Updated July 21, 2023
What is Golden Handshake?
Golden Handshake is classified as a severance agreement wherein the employer would have to give a severance package in case the employee loses out on their job due to lay-offs, retirements, or due to professional negligence. The golden handshake tends to offer employees benefits of employment when they are leaving the organization.
Explanation
Normally employment contracts contain a clause of severance package to be given to the employees by the employer when they lose out on their active jobs due to professional negligence or due to lay-offs or due to voluntary retirement. The severance package is offered to the employees who are either engaged in a high-risk job or they are employed as a top executive in the organization. This is primarily done to protect employee interests when they hold top executive posts. The severance package is the collection of the benefits offered by the employer to the employee when the services of the employees are ended abruptly or they are laid off from the organization.
Normally, the employer and employee have to sign the severance agreement or contract. The total amount of the money receivable to the employee depends upon the tenure’s length they stay in the organization. Such payments may also include unutilized vacations or sick leaves and business expenses that are yet to be reimbursed.
How Does it Work?
Whenever a business feels that the top employee has attained an age where he could be asked to retire or whenever business reaches the point that they have to cut down the costs of the employees, they initiate the golden handshake clause as per the contract. They communicate with the employees who hold the top executive positions in the organization. In such a scenario, it is not the mistake of the employees and yet their services are being terminated. The severance package under the golden handshake clause mitigates the imminent financial risk resulting from an abrupt termination of services. The scenarios where a golden handshake is prominently applied are when the employee is closed to his retirement age or either the business is looking towards the reduction in costs of operations.
Examples of Golden Handshake
Let us take the example of Cognizant technology solutions. The organization is a reputed business in the field of information technology, business process management, and management consulting. In the year 2017, the business faced the problem of severe issues of rising costs. To curb the same, the business offered a voluntary retirement scheme under the clause of golden handshake to the selected top executives in the organization. The business offered them the option of an exit from the organization. Under the severance package, the Vice presidents were offered with 9-month severance package whereas assistant vice presidents were offered six-month severance packages.
Reasons for Golden Handshake
In the business lifecycle, there comes a point beyond which if the business continues to undertake the rising costs of operations, this could result in imminent failures for the business. The business may shut down eventually and this would end up affecting the employees who are at the bottom-most level or tier in the organization. Therefore, as a defense mechanism and to protect the interests of all employees, the top executives are asked to take up voluntarily retirement or they are laid off by the business which then helps the business to curb their rising costs. Since the employees who held the top-level positions in the organizations were not at any fault, the business offers them a golden handshake which helps the laid-off employees to mitigate their financial risk.
Golden Handshake vs Golden Parachute
The golden parachute is termed as a package that the employee receives if the business has been taken over by the other company and the services of the employee are terminated as the result of the merger. The golden parachute is also given to key and top executives employed in the business. The package under the golden parachute may be composed of severance pay, stock options and cash bonuses. The golden parachute can be regarded as a poison pill which undertaken by the target business in the form of employee exodus to discourage the attempts of a hostile takeover by the acquiring business. On the other hand, the golden handshake can be compared to as golden boot offered by the organization to offered with the intent of initiating their voluntary retirement from the organization. The golden handshake is nowhere related to mergers and takeovers.
Advantages and Disadvantages
Below are the points to explain the advantages and disadvantages
Advantages
Below are the points to explain the advantages:
- Normally top-level executives or employees are engaged in a high-risk job. Taking the nature of risk into the account, the employer agrees to offer a hefty package in the form of a golden handshake. This motivates the employee to work diligently for the employer.
- Normally when top-level executives change jobs, they take into account the level of severance package offered by the employer along with the salary offered.
- Therefore, a severance package may be utilized as a key to attract top and valuable executives from the competitor so as to gain maximum competitive advantage.
- The golden handshakes take care of the financial security of the employee when he or she faces unemployment and job loss.
- It helps employees to seek out better alternatives and opportunities as they won’t have to worry on the account of immediate money requirements or funding needs.
Disadvantages
Below are the points to explain the disadvantages:
- The golden handshake offered to the employee is often not performance-based. The employment contract does not add the stipulation or clause that the employee has to perform throughout his employment tenure. Therefore, when employees are fired under the ground of non-performance, the employees would still be eligible for the severance package.
- The packages offered under the golden handshake scheme can be at times so lucrative that the employee may deliberately perform actions that could adversely impact the organization and in this manner, the golden handshake drives conflicts of interests.
- The organization may induce early retirements for the employees deliberately to tone down the costs of increasing operations.
- They could further initiate it to cut down on their labor force to meet the demand of an ever-changing business environment or to cope up with a takeover.
- If the top executives take up a golden handshake then they have to accept the non-compete clause under the severance package.
- A non-compete clause states that the top executive would be allowed to open any rival business for predefined tenure once terminated from the organization.
Conclusion
The golden handshake is one of the clauses in the employment contract of the employee who holds top executive or management level position in the organization. The golden handshake offers a severance package which helps employee mitigate their financial risk.
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