TERM PAPER

OF
HUMAN ELEMENTS AT WORK
TOPIC:- Golden Handshake :the need of an hour

SUBMITTED TO:- SUBMITTED BY:-

MRS.Amanpreet kaur Raghav Sharma
MBA
ROLLNO: B46
REGD.NO: 11010867
ACKNOWLEDGEMENT

I would like to express my gratitude for the many helpful comment and suggestions .I have
received over the last few days regarding the expository and critical expects of my term work
and especially for those comments which bear directly or may various argument for the center
thesis of term work.

Most importantly I would like to thank my HOD (head of department) and my teacher Mrs.
Amanpreet Kaur for his days of supervision. His critical commentary on my work has played a
major role in both the content and presentation of our discussion and arguments.

I have extend my appreciation to the several sources which provided various kinds of
knowledge base support for me during this period.
GOLDEN HANDSHAKE
A large payment made by a company to a senior executive upon termination of employment
before his/her contract ends.
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.

Typically, "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.

Golden handshakes may create perverse incentives for top executives to facilitate the sale of the
company they are managing by artificially reducing its stock price.

It is fairly easy for a top executive to reduce the price of his/her company's stock - due to
information asymmetry. The executive can accelerate accounting of expected expenses, delay
accounting of expected revenue, engage in off balance sheet transactions to make the company's
profitability appear temporarily poorer, or simply promote and report severely conservative (e.g.
pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to
(at least temporarily) reduce share price. (This is again due to information asymmetries since it is
more common for top executives to do everything they can to window dress their company's
earnings forecasts).

A reduced share price makes a company an easier takeover target. When the company gets
bought out (or taken private) - at a dramatically lower price - the takeover artist gains a windfall
from the former top executive's actions to surreptitiously reduce share price. This can represent
tens of billions of dollars (questionably) transferred from previous shareholders to the takeover
artist. The former top executive is then rewarded with a golden handshake for presiding over the
firesale that can sometimes be in the hundreds of millions of dollars for one or two years of
work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit
from developing a reputation of being very generous to parting top executives). This is just one
example of some of the principal-agent / perverse incentive issues involved with golden
handshakes and golden parachutes.

Similar issues occur when a publicly held asset or non-profit organization undergoes
privatization. Top executives often reap tremendous monetary benefits when a government
owned or non-profit entity is sold to private hands. Just as in the example above, they can
facilitate this process by making the entity appear to be in financial crisis - this reduces the sale
price (to the profit of the purchaser), and makes non-profits and governments more likely to sell.
Ironically, it can also contribute to a public perception that private entities are more efficiently
run reinforcing the political will to sell off public assets. Again, due to asymmetric information,
policy makers and the general public see a government owned firm that was a financial 'disaster'
- miraculously turned around by the private sector (and typically resold) within a few years.

Golden Handshake: A Boon or a Bane

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.

We can also define golden handshake as a clause in an executive employment contract that
provides the executive with a significant severance package in the case that the executive loses
their 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.

Typically, "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 encounter 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. This business term dates from the mid-1900s
and is closely associated to golden parachute- a generous severance agreement for an executive
in the event of sudden dismissal owing to a merger or similar circumstance.

In the changed scenario of globalization, cost cutting by public 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.

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. Let
us see what happens to the employees who receives "Golden Hand Shake”.

1. Those employees either start his own venture

2. The money gets spend on their children's education
3. The money also gets spend on their daughter's marriage
4. Some money or amount is used for saving
5. Most of the time it is found that the money results into expenditure affairs

Now if we see various issues how many people can get success in their own venture if they get
started with business, very few so result is loss. Only exception is perhaps if you start the
business at very small level where you think there is less investment and income is guaranteed
like having a General Store or you turn out to be Vendors. Otherwise you are totally bankrupt.

The result is trauma all around. Spending days in utter frustration jobless seen as a spent force an
outcast an object of pity. Those who kept some money in savings schemes discovered in 4/5
years time that 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.

There is no government at the centre worth the name. Is there anybody to review it to retrace the
steps? Most unlikely. So "downsizing" will continue. Market will further shrink. Industry will
face a fresh bout of crisis. The employees will still feel deprived.

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.

