IS THE GOLDEN HANDSHAKE REALLY GOLDEN?

INTRODUCTION

Life is hard enough without having to decipher everything. Each week, marketplace

brings you a word or a phrase that has bubbled to the top of the news; for instance -

"Golden Handshake." You hear it, you see it, but do you really know it?

This is not a new management buzz but it is a term associated with a valuable

commodity Gold so how golden is Golden Handshake we need to understand that and also

its intricacies. We can Define Golden handshake is a large payment made by a company to a

senior executive upon termination of employment before his/her contract ends It is also

associated with the term "Downsize" meaning - reduce the manpower. Now a days every

company is chanting only one 'mantra' - reform - restructure – downsize " Don't recruit

fresh employees in cases of retirement, throw the casual or contract workers our of job and

even if that is not sufficient - lure the employees to leave the job give them some extra

money in their hands – This is Golden Handshake!

A golden handshake is a clause in an executive employment contract that provides

the executive with a significant severance package in the case that the executive loses his or

her job through firing, restructuring, or even scheduled retirement. This can be in the form

of cash, equity, and other benefits, and is often accompanied by an accelerated vesting of

stock options.

Unlike the Iron Handshake, which is compulsorily given to the employees and is

beneficial only to the organisations, "golden handshakes" are offered only to high-ranking

executives by major corporations and may entail a value measured in millions of dollars.

Golden handshakes are given to offset the risk inherent in taking the new job, since high-

ranking executives have a high likelihood of being fired and since a company requiring an

outsider to come in at such a high level may be in a precarious financial position. Their use

has caused some investors concern since they do not specify that the executive had to

perform well. In some high-profile instances, executives cashed in their stock options, while

under their stewardship their companies lost millions of dollars and thousands of workers

were laid off.

THE GOLDEN HANDSHAKE SCHEME

A severance package is a bundled package of financial compensation and benefits

which is offered to some employees when they leave their positions. Some people call

severance packages “golden parachutes,” referring to the fact that they allow former

employees to float on their severance benefits, at least for a while. Such packages may be

built into employment benefits in some companies; teachers, for example, may receive

retirement benefits after working a set number of years. Severance packages are also

offered to employees, who are laid off, and they are sometimes used to encourage high paid

employees to leave to bring company costs down, in which case a severance package may

be called a Golden Handshake.

Any number of things can be included in a severance package. It can help to know if

your company offers such benefits; the details are often included in hiring contracts or

employee manuals, and it is well worth reading through these materials to make sure that

you understand them. Employees may also be able to negotiate a severance package,

depending on the circumstances in which they leave. Negotiations can be delicate at times,

but they can also yield better benefits when carried out well.

Some common inclusions in a severance package are: stock options, health

insurance, life insurance, compensation pay, pay for unused sick or vacation days, job

placement assistance, and retirement benefits such as those paid into a 401K plan. Exact

benefits obviously vary, and no benefits can be expected from a company which is going out

of business, whether or not they have been promised.

In terms of insurance, some companies continue to cover their employees after they

leave with medical and dental benefits. Companies may also allow employees to buy into

life insurance plans with company assistance; likewise with retirement accounts. Stock

options are another technique for compensating employees, since the employee may hang

onto the stocks or sell them, if desired. Severance benefits are also commonly provided

when termination is sudden; a severance package can include up to six months of pay in

some cases.

Additional pay such as accrued back-pay for unused sick and vacation days is not

uncommon, and some companies simply offer a lump sum to retiring employees to thank

them for their work. Additional payments and severance terms in general are determined

on the basis of how long an individual was employed; benefits will be much better after 40

years of work, for example.

In the changed scenario of globalisation, cost cutting by public sector, private sector

undertakings and Government departments has become the order of the day. The first

victims of the economy measures are the employees, who are being made to pay with their

jobs.

WHY THE GOLDEN HANDSHAKE IS GIVEN?

The companies get bogged down due to various pressures they face. Some of

reasons why companies go in for the Golden handshake Scheme are:

1. Relocation of the manufacturing units to other locations. This can be understood

through Fiat’s Golden Handshake scheme – Fiat announced a VRS scheme at the

Kurla plant in August 2006, which was accepted by more than 50% of its 1270 strong

workforce, putting in motion its plan to eventually relocate all manufacturing to

Ranjangaon.

