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Home work Title/ No. Golden Handshake: HR perspective Course Code: MGT513
Course Instructor: Mr. Devdhar Shetty Course Tutor (if applicable): _____________
Declaration:
I declare that this assignment is my individual work. I have not copied from any other student’s
work or from any other source except where due acknowledgment is made explicitly in the text,
nor has any part been written for me by another person.
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Golden Handshake
“A golden handshake is a clause in an executive employment contract that
provides the executive with a significant severance package in the case that the
executive loses his or her job through firing, restructuring, or even scheduled
retirement”.
companies are having financial troubles they often let employees go. Sometimes
they offer “early retirement” packages to their older employees. Essentially what
retirement, because the person in question makes too much money for the company
While some people do not have problem with this problem and would
happily take the early retirement option from a down-sizing company, other people
see this as age discrimination; and in a way, they’re right. However, this is not an
illegal practice unless it can be proved that the employee was being let go solely
because of his or her advanced age. Otherwise, employers can and will do this as
often as they like. Early retirement incentives have emerged as a new tool for both
INTRODUCTION
The efficiency underlying the compensation packages awarded to executives of
publicly traded firms has recently received a great deal of attention. At times, some
executive-pay packages seem arbitrary and excessive, resulting in increasing
scrutiny from shareholders, investors, news media, and government agencies.
Typically, the executive compensation contract is negotiated to include a
combination of salary, performance-based bonus, corporate perks and private
expenses, employment benefits, equity-based pay, and stock options. Firms offer
executives incentive-based compensation contacts to better align shareholder and
executive interests. The executives profit from incentive-based pay when they
manage efficient production while implementing new positive cash-flow projects
to enhance the performance of the firm, and, in turn, increase the performance of
the stock, essentially making the options more valuable as the stock price rises
above the exercise price. As a result, executives have incentives to boost near-term
share prices regardless of long-term consequences. In other words, the incentive
based executive compensation changes the business focus of executives from the
practice of operational management for long-term survival of the firm to the art of
earnings management for short-term return for owners of the firm.
In an era of the internet company related news and financial reports become
immediately known to investors, whether through official press announcements or
unofficial information channels, and instantaneously this new information is
incorporated into the stock price as investors rebalance their investment portfolios.
As a result, the efficiency of participants in utilization of firm-specific information
in the stock market is magnified. In general, top executives and other high ranking
executives of publicly traded companies have less time than ever to show results
on the job and have a lower margin of error in firm performance. Although
executives may be diligent in their operation management of the firm’s productive
resources, owners of the firm may not be patient with the rate of return on their
investment in the corporation. Specifically, corporate executives are under rapid
fire from shareholders when their firm’s performance falls short of market
expectations, due to disappointing earnings or not making good on growth-related
expansion through mergers and acquisitions or delaying introduction of new
product strategy, resulting in lower market value of the firm. As a result, outraged
shareholders lobby the company board of directors to intervene and force swift
changes in management in order to initiate a turnaround in firm performance and,
thus, restore market value of the firm.
2. In the recent past, corporate executives have either been involuntarily ousted
by the company board of directors or they have voluntarily resigned under
pressure from shareowners. Although corporate executives leave under a
cloud of corporate transgressions of their fiduciary duties, firms are able to
negotiate a generous golden handshake with departing executives. The size
of exit pay packages has traditionally been less closely monitored because of
laxer disclosure rules related to corporate financial dealings. This implies
that “parting is such sweet sorrow” because companies pay dearly in
severance pay to departing executives to walk away from their employment
contract after periods of undistinguishing or, worse, poor firm performance.
Need of Golden handshake
1. The rise in such use stems from both the evolving economic needs of companies
and the congressional prohibition of involuntary retirement plans based on age.
4. These lawsuits have generally fallen into two categories. One group contends
that early retirement incentives have been implemented by employers as a
disguised attempt to involuntarily retire older workers. This Note will focus on the
second group, those workers who are either ineligible to participate in the plan
because they are too old, or eligible, but offered fewer benefits than other younger
workers.
There are some limitations to Golden Handshake:
1. The Golden Handshake retirement must prevent the layoff of a less senior
employee.
