completely distorts the incentives well that is a complete different thing…

    And so, if you really want to get to some worthwhile research results, you should eliminate from the data all those case when the company had just recently been the target of an acquisition, and those where, just as an example, the golden parachute is worth less than two years of the CEO’s normal remuneration.

  9. A new, curtain calling, from the Per Kurowski. Advice taken!