There are several instances of employees, who had taken VRS, being harassed by their kith and
kin and family members for money; 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. 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. So Golden Handshake can never be a golden opportunity.

A golden handshake is a hefty severance package which is offered to senior executives and other
high ranking employees. Often, the terms of a golden handshake are included in a hiring
contract, and they are viewed as insurance against sudden or involuntary job termination. A
golden handshake may also be offered to an employee to encourage him or her to retire; this is
common in systems like schools, where long-term employees make more money, and it can be
more cost efficient to hire entry level teachers.
The specifics of a golden handshake vary, depending on the position. Typically it includes a
lump sum of money, and it may also include stock options or securities, continued insurance
coverage, or payment into retirement accounts. A golden handshake also typically includes a few
weeks of full pay, especially if the employment termination was sudden, allowing the former
employee a chance to recover.

Corporate executives are especially subject to shifting allegiances and company restructuring. As
a result, many demand golden handshake contracts to ensure that they will be compensated if
their positions suddenly evaporate or radically change. Executives can also be made obsolete
through rearrangement of departments, or they may be fired for poor performance or due to other
issues with the company. Most executives are aware that their job security is very low, especially
if they were brought into positions of high authority.
Golden handshakes can also be sweeteners for mandatory retirement. In industries where retiring
long-term employees is a cost effective business decision, a golden handshake is almost used like
a punishment. If the employee declines to retire, the offer will be retracted, and the employee
may take a loss. Employees may also be asked to retire due to declining job performance or age,
in which case a company may wish to provide recognition of the employee's years of loyal
service.

(1) Retirement incentive will save city $3.36 million employees accept early-
retirement incentive; program will help avoid layoffs By Sena Christian, The
Press Tribune

The City of Roseville will save an estimated $3.36 million over the course of the next five years,
now that 40 employees have accepted an early-retirement incentive.

This will also help the city avoid layoffs in the near future.

The Public Agency Retirement Services (PARS) supplementary retirement plan acts as an
incentive to get top-step city employees to retire sooner than they would otherwise. Tom Goldie,
director of central services, accepted the offer.

The 59-year-old has worked for the city since 2000, starting as a facilities manager. Since then,
he has seen his department drop from about 70 employees to 40. By accepting the retirement
offer, he said the department will retain one position — although the director position will be
eliminated.

“One reason I decided to leave is the budget was out of whack … and this is in lieu of more
layoffs,” Goldie said. “It was a tough decision to make in that I will miss the people I work with
a lot. I’ve enjoyed my time here.”

The Roseville City Council unanimously approved the early-retirement incentive program during
its Nov. 3 meeting. On Sept. 1, the council passed the program on the condition that a cost-
benefit analysis shows the plan meets the city’s fiscal and operational goals. Councilmembers
were satisfied with the results of that analysis.
“I really like this and I think the direction we’re going is a good direction,” said Councilman Jim
Gray.

Currently, 255 city employees qualify for the program and 40 accepted. During the September
meeting, PARS Senior Vice President Dennis Yu estimated that about 77 people would take the
offer, resulting in five-year savings between $9 million and $13.5 million.

With 40 employees opting for the offer, the city will save an estimated $716,140 of personnel-
related costs each year over the course of five years. This net savings include the cost of
retirement health care, natural attrition and the retirement incentive.

Under the program, an enrolled employee receives a cash payment equal to 7 percent of the
employee’s final annual base salary after retiring. The employee chooses the payout option,
which might be over the course of five years, for instance, or his or her lifetime.

Ultimately, the potential savings of the PARS program depend on the resulting vacancy rate of
staff positions.

“The key to all of this is that we hold the vacant positions vacant,” said city Finance Director
Russ Branson.

Following the retirements, the city can either choose to leave the vacated positions empty or hire
people at lower pay levels. Branson said the city will eliminate 19.5 full-time-equivalent
positions and fill 20.5 at a lower salary.

To be eligible for PARS, an employee must be 50 years of age as of Dec. 23 2010, have worked
for the city for at least five years and can’t enroll in the CalPERS Golden Handshake program.

Labor comprises the largest portion of the city’s general fund expenditure. The city has cut 22
percent of its workforce since 2007. Branson said the city is now done offering these incentives,
after having already completed three rounds of the PERS incentive program.