3. If more employees desire a Golden Handshake than there are position deletions,
employees will be offered the retirements in descending order of county seniority.
The County is not required to offer Golden Handshakes if it would “foreseeable
result in an operational detriment.” However, this does not mean that Golden
Handshakes can be withheld solely due to fiscal detriment. Clearly Golden
Handshakes save money in both the short and long term.
Legal rules related to Golden Handshake
* Where exemption has been allowed to an employee under section 10(10C) for
any assessment year, no exemption there under shall be allowed to him in relation
to any other assessment year.
The following aspects also need to be kept in view in the context of VRS-
Golden Hand Shake.
2. It is the last salary drawn which is to form the basis for computing the
amount of payment.
Details on whether the golden handshake will be a onetime lump sum payment
only or a percentage of the employee's salary to be paid over X number of months,
and details on whether to include a balloon payment at all will be highly country-
specific. Whether the government will set up the system, as opposed to a bank, will
also vary.
A couple of additional questions come up at this point of the analysis: How can
donors, eventually footing part of the bill, be satisfied that the trimming is actually
happening? What proof could they insist on getting about the staff reduction
process's progress? Among other things, they could: look at the government's
monthly payroll and disburse their funds for the golden handshake installments,
only as they have proof of reductions in the civil workforce. have civil servants get
a severance certificate and draw all their golden handshake benefits from an entity
that has donor control, for example a savings account in a commercial bank.*
(*): The scheme would thus effectively be financially administered outside the
government.
Place advertisements in the local newspapers announcing the option for lower
grade civil servants to leave their employment and become eligible for a package
of benefits. Interested civil servants would then resign, get their severance
certificates and go with them to designated banks and begin drawing funds as per
the advertised package. The reaction of civil servants would then be observed for a
few months. If there are very few takers, a new advertisement in the papers would
present an improved package deal and the reaction would be observed again. The
takers of the first package would automatically become eligible for an upgrade to
bring them up to par with the new package. This can be repeated 2-3 times, if
necessary, until the package is attractive enough to reach the desired rate of
progression and percentage of reduction in the lower grade staff. Should the
package elicit a response bigger than expected -beyond what had been planned for
financially- it would be made clear to civil servants that the system will either
work on the basis of first-come-first-served, or a lottery system would have to be
set up.
One should be very clear that the risk of losing the good people first is
unavoidable. But this may not matter. The preferred option would still be a
minimal acceptable incentives package followed by mandatory severance if the
voluntary downsizing does not result in the expected reduction.
Social security (retirement) benefits would still accrue to the leavers at retirement
age according to the prevailing regulations in the country. They are deemed to be
their rights. This should be made clear to civil servants as part of their severance
package briefing.
Finally, we totally discounted the feasibility of any plan that would offer any kind
of government bonds or papers (as opposed to cash) as part of the payments for the
downsizing operation.
Articles
Abstract
The berth operators however said the number of workers able to work will in no
way exceed 600 as many of the listed 2500 workers are physically unfit and about
900 dock workers had taken all their financial benefits under 'golden handshake'
from the port authority in a reform scheme during the caretaker government.
Abstract
Avinash Persaud. Financial Times. London (UK): Nov 27, 2009. pg. 15
Abstract
Separate but related to regulatory capture is the politics of booms. A boom persists
because no one wants to stop it. The government of the day wants it to last until the
next election. The early phase of a boom brings extra growth, low inflation and
falling defaults. Governments tout this as a sign of their superior performance.
Bankers argue such alchemy justifies their golden handshakes and excuses their
golden handcuffs. Booms spread cheer by providing finance to the previously
unbanked. Donations to worthy causes and universities temper traditional channels
of criticism. How easily can the underpaid regulator stick his hand up and say it is
all an unsustainable boom?
Abstract
Sales tax has been declining for six quarters and property tax has fallen 20 percent
in the past two years. Besides the cuts, 23 city workers will likely leave early,
spurred by a severance package or a golden handshake that adds two years of
service.
