A pension parachute is a retirement plan that provides executives with significant benefits in the event of a merger, acquisition, or other change in control of a company. It is a form of golden parachute, which is a type of severance agreement that provides executives with substantial financial compensation in the event of job loss due to a merger or acquisition.
The purpose of a pension parachute is to provide executives with a safety net in the event of a change in control of the company. These plans are typically negotiated as part of an executive's employment contract, and can include various benefits such as accelerated vesting of stock options, continuation of salary and benefits, and enhanced retirement benefits.
The components of a pension parachute typically include a defined benefit pension plan, supplemental executive retirement plan (SERP), and other retirement-related benefits such as 401(k) matches and deferred compensation plans.
The importance of a pension parachute is to provide executives with financial security and incentives to stay with the company during a time of uncertainty. It also helps to attract and retain top talent, as these plans are often offered as part of executive compensation packages.
However, pension parachutes have also been criticized for providing excessive compensation to executives, and for being a form of entrenchment that can make it difficult for companies to make changes or respond to market pressures.
An example of a pension parachute in action is the case of General Electric (GE), where former CEO Jack Welch was granted a pension parachute worth an estimated $417 million upon his retirement in 2001. This sparked controversy and criticism, as many felt that the amount was excessive and did not align with shareholder interests.
In summary, a pension parachute is a retirement plan that provides executives with significant benefits in the event of a change in control of a company. While it can provide executives with financial security and incentives to stay with the company, it has also been criticized for providing excessive compensation and being a form of entrenchment.