IS THE GOLDEN HANDSHAKE REALLY GOLDEN?

INTRODUCTION

Life is hard enough without having to decipher everything. Each

week, marketplace brings you a word or a phrase that has bubbled to the
top of the news; for instance - "Golden Handshake." You hear it, you see
it, but do you really know it?

This is not a new management buzz but it is a term associated with

a valuable commodity Gold so how golden is Golden Handshake we need
to understand that and also its intricacies. We can Define Golden
handshake is a large payment made by a company to a senior executive
upon termination of employment before his/her contract ends It is also
associated with the term "Downsize" meaning - reduce the manpower.
Now a days every company is chanting only one 'mantra' - reform -
restructure – downsize " Don't recruit fresh employees in cases of
retirement, throw the casual or contract workers our of job and even if
that is not sufficient - lure the employees to leave the job give them some
extra money in their hands – This is 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. This can be in the form of
cash, equity, and other benefits, and is often accompanied by an
accelerated vesting of stock options.

Unlike the Iron Handshake, which is compulsorily given to the

employees and is beneficial only to the organisations, "golden
handshakes" are offered only to high-ranking executives by major
corporations and may entail a value measured in millions of dollars.
Golden handshakes are given to offset the risk inherent in taking the new
job, since high-ranking executives have a high likelihood of being fired
and since a company requiring an outsider to come in at such a high level
may be in a precarious financial position. Their use has caused some
investors concern since they do not specify that the executive had to
perform well. In some high-profile instances, executives cashed in their
stock options, while under their stewardship their companies lost millions
of dollars and thousands of workers were laid off.

THE GOLDEN HANDSHAKE SCHEME

A severance package is a bundled package of financial

compensation and benefits which is offered to some employees when they
leave their positions. Some people call severance packages “golden
parachutes,” referring to the fact that they allow former employees to
float on their severance benefits, at least for a while. Such packages may
be built into employment benefits in some companies; teachers, for
example, may receive retirement benefits after working a set number of
years. Severance packages are also offered to employees, who are laid
off, and they are sometimes used to encourage high paid employees to
leave to bring company costs down, in which case a severance package
may be called a Golden Handshake.

Any number of things can be included in a severance package. It

can help to know if your company offers such benefits; the details are
often included in hiring contracts or employee manuals, and it is well
worth reading through these materials to make sure that you understand
them. Employees may also be able to negotiate a severance package,
depending on the circumstances in which they leave. Negotiations can be
delicate at times, but they can also yield better benefits when carried out
well.

Some common inclusions in a severance package are: stock options,

health insurance, life insurance, compensation pay, pay for unused sick or
vacation days, job placement assistance, and retirement benefits such as
those paid into a 401K plan. Exact benefits obviously vary, and no benefits
can be expected from a company which is going out of business, whether
or not they have been promised.

In terms of insurance, some companies continue to cover their

employees after they leave with medical and dental benefits. Companies
may also allow employees to buy into life insurance plans with company
assistance; likewise with retirement accounts. Stock options are another
technique for compensating employees, since the employee may hang
onto the stocks or sell them, if desired. Severance benefits are also
commonly provided when termination is sudden; a severance package
can include up to six months of pay in some cases.

Additional pay such as accrued back-pay for unused sick and

vacation days is not uncommon, and some companies simply offer a lump
sum to retiring employees to thank them for their work. Additional
payments and severance terms in general are determined on the basis of
how long an individual was employed; benefits will be much better after
40 years of work, for example.

In the changed scenario of globalisation, cost cutting by public

sector, private sector undertakings and Government departments has
become the order of the day. The first victims of the economy measures
are the employees, who are being made to pay with their jobs.

WHY THE GOLDEN HANDSHAKE IS GIVEN?