2. Major restructuring of the companies.

3. Hiring entry level employees will be more cost effective and will work out

economically rather than paying those employees who have grown in age and

experience. The best example for this is the Maruti Udyog which has given Golden

Handshake to many of its employees who are aged above 40 years as the company

officials pointed out that "When people grow in age, they become more expensive ...

Their output may not be commensurate with the salary.”

4. Mergers, acquisitions and hostile takeovers. Example for this is Craig Conway,

PeopleSoft's former CEO, has received a severance package in excess of $16 million,

following his ouster from the embattled software company where a hostile take over

battle took place between the software giants Oracle and People Soft.

5. The Golden handshakes are also given by the companies to show their respect to

those employees who have worked with commitment and given their services loyally

to the companies.

Benefits of Golden Handshake to the employers

1. Cost effectiveness

2. Cost cutting

Benefits of Golden Handshake to the employees

1. The entrepreneurial traits of people who receive the Golden handshakes come to

the fore.

2. Proper compensation to employees in case of sudden retrenchment and

restructuring of jobs.

3. Temporary financial security.

But, Golden Handshakes are also given due to not so golden reasons. Some of the highly

publicized lucrative golden handshakes paid to corporate executives when they were

separated from their post with the firm are:

KENNETH LAY, oversaw possible illegal transaction dealings with outside partnerships to

inflate the financial results and hide large sums of debt that ultimately resulted in Enron’s

collapse that wiped out billions of investor dollars and cost the jobs of thousands of

employees, was sheltered from the ravages of Enron’s bankruptcy filings and walked away

with an exit package worth over $81 million;

L. DENNIS KOZLOWSKI left Tyco International Ltd., investigated for aggressive accounting

practice by accelerating pre-merger cash reserves to boost firm profits, and was entitled,

from his 2001 employment contract, to an exit package worth over $122 million; however,

having been indicted on sales-tax evasion on unauthorized expenses and felony charges

related to unauthorized loans along with bonus payments for personal use, Mr. Kozlowski’s

severance pay package was negotiated and revised downwards to around $68 million,

including $3.5 million annually for a 30-day-per-year consulting contract for the rest of his

life;

JILL BARAD, who served as CEO at Mattel Inc. for three years, resigned under pressure from

angry investors and the company board of directors following three consecutive quarters of

unexpected losses and a botched $3.5 billion acquisition of Learning Co. software concern.

She was paid an exit package valued at a little over $51 million;

BERNARD EBBERS, founder and CEO of WorldCom Inc., was fired for being involved in

accounting fraud. He borrowed $408 million for personal expenditures from WorldCom Inc.

To cover margin loans, using personal WorldCom stock as collateral. He received severance

valued at around $24 million, including $1.5 million annual pension for life and thereafter,

his wife, if she survives him, will receive $750,000 for life; however, the payments are

contingent on him not defaulting on his loan obligation nor declaring personal bankruptcy;

DURK JAGER resigned under pressure and was given $9.5 million in severance pay after

serving as CEO for 17 months at Procter & Gamble Co. while the company’s market value

declined by $73 billion or 50% due to unsuccessful restructuring that delayed introduction

of new products to the market, earning projections fell short of expectations coupled with

the failed acquisition of Warner-Lambert Co. and American Home Products Corp. that

followed P&G’s brief attempt to acquire Gillette Co..

With the economic recession gaining speed the world over, every other sector are

going in for the downsizing and the Golden Handshake offer as a cost cutting strategy. The

financial sector has seen some of the major financial institutions stumbling and using the

Golden Handshake as a cost cutting strategy. The Golden Handshake scheme has touched

every sector because of recession.

Even the world of sport is not untouched by the Golden Handshake experience.

Darrell Hair made his outrageous "non-negotiable" demand for half a million dollars to retire

quietly row surrounding Inzamam-ul-Haq, the Pakistan captain, who faces charges of ball

tampering and bringing the game into disrepute by failing to lead out his side after tea on

the fourth day. Though he withdrew that demand two days later, the DAMAGE was done.

