Read Case #1 entitled “Understanding Your Employee Benefits: Executive Compensation in a Corporation” on page 308 in your text and answer these case questions: What is the purpose of the platinum parachute? Why would the company provide this benefit? How does it compare to the golden parachute? Why does the company offer an incentive stock option plan? What other protections are in place for the shareholders and employees relative to executive compensation in organizations?
After 15 years working at a small, family-run business, you have received an offer for a new opportunity in a large corporation. During a series of interviews with executives in the company, you learn about a variety of avenues to move up the corporate ladder. You believe that the position as a department manager provides you an opportunity to join a company where you could spend the rest of your career. As an executive position with the company could be in your future, you think that you should learn more about the compensation that executives at this company receive. Further, you want to make sure that you will be joining an organization that behaves ethically and pays all employees fairly.
You have a concern about what you have heard in the media about excessive executive compensation in large companies such as the one you are thinking about joining. You have read stories about public protests of large corporations and have also heard about executive scandals in which organizational leaders have inflated expenses to companies and spent money on excessive parties and furnishings for private residences. You are curious about whether such protests or scandals have involved your potential future employer.
You start to research this issue and are relieved to learn that there have not been any executive scandals at this organization. There is an article, however, about a previous CEO receiving a platinum parachute. You aren’t sure what this means, but you understand that the company lost quite a bit of money while that person was the CEO, and it seems as if he still received a fairly generous separation package from the company. The article also states that most top executives at this organization have a golden parachute clause in their contracts, and you aren’t sure what the difference is between platinum and golden parachutes.
The company is publicly held, and you learn that its executives do participate in an incentive stock option plan. Executives are granted a certain number of stock options each year that they are able to exercise after five years. As a result, there is an incentive for executives to work to increase the overall value of the company stock. This part of executive compensation seems to make sense. You hope that someday you also will be rewarded by the company’s success.
In the company’s annual report, you are able to see the total compensation of many of the company’s top executives, and overall, it seems that the executive pay and benefits at the company are not generally considered to be excessive. It also seems that executive compensation is attractive and in line with something that you should aspire to receive. Based on your research so far, this opportunity might just be the right move for your career.
Answer 1.
Platinum Parachute: Platinum Parachute is a type of compensation that is provided to the high paying executive or mostly CEO of the organization to terminate him before the expiration of the employment contract in the organization. Platinum Parachute is paid in the form of severance pay, stock option, and continuation of employee benefits. The CEO is one of the top executives of the organization and he is liable to increase revenue and profit for the organization with the help of his understanding of the industry and experience in a particular industry. But it is not like that the CEO will be successful every time, sometime he may fail in his job and because of that, the company can lose huge money.
In this case, the CEO can be terminated before the expiration date of his employment contract with the company and the CEO is provided with a platinum parachute as an incentive.
The main purpose of Platinum Parachute is to give benefit to the CEO for early termination than his employment maturity date. Because CEOs perform better to increase organization revenue and profit but due to uncontrolled situations and other reasons, CEOs could fail in the job role and can cost the organization is losing revenue and profit. But due to shareholder and other executive pressure, the organization terminate the CEO before expiring his contract. In this case, the CEOs can go for legal suits and can use other ways to save his job and reputation in the organization.
The organization does not want to face public scrutiny and legal actions for its doing against the CEO so the organization wants to solve the issue by paying the CEO before termination.
Answer 2.
The reasons the organization provide platinum parachute to its CEO.
The various reasons are discussed below,
Answer 3.
Golden Parachute: Golden Parachute is one of another incentive that would be a part of the employment contract of high paying executives and CEOs of the organizations. Golden parachute incentive helps executives in early termination in case of company merger or acquisition. In this case, these executives can lose their jobs. Golden Parachute provides pay and other benefits for 1-5 years as per the employment contract.
The main difference between Platinum Parachute and Golden Parachute is as below,
a. The platinum Parachute is the compensation benefit provided to the CEO, but the Golden parachute is provided to top-paying executives that include all C level employees and other executives as per their employment contract with the organization.
b. The platinum parachute is the compensation benefit when the CEO is fired for his early termination due to his failure in his job role and company losses, but Golden parachute is the benefit given to the executives for their early termination in case of change`company ownership status or in case of termination due to merger or acquisition.
c. Platinum Parachute is helpful in the termination of the CEO that is not performing well as per the shareholders and other top executives that can save huge money in the future for the organization. But the Golden Parachute helps organization to retain and attract top talented employees. The company will make sure that employees feel safe about their future in the organization. They should keep in mind that the company will give them benefit in case of early termination due to the change in the ownership status or if merger and acquisition happen in future.
Answer 4.
Employee Stock Option: Employee stock option refers to the benefit provided by the organization to its top and important employees and encourages employees to buy a certain number of company shares at the rate lesser than the market price. Employees can benefit from employee stock options after some years by selling these shares at the future market price. Employee performs better when they have the company's shares because their share value increases if they perform better in their job role.
The purpose of giving Employee stock options to the employees are listed below:
a. Attracting and Retaining talented employees: A better employee stock option plan attract new talented employees or executive to the organization as this is one of the best benefits provided by the company where the employee can benefit in future when the share price of the company increases. An employee can sell his shares in the future at a higher price and can benefit from that. It helps in retaining existing executives in the organization. It is a big achievement in getting stock options in the organization.
b. A cost-effective option for the organization: Employee stock option is a cost-effective for the organization as the company is not required to pay in cash in the current situation and can provide company shares to employees that can be cashed out by employees in the future.
c. Better employee performance: Employee stock options motivate and encourage employees to perform better to increase company revenue and profit so that the share value of the company increases. This will be beneficial for the employee as well as the organization.
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