Golden Parachute

The financial crisis in America has put the golden parachute under renewed scrutiny.

Massive bailout plans by the United States to rescue troubled investment banks provides a golden opportunity to, among other more urgent things, examine the golden parachute, the thing that allows bank executives to jump from an airplane about to crash and land safely on the ground – and into a pool of cash.

Parachute, the umbrella-shaped apparatus that sky divers fall out of the sky with – otherwise, sky diving would not be fun, I assure you. Golden, because there's a lot of money involved.

OK, firm definitions first.

"Golden parachute" refers to clauses in a contract that allows corporate executives to cash out in a crisis, such as the financial crisis that currently grips America and Europe.

That's just how their contracts are negotiated and structured. There are specific clauses (golden parachutes) that stipulate that when "shit happens" – a euphemism for something inconvenient occurring – the company will pay its top executives a bonus package, including cash, stock options or both. This bonus package is otherwise known as a severance pay, similar to a divorce package.

Under normal circumstances, say, when a bank is bought out by another, the golden parachute clauses are understandable, seen as a reward for the CEO's previous contribution, such as it is.

I am a Chinese and I can understand these things. As a young employee, I once asked a superior why civil servants all seem to want to move up the ladder in a government office. "There's money and benefits", my superior replied perfunctorily, "houses and cars." And he asked me back: "Otherwise who wants to 'Serve the People'?"

You see, the golden parachutes are in place to make sure that nobody takes the fun away.

Only that this time in America, taxpayer's money is at stake. People rightfully demand why banks rescued the taxpayer should continue to reward managers whose poor management had led them to the brink of ruin in the first place.

Oh, well, I don't want to get involved in all the economics and politics as to why there is a democracy for the few. I just want to help you understand the concept of a golden parachute.

I've done that, I think. Let's move on to examples from recent media:

1. It's no secret that CEOs have been raking in millions of dollars in salaries, stock options, retirement benefits, and perks like country club memberships and private jet use at a rate that far outpaces the growth of rank-and-file workers' wages. What's more, even when their companies don't perform well or when the top dog gets the boot, the CEO still gets out with a golden parachute worth millions in severance pay, retirement benefits, stock options, and other benefits.

- The Golden Parachute: CEO Severance and the Housing Crisis by the Numbers, AmericanProgress.org, February 27, 2008.

2. Fannie Mae and Freddie Mac's regulator is blocking as much as $24 million in "golden parachute" severance payments to the companies' ousted chief executives.

The Federal Housing Finance Agency notified former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron that they will not receive the exit pay called for in their employment contracts now that the companies are under federal control, the regulator said in a statement on its website.

FHFA director James Lockhart on Friday proposed limiting payments for departing executives, board members, contractors, outside lobbyists, and business partners. US senators including Charles Schumer of New York, Jack Reed of Rhode Island, and Richard Durbin of Illinois had urged FHFA to trim or eliminate bonuses for Mudd and Syron, citing their "failed leadership."

"We find it way out of line that these two executives will be rewarded with millions of dollars in bonus compensation at a time when taxpayer dollars may have to be deployed to cover any financial losses caused by errors in management," Schumer and Reed, both Democrats, wrote in a Sept. 9 letter to Lockhart.

3. Banks' boards of directors, encouraged by their shareholders, must look hard at reforming the pay of top bankers. The core problem is this: Bankers get stellar rewards in the good times and don't have to give money back when their strategy sinks the bank a few years down the road. They might miss a bonus, or even get fired - and float down to earth on the "golden parachute" negotiated in the flush years.

One way to change this would be for banks to hold a big chunk of bankers' pay in escrow, to be doled out over several years. A bigger share of a bankers' pay could be made in restricted stock that can only be sold over a fairly long period of time. Golden parachutes could depend on good performance through the executive's tenure.