ANALYSIS- Here we gave a senior executive employee a amount of money

upon termination of employee before the contract ends, basically it is
provided so as the employee get satisfied.

(2) Taxman takes shine off ‘golden handshakes’

COMPANY executives and directors can no longer look forward to generous tax concessions on
their “golden handshakes” when they retire, due to new tax laws

Company executives and directors can no longer look forward to generous tax concessions on
their “golden handshakes” when they retire, due to new tax laws.
Peter Surtees, a tax director at commercial law firm Deneys Reitz, said yesterday: “Gone are the
days of tax benefits accompanying huge payouts to directors.

Executives can expect all the proceeds of their endowment policies to go back into the
company’s coffers until payment on disability or death,” he said.

Former finance minister Trevor Manuel raised concerns in the budget review last year that
deferred compensation schemes were being used as up-front tax deductions for employers to
provide a mechanism for the deferral of tax to be paid by employees.

The 2010 Taxation Laws Amendment Act, which was gazetted last week, revises the
requirements for key personnel who can receive a tax deduction in insurance schemes.

Mr Surtees said deferred compensation schemes were used by many companies as incentives to
retain executives . An employer would take out an insurance policy on an employee’s life to
make provision for the additional retirement capital. On retirement, the payments would be taxed
according to a favourable formula, he said.

Peter Stephan, Association for Savings and Investment SA senior policy adviser, said the new
law made radical changes to the Income Tax Act, which regulated the deduction of premiums on
employer-owned policies.

He said many employers used key person insurance to legitimately protect the business against
loss of profits in the event of a key employee or director dying, becoming disabled or suffering
from ill health.

But long-term insurance plans had also been used to provide employees with deferred
compensation, with the policy proceeds intended for the key employee being taxed at a lower tax
rate. Mr Stephan said some parts of the new tax law were still not clear.

The new law will come into effect on January 1.

ANALYSIS- HERE IT IS PROVIDED WITH THE INCENTIVES IN

ORDER TO RETAIN THE EXECUTIVES .AN EMPLOYER MAY TAKE
OUT AN INSURANCE POLICY ON AN EMPLOYEE LIFE MAKING
PROVISION FOR THE ADDITIONAL RETIREMENT POLICY.

(3) Downsizing the Civil Service in Developing Countries: The Golden

Handshake Option Revisited.

Strictly speaking, we are not here talking about a golden handshake -a term coined for the
'Fortune 500' managers; the civil service will never be able to offer anything close to a 'golden
handshake'. We are talking more about an ECONOMIC JUMPSTART or an incentive for
redundant staff to voluntarily leave the civil service and start productive lives that better
contribute to the growth of the economy. (Landau, 1969) The economic jumpstart benefits both
the individual and the economy. It is in this sense that our use of the term golden handshake
should be understood.

In addition to financial incentives to leave the service, the procedures used for downsizing do not
exclude the eventual mandatory dismissal of some staff (see below). Moreover, it is difficult to
predict whether such an economic jumpstart will also affect the performance of the civil servants
left behind, i. e., whether downsizing can make the government machine work better after
trimming.

Large-scale dismissal of civil servants is socially and politically unacceptable and is simply not
feasible. Attrition can probably downsize the civil service only about 4-5% a year; this rate may
be inadequate. (As our calculations for Kenya show below, double those numbers are needed
roughly to bring the size of complement to desirable levels in about three years).

Variants of golden handshakes have been tried in several developing countries, but mostly with
limited success. It is contended that golden handshake exercises conducted in those countries
have still left many innovative options untried; we will explore them here.

When considering golden handshake options, one has to remember that it is not only the money
the civil servants will ultimately consider, but also security; this may, ultimately, be the more
important factor.

It seems that any downsizing scheme will work better if the incentives package offered is at least
as attractive (or slightly worse, but with a perceived future potential) as staying on for a long
civil service career. Although designing and costing such a package may not be easy, a few
methods may be suggested.

The benefits offered to civil servants in a downsizing exercise are a national issue. Therefore,
one has to develop solutions that are compatible with what exists in the country. Benefits can
conceivably be better than those found in the rest of the labour market, but not exceedingly so.
One can definitely not give generous benefits to redundant civil servants being asked to leave
when others -in a national context- get nothing; it is a matter of finding a balance. (Synnerstrom,
1996)

The decision to downsize is a political one. Once the decision has been taken, two issues emerge:
how much downsizing is needed?, and how fast does it have to be implemented to have the
desired measurable impact?