The companies get bogged down due to various pressures they

face. Some of reasons why companies go in for the Golden handshake
Scheme are:

1. Relocation of the manufacturing units to other locations. This can be

understood through Fiat’s Golden Handshake scheme – Fiat
announced a VRS scheme at the Kurla plant in August 2006, which
was accepted by more than 50% of its 1270 strong workforce,
 putting in motion its plan to eventually relocate all manufacturing to
Ranjangaon.
2. Major restructuring of the companies.
3. Hiring entry level employees will be more cost effective and will
work out economically rather than paying those employees who
have grown in age and experience. The best example for this is the
Maruti Udyog which has given Golden Handshake to many of its
employees who are aged above 40 years as the company officials
pointed out that "When people grow in age, they become more
expensive ... Their output may not be commensurate with the
salary.”
4. Mergers, acquisitions and hostile takeovers. Example for this is
Craig Conway, PeopleSoft's former CEO, has received a severance
package in excess of $16 million, following his ouster from the
embattled software company where a hostile take over battle took
place between the software giants Oracle and People Soft.
5. The Golden handshakes are also given by the companies to show
their respect to those employees who have worked with
commitment and given their services loyally to the companies.

Benefits of Golden Handshake to the employers

1. Cost effectiveness
2. Cost cutting

Benefits of Golden Handshake to the employees

1. The entrepreneurial traits of people who receive the Golden

handshakes come to the fore.
2. Proper compensation to employees in case of sudden retrenchment
and restructuring of jobs.
3. Temporary financial security.

But, Golden Handshakes are also given due to not so golden reasons.
Some of the highly publicized lucrative golden handshakes paid to
corporate executives when they were separated from their post with the
firm are:

KENNETH LAY, oversaw possible illegal transaction dealings with outside

partnerships to inflate the financial results and hide large sums of debt
that ultimately resulted in Enron’s collapse that wiped out billions of
investor dollars and cost the jobs of thousands of employees, was
sheltered from the ravages of Enron’s bankruptcy filings and walked away
with an exit package worth over $81 million;

L. DENNIS KOZLOWSKI left Tyco International Ltd., investigated for

aggressive accounting practice by accelerating pre-merger cash reserves
to boost firm profits, and was entitled, from his 2001 employment
contract, to an exit package worth over $122 million; however, having
been indicted on sales-tax evasion on unauthorized expenses and felony
charges related to unauthorized loans along with bonus payments for
personal use, Mr. Kozlowski’s severance pay package was negotiated and
revised downwards to around $68 million, including $3.5 million annually
for a 30-day-per-year consulting contract for the rest of his life;

JILL BARAD, who served as CEO at Mattel Inc. for three years, resigned
under pressure from angry investors and the company board of directors
following three consecutive quarters of unexpected losses and a botched
$3.5 billion acquisition of Learning Co. software concern. She was paid an
exit package valued at a little over $51 million;

BERNARD EBBERS, founder and CEO of WorldCom Inc., was fired for being
involved in accounting fraud. He borrowed $408 million for personal
expenditures from WorldCom Inc. To cover margin loans, using personal
WorldCom stock as collateral. He received severance valued at around
$24 million, including $1.5 million annual pension for life and thereafter,
his wife, if she survives him, will receive $750,000 for life; however, the
payments are contingent on him not defaulting on his loan obligation nor
declaring personal bankruptcy;

DURK JAGER resigned under pressure and was given $9.5 million in
severance pay after serving as CEO for 17 months at Procter & Gamble
Co. while the company’s market value declined by $73 billion or 50% due
to unsuccessful restructuring that delayed introduction of new products to
the market, earning projections fell short of expectations coupled with the
failed acquisition of Warner-Lambert Co. and American Home Products
Corp. that followed P&G’s brief attempt to acquire Gillette Co..
With the economic recession gaining speed the world over, every
other sector are going in for the downsizing and the Golden Handshake
offer as a cost cutting strategy. The financial sector has seen some of the
major financial institutions stumbling and using the Golden Handshake as
a cost cutting strategy. The Golden Handshake scheme has touched every
sector because of recession.
Even the world of sport is not untouched by the Golden Handshake
experience. Darrell Hair made his outrageous "non-negotiable" demand
for half a million dollars to retire quietly row surrounding Inzamam-ul-Haq,
the Pakistan captain, who faces charges of ball tampering and bringing
the game into disrepute by failing to lead out his side after tea on the
fourth day. Though he withdrew that demand two days later, the DAMAGE
was done.
Be it any sector Railways, banks, textile industry, Aluminium plants,
Steel Plants, you name any industry - Thousands of employees are going
out of employment everyday. If we ask the companies one question - who
is going to buy the products, if everybody is thrown out of jobs a vast
majority become burden of an employed few? We know nobody will
answer it. The facts prove that there are no buyers even after
unbelievable gifts are offered with some products. Go through newspaper
ads on any day the industry itself is getting a handshake - not so golden.
Since every coin has two sides, what happens to those employees and the
employers who receive and give Golden Handshakes respectively? Thus,
the two sides of the Golden Handshake Scheme can be noted as follows:

PROS

1. The golden handshake would allow thousands of people to have

cash, and the time, to indulge into any gainful self employment or
business activities.

