Golden Parachute

A golden parachute refers to the severance and other benefits an executive is entitled to receive in connection with a change in control. Under Internal Revenue Code Section 280G, payments that exceed a specified multiple of the executive’s average pay can trigger a 20% excise tax on the excess, on top of the executive’s ordinary income tax.

Companies handle that excise tax exposure in one of three common ways, and the choice is itself a disclosed governance fact: a gross-up, where the company pays the executive’s excise tax bill on top of the parachute payment (now rare, and disfavored by proxy advisers); a best-net cutback, where payments are reduced only if doing so leaves the executive better off after tax than paying the full amount and the tax; or a straight cutback, where payments are trimmed to just below the threshold that would trigger the tax at all, regardless of the net outcome.

A shareholder advisory vote specifically on golden parachute arrangements — separate from the ordinary say-on-pay vote — is required whenever a merger or acquisition proxy discloses new or enhanced change-in-control compensation for the target company’s named executive officers.

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.