In addressing these issues, one must keep in mind that each country situation will be different,
and also that the final target may matter less than establishing the speed of the desired change.
There are simply no generally accepted scientific methods to calculate the number of positions
that should be cut; downsizing is more an empirical, pragmatic and political process.

Therefore, what measures are there for deciding how far to downsize? First, one has to make sure
that the government is not borrowing from its Central Bank to meet the payroll. Second, one has
to define the ideal mix of salaries (emoluments), O + M and capital investments (CI) desirable
for a new government budget. Third, one has to choose the best plan of action that will bring one
closer to such an ideal mix.

Looking at existing ratios between salaries, O + M and CI is, therefore, the point to start to
define the above ideal mix for the specific local situation. Given understandable differences, a
ministry by ministry comparison of such mixes makes more sense. Conversely -in the case of the
health sector for instance- it is possible to compare the same ratios between the non-
governmental (NGO) sector with those of the government's health sector in the country. This can
help come up with a more rational mix of salaries, O + M and CI.

The value of a methodology that proposes a better mix of percentage personnel costs, O + M
costs and CI is that it helps determine a first downsizing target. Several avenues seem possible to
do this. One could:

ANALYSIS- HERE WE FOUND THAT IN ORDER TO ACHIEVE A GOAL

WE HAVE TO DOWNSIZE EMPLOYEE COUNTING IN THE
CORPORATION SO THAT PARTICULAR TASK IS ACHIEVED BY
PROVIDING EMPLOYEES WITH SOME BENEFITS THAT MAY
BENEFIT THEM IN THE FUTURE.

(4) Soft Landings for CEOs

Some shareholders may object, but heads of most major financial services
firms will have very secure futures even if they're forced out

It's anybody's guess which chief executive of a major financial services firm will be the next to
fall victim to the subprime mortgage mess—or when. But should the fallout spread, one thing is
certain: Many of the executives currently running financial services companies will leave with
significantly less compensation than they thought. Most, that is, but not Richard Fuld Jr. The
CEO of Lehman Brothers has nothing to worry about—his exit package is valued at $299
million, putting him close to the record for any such package.

By parsing proxy statements and crunching numbers, analysts can figure out roughly how much
the CEOs of major financial services firms might take on their way out. Paul Hodgson, a senior
research associate at The Corporate Library, did just that for the heads of 10 financial services
firms, at BusinessWeek.com's request.

Some of the numbers uncovered by The Corporate Library are staggering, but a scratch below
the surface shows that what drives severance packages can vary widely from company to
company. At companies like Bank of America (BAC) or Countrywide Financial (CFC), the bulk
of a CEO's exit package is tied up in retirement benefits.

Determing Their Own Fate

At companies such as Lehman Brothers (LEH), Morgan Stanley (MS), JPMorgan Chase (JPM),
and Goldman Sachs (GS), most of a CEO's expected termination benefits come in the form of
restricted stock. CEOs whose fortunes are so closely linked to the firm's stock price ultimately
determine their own fate. "Despite the large number of zeros, even within this very high-paying
industry, there is substantial pay for performance," says Ira Kay, global practice director for
compensation consulting for Watson Wyatt.

Case in point: Stanley O'Neal, who became the first chief executive who headed for the door
after Merrill Lynch (MER) posted a $2.24 billion third-quarter loss related to mortgage troubles.
While the massive size of O'Neal's exit package—the fifth largest on record at $161 million—
raised eyebrows, pay consultants note that O'Neal pocketed only what was owed him, including
$131.4 million in stock and stock options, as well as nearly $25 million in pension benefits.

However, he received no bonus. "O'Neal was pushed out with not so much as a golden
handshake," says Frank Glassner, president of Compensation Design Group, an executive
consulting firm in San Francisco. Glassner and other compensation experts say Merrill Lynch's
decision may set a precedent for other boards to take performance-based pay more seriously.

Tenure Has Its Advantages

But no one is claiming a victory yet. Citigroup (C) chief Charles Prince received a $12.6 million
bonus, despite lackluster performance during his tenure. With a total walk-away package of more
than $40 million, Prince ranks ahead of four other CEOs on The Corporate Library's list.

