Annexure

Home work Title/ No. Golden Handshake: HR perspective Course Code: MGT513

Course Instructor: Mr. Devdhar Shetty Course Tutor (if applicable): _____________

Date of Allotment: _____________________ Date of submission: 10/05/2010

Student’s Roll No: B39 Section No. : RS1901

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.

Md. Sagir