Are golden parachutes, as critics have charged, an outrageous ploy by top executives to enrich themselves at the expense of shareholders in the event of a takeover? Or are they, as management has argued, a device to protect shareholder interests by encouraging executives to act as honest brokers during takeover bids rather than resist bids just to protect their jobs?
Neither may be the case, report Harbir Singh of the University of Pennsylvania's Wharton School and Albert A. Cannella Jr. of Texas a&m University. Rather, golden parachutes seem to be mainly an incentive to improve executive and corporate performance.
In an analysis of 70 corporate takeovers in the 1980s, the two researchers found that executives with golden parachutes were significantly more likely to stay on the job in acquired companies in the years immediately following a takeover than those who had no such deal. "Since it's up to the acquiring company whether an executive is retained," says Canella, "it's clear that the new people in charge valued executives with golden parachutes, and it's also clear that such executives weren't simply interested in enriching themselves by jumping ship."
In sum, say Singh and Canella, golden parachutes appear to be a way of inducing managers to pursue long-run profitable strategies for their companies, without fear of losing their jobs.