At the top of pack—and far ahead of his colleagues in financial services—is Lehman's Fuld, who
could be entitled to an exit package worth nearly $299 million. The bulk of it is $276 million in
restricted stock, some of which was awarded in the 1990s. Fuld's expected payout outshines
everyone else in the industry because he has worked at the investment bank since 1969 and has
run it since 1993.

Even so, the package has raised some eyebrows.

(5) A Lesson in Simplicity - Case Study

Once upon a time, (all good stories start out with that don't they?) there was a North American
hi-Tech company, we'll call them NatCo for convenience, that was feeling the stresses of
competition from a rival Asian company, whom we'll call "Offshoring" for purposes of
anonymity. In the interests of research into better management of projects (I have to bring in
project management some how, don't I?) NatCo decided to invite Offshoring to engage in a
competitive project.

After much hard negotiation on both sides, the parties finally agreed on a project. This project
had to be held where there could be little political influence, and Canada was the obvious
country of choice. The project also had to be independent of any high technology content, for
fear of exposing trade secrets. The one finally selected was a canoe race to be held on the South
Arm of the Fraser River, here in British Columbia. Because of its length, the race was called The
Long Race. The Fraser River is a major river that flows through the low-lying delta area just to
the south of Vancouver
Anyway, both teams practiced long and hard. On the big day, the weather was fine, the water
calm and everything ready and just right. The Offshoring team won The Long Race by a couple
of klicks.[3]

As a result of this, NatCo became very discouraged by the severe loss and their morale sagged.
Corporate management decided that the reason for the crushing defeat must be thoroughly
investigated. A Continuous Measurable Improvement Team (CMIT) was formed consisting of
senior executives with a mandate to examine the problem and do whatever it takes to apply a
corrective action plan.

After several highly secretive meetings, the CMIT finally agreed on the cause. The Offshoring
team had six people paddling and one steering whereas NatCo had one person paddling and six
people steering. Since this was a matter of corporate prestige, the CMIT hired the best project
management consulting company in the country, but not from Canada you understand, to
examine the problem and recommend appropriate corrective action.

After some time and several million dollars later, that's US dollars of course, the PM consultants
observed that while "too many people were steering and not enough were paddling" there was
also a failure to adopt best practices in project management. In fact they identified no less than
seven processes that should be added, thirteen that should be renamed and two deleted to comply
with latest published recommendations. In addition, a project such as this should have serious
management attention and visibility at the highest corporate level.

Accordingly, to prevent losing to Offshoring the following year, NatCo decided to institute a
new management structure to oversee a much improved project management process. A program
of four projects was therefore launched: Canoe acquisition; Paddle acquisition; Paddler and
Steerer selection; and Paddler and Steerer training. Four project managers were appointed along
with four technical sponsors (the functional divisions wanted in on the act) and these people
were designated as Project Directors. A Program Manager was appointed to manage the
program. To give the required corporate visibility at the executive level, a new vice-president
position was created: VP-Competitive racing.

Following a risk analysis, it was observed that the Lower Fraser River is tidal and the water can
be quite rough. To mitigate this risk, several selected steerers and paddlers were sent to the local
maritime institute to obtain their certificate of perfect marine paddling (pmp). However, the
Program Manager determined that steerers and paddlers with a pmp certificate would not
actually be deployed in the race unless absolutely necessary because certificated personnel
expected more money and proper project cost control must be maintained over the program.

Instead, a new performance standard was established to incentivize the work of canoe paddlers
and thereby enable the possibility of becoming a "six figure performer". Management called this
"empowerment". A small breakout group from the Paddler and Steerer selection project was
formed to examine the issue of ratio of steerers to paddlers. However, since steerers dominated
it, the group concluded that any change in ratio was "not consistent with NatCo's management
culture", so no changes were recommended.

ANALYSIS-NatCo promptly laid off all canoe steerers and paddlers on the
grounds of poor performance or expectations, sold all its paddles, canceled all
capital investments in new canoes, awarded a high performance certificate to
the PM consulting company, re-assigned all Project Directors and Managers
to other duties, and used the money saved as a "golden handshake" for the
Vice-President.