Silver Parachute: What It is, How it Works, Examples

What Is a Silver Parachute?

A silver parachute is a clause in a hiring contract outlining special compensation arrangements paid to specific employees when they leave a company or their position is made redundant or they are laid off. These types of clauses frequently come into effect following a merger, acquisition, or other change in corporate control.

Understanding the Term Silver Parachute

​​​​​​​Silver parachutes may include severance pay in the form of cash, a special bonus, stock options, or vesting of previously awarded compensation. The contract contains explicit language detailing the conditions under which the silver parachute clause will become valid.

A silver parachute is similar to the more widely known golden parachute, which often applies to only the top executives in an organization. A silver parachute typically includes smaller compensations than a golden parachute. Also, more employees are eligible to receive them. Golden and silver parachutes are so named because they are intended to provide a soft landing for employees of certain levels who lose their jobs. 

Typically, mergers and acquisitions (M&A) will also offer tin parachutes for other employees who lose their position within three years of a change of corporate control. When enacted, employees are often eligible to receive one year’s salary plus two weeks for each year of service up to 52 weeks.

Parachute Clause Examples

The 2008 financial crisis brought many parachute clauses into the public spotlight. These unique plans drew scrutiny as the top executives of some of the nation’s largest banks and brokerages received millions of dollars in severance while their companies relied on taxpayer bailouts and takeovers to stay afloat. 

As reported by Time magazine, one of the more famous examples of a golden parachute was the approximately $160 million severance payment given to Stan O’Neal by Merrill Lynch. The ousted chair and chief executive received his parachute payment in October 2007, just as the scope of the financial crisis was becoming clear. 

In addition to monetary awards, other examples of opulent parachute benefits include

• Continued enrollment in company pension plans
• Vesting of all retirement benefits
• Paid health and dental insurance
• Compensation for legal fees

Instances of these and other exclusive advantages drew criticism from shareholders and the public. As a result, the post-financial crisis era has seen many companies review their executive-level compensation policies and devise new ways to link executive performance to corporate success.

Special Considerations

In many cases, their goal has been to determine whether such packages are in the best interests of the firm and its investors. One argument in favor of parachute clauses is that they encourage and retain the top executives who will continue to innovate and grow their organization.