Be it any sector Railways, banks, textile industry, Aluminium plants, Steel Plants, you

name any industry - Thousands of employees are going out of employment everyday. If we

ask the companies one question - who is going to buy the products, if everybody is thrown

out of jobs a vast majority become burden of an employed few? We know nobody will

answer it. The facts prove that there are no buyers even after unbelievable gifts are offered

with some products. Go through newspaper ads on any day the industry itself is getting a

handshake - not so golden. Since every coin has two sides, what happens to those

employees and the employers who receive and give Golden Handshakes respectively? Thus,

the two sides of the Golden Handshake Scheme can be noted as follows:

PROS

1. The golden handshake would allow thousands of people to have cash, and the time,

to indulge into any gainful self employment or business activities.

2. The golden handshake contracts ensure that the employees will be compensated if

their position suddenly evaporate or radically change.

3. It offers financial security to the executives in case they are made obsolete through

re-arrangement of departments, or fired for poor job performance or for any other

issues with the company.

4. Golden handshake may be used by the companies as a way of showing recognition

to an employee’s years of loyal services.

5. It allows former employees a chance to recover since the unemployment was

sudden.

6. It is a way of encouraging long term employees to retire so that the company can go

in for cost effective hire of entry level employees.

CONS

1. The employees, after getting the golden handshake, when they start a new venture,

do not have any guarantee that they will succeed and go through a very frustrating

period due to uncertainty.

2. They go through trauma and spend days in utter frustration as they are looked at as

an outcast or an object of pity.

3. The present scenario economic structure shows a rise in inflation rate. Thus, those

who have kept the money in four to five years time, the good amount of interest

earned in yesteryears, is nothing today due to inflation. If things go by the same rate

what will be left over is only horror.

4. They would find themselves in a helpless position and their future appears bleak.

Most of the times they cannot even decide what to do with the few lakhs of rupees

they get in by way of compensation package. Many of them end up burning their

fingers by starting business ventures without proper planning.

5. There are several instances of employees, who had taken VRS, being harassed by

their kith and kin and family members for money.

6. The money is just spent away as the employees do not have the knowledge of how

to manage such a large amount.

7. There is also a chance of some of them going into depression due to constant

nagging by their `near and dear' ones that they are sitting idle at a time when they

should have been working.

8. Some VRS people have utilized the money to discharge their duty by their family.

However, many of them who have been used to a busy life do not find it easy to sit

back and relax at home and end up on the wrong side of things.

9. The desperation and frustration that these people go through may lead them to get

involved in anti-social activities as the saying “An idle mind is a devil’s workshop”

rightly says.

Thus, all that glitters is not gold. The term golden handshake conjures up the image of a

pile of money. But at the end of the day, when it is analysed keeping the human factor in

mind, it is not golden at all.

REFERENCES

What Golden Handshake means – Shwetha http://www.citehr.com/118903-

golden-handshake.html

Golden Handshake: A bane or a boon - Reshma Shrivastava,

Lecturer, MBA Department, Disha Institute of Management & Technology,

Raipur. http://www.indianmba.com/Faculty_Column/FC457/fc457.html

http://www.wisegeek.com/what-is-a-severance-package.htm

Down-sizing and golden handshake scheme - by Syed m. Aslam.

http://www.pakistaneconomist.com/database2/cover/c97-16.asp

Fiat’s golden handshake for Kurla unit employees – The Economic Times, 22nd

August2006

http://www.economictimes.indiatimes.com/News/News_By_Company

Maruti plans golden handshake scheme, January 30, 2001 -

http://www.indiacar.net/news/n1081.htm

The umpire who sought golden handshake – by TED CORBETT, Sportstar,

VOL.29 :: NO.35 :: Sep. 02, 2006. http://www.hinduonnet.com/tss/tss2935

Conway’s Golden Handshake – by Dawn Kawamoto,

http://www.news.cnet.com/Conways-golden-handshake/2100-1014_3-

5417239.html

Golden Handshakes: Pay for Failure and Executive Separation –

by Karim Gulamhusein, Department of Economics, The

Kazakhstan Institute of Management, Economics and Strategic

Research, http://www.economics.ca/2008/papers/1030.pdf

www.wikipedia.org -

http://en.wikipedia.org/wiki/Golden_handshake