Golden Parachute

A golden parachute is the package of severance and other benefits an executive is entitled to receive in connection with a change in control. The term covers cash severance and the accelerated vesting of equity, along with continued benefits such as health coverage or perquisites. It appears in a proxy statement in two places: the potential-payments disclosure for each named executive officer, and, in a merger, the golden parachute compensation table that shareholders are asked to vote on.

The tax rule behind the term is Internal Revenue Code Section 280G, which reaches payments contingent on a change in control, with Section 4999 imposing a twenty percent excise tax on the portion that exceeds the permitted amount. The consequence runs both ways: the executive owes the excise tax on the excess, and the company loses its deduction for that excess payment. The threshold is not a universal constant; it is calculated from the executive’s own compensation history.

Equity acceleration counts toward the total at the value attributable to the change in control, not at the grant-date figure the Summary Compensation Table reported. That is one reason a large unvested equity position can carry a package across the threshold even when the cash severance looks unremarkable. The measurement is why a parachute disclosure and an executive’s ordinary pay disclosure can describe the same awards at very different amounts.

A gross-up is the arrangement in which the company pays the executive’s excise tax, plus the tax on that payment, so the executive keeps the full parachute amount. It is rare among large public companies today and generally disfavored by proxy advisers, because it removes the cost of the excise tax from the executive entirely and places it on shareholders. Where a gross-up exists, the disclosure says so plainly, and it is a governance fact in its own right.

A best-net cutback reduces the payments only when doing so leaves the executive better off after tax than taking the full amount and paying the excise tax. A straight cutback trims the payments to just below the level that would trigger the tax at all, regardless of which outcome is better for the executive. Both are common and both are disclosed, and the form matters because it determines who ultimately bears the tax.

When a merger or acquisition proxy discloses new or enhanced change-in-control compensation for the target company’s named executive officers, shareholders receive a separate advisory vote on those arrangements, distinct from the ordinary say-on-pay vote. Both votes rest on Section 951 of the Dodd-Frank Act. The golden parachute vote covers the compensation disclosed in the merger proxy rather than the company’s standing pay program.

Not every payment connected with a deal is a parachute payment, because the test is contingency on the change in control. A benefit that a double trigger leaves unvested, because no qualifying termination occurred, is not contingent in the relevant sense and never enters the calculation. Compensation for services actually rendered after the transaction is likewise outside it.

The practical question in a golden parachute disclosure is not only how large the total is, but who bears the excise tax and whether a termination is required before anything is paid. A company showing a large total with a straight cutback is transferring less than a company showing a similar total with a gross-up, because in the first case the payment is trimmed rather than topped up.

Leidos's disclosed excise tax treatment on change-in-control payments is a cutback: benefits are reduced to just under the Section 280G threshold rather than grossed up, which would have the company pay the executive's excise tax on top.