2. The golden handshake contracts ensure that the employees will be

compensated if their position suddenly evaporate or radically
change.

3. It offers financial security to the executives in case they are made

obsolete through re-arrangement of departments, or fired for poor
job performance or for any other issues with the company.

4. Golden handshake may be used by the companies as a way of

showing recognition to an employee’s years of loyal services.

5. It allows former employees a chance to recover since the

unemployment was sudden.

6. It is a way of encouraging long term employees to retire so that the

company can go in for cost effective hire of entry level employees.

CONS

1. The employees, after getting the golden handshake, when they start
a new venture, do not have any guarantee that they will succeed
and go through a very frustrating period due to uncertainty.

2. They go through trauma and spend days in utter frustration as they

are looked at as an outcast or an object of pity.

3. The present scenario economic structure shows a rise in inflation

rate. Thus, those who have kept the money in four to five years
time, the good amount of interest earned in yesteryears, is nothing
 today due to inflation. If things go by the same rate what will be left
over is only horror.

4. They would find themselves in a helpless position and their future

appears bleak. Most of the times they cannot even decide what to
do with the few lakhs of rupees they get in by way of compensation
package. Many of them end up burning their fingers by starting
business ventures without proper planning.

5. There are several instances of employees, who had taken VRS,

being harassed by their kith and kin and family members for money.

6. The money is just spent away as the employees do not have the
knowledge of how to manage such a large amount.

7. There is also a chance of some of them going into depression due to

constant nagging by their `near and dear' ones that they are sitting
idle at a time when they should have been working.

8. Some VRS people have utilized the money to discharge their duty by
their family. However, many of them who have been used to a busy
life do not find it easy to sit back and relax at home and end up on
the wrong side of things.

9. The desperation and frustration that these people go through may

lead them to get involved in anti-social activities as the saying “An
idle mind is a devil’s workshop” rightly says.

Thus, all that glitters is not gold. The term golden handshake conjures
up the image of a pile of money. But at the end of the day, when it is
analysed keeping the human factor in mind, it is not golden at all.
REFERENCES

• What Golden Handshake means – Shwetha

http://www.citehr.com/118903-golden-handshake.html

• Golden Handshake: A bane or a boon - Reshma Shrivastava,

Lecturer, MBA Department, Disha Institute of Management &
Technology, Raipur.
http://www.indianmba.com/Faculty_Column/FC457/fc457.html

• http://www.wisegeek.com/what-is-a-severance-package.htm

• Down-sizing and golden handshake scheme - by Syed m. Aslam.

http://www.pakistaneconomist.com/database2/cover/c97-16.asp

• Fiat’s golden handshake for Kurla unit employees – The Economic

Times, 22nd August2006
http://www.economictimes.indiatimes.com/News/News_By_Comp
any

• Maruti plans golden handshake scheme, January 30, 2001 -

http://www.indiacar.net/news/n1081.htm

• The umpire who sought golden handshake – by TED CORBETT,

Sportstar, VOL.29 :: NO.35 :: Sep. 02, 2006.
http://www.hinduonnet.com/tss/tss2935

• Conway’s Golden Handshake – by Dawn Kawamoto,

http://www.news.cnet.com/Conways-golden-handshake/2100-
1014_3-5417239.html

• Golden Handshakes: Pay for Failure and Executive Separation –

by Karim Gulamhusein, Department of Economics, The
Kazakhstan Institute of Management, Economics and Strategic
Research, http://www.economics.ca/2008/papers/1030.pdf
• www.wikipedia.org -
http://en.wikipedia.org/wiki/Golden_handshake