Abstract (Summary)
6. Executive compensation
Patrick Danner. Knight Ridder Tribune Business News. Washington: May 21,
2007. pg. 1
Abstract (Summary)
Delray Beach's Office Depot boss Steve Odland's pay topped $41 million in 2005
-- placing him atop the highest paid list. Much of the value was tied to options he
got as a golden handshake when he joined the company in 2005. His 2006
compensation didn't include such lucrative stock options.
Abstract (Summary)
Francisco Gonzalez, chairman of BBVA, and two other senior executives of the
Spanish bank would receive Euros 122m (Dollars 145m) in compensation if they
were forced to quit their jobs for reasons other than retirement, ill health or gross
incompetence, according to documents filed with the Spanish stock market
regulator.
Based on last year's pay, this would amount to about Euros 60m for Mr Gonzalez
and Euros 50m for Jose Ignacio Goirigolzarri, BBVA chief executive.
BBVA, with a market value of Euros 58bn, last year failed to acquire Banca
Nazionale del Lavoro in Italy. Despite its size, someanalysts believe Spain'ssecond
largest bank has missed its chance to become a consolidator and is now vulnerable
to a foreign takeover.
A proposal by the Dutch deputy prime minister Wouter Bos to crack down on
golden handshakes might be adopted by other European countries. The finance
ministers of the euro-zone countries say they will study the possibility of changing
European laws so that golden handshakes can be taxed. It may not seem likely, but
the ministers' apparent approval of Mr Bos' proposal is in any event surprising. By
Perro de Jong.
GEORGE TOWN, Tues. - About 150,000 civil servants, including teachers, are in
for a windfall.
Civil servants who opted for the Employees' Provident Fund retirement scheme
will be eligible for the "golden handshake" payment upon retirement.
The privilege was previously reserved for those who opted for the pension scheme.
The new ruling took effect from March 1, last year, for teachers and from Nov 1
for other civil servants.
Aug 4: The Bangladesh Sugar Mills Corporation offered golden handshake to 103
employees and labourers of Mobarakganj Sugar Mills on August 1.
According to the mill sources, about 214 employees of the mills submitted
applications to the mill authority seeking golden handshake. The authority
accepted golden handshake for
11,
New Delhi, Feb 15 (PTI) Air Sahara today said that it had not agreed for any
golden handshake or no-objection certificate for its pilots while dismissing the
reports that they were on strike.
"We had talks yesterday and responding to the inconvenience to the passengers
caused by the simultaneous leave, the pilots have today joined their duties and
normalcy has been restored in all Air Sahara flights," Executive Vice President Air
Sahara Alok Sharma said in a statement here.
A LABOUR DEPARTMENT staffer restructured out of a job has been paid more
than $150,000 -- prompting National Party claims of a "golden handshake".
Literature review
It was analyzed that “golden handshakes” is given to executives
when they are separated, either voluntarily or involuntarily, from
their post with a corporation. The separation pay packages are
generally generous beyond the total compensation packages paid
during an executive’s tenure with the firm.
Also, the higher up the corporate hierarchy an executive is
employed the greater will be his span of control over the firm’s
production activities and the large number of the firm’s
subordinates. As a result, involuntary termination of an executive
from his duties with the firm prior to the expiration of his
employment agreement, the owners of the company will incur a
cost by paying a buy-out premium to remove the executive from
his post and to sever all ties with the executive.
During the last few years, it was inquired that number of “golden handshake” cases
in the public sector. Their common characteristic is that they involve a
arrangement where the employer makes a severance payment, and (in some cases)
gives an undertaking of confidentiality, in return for the employee’s resignation.
In many of reports of these inquiries, it has been critical of the way in which the
public sector employer handled the process leading up to the agreement – along
with the substance of the agreement itself.
This study observed a number of themes – among them:
• In some cases, employers have rushed to sign an agreement, before obtaining
specialist advice about the other options that might have been open to them.
It seems, that many severance payments are also open to criticism because the
employer has failed to establish, and follow, fundamental employment
Bibliography:
http://employmentsearchguide.com/employmentinformation
http://www.proquest.com/en-US/
http://www.emeraldinsight.com/Insight/menuNavigation.do;jsessionid
http://articles.courant.com/keyword/golden-handshake
http://www.lrd.org.uk
www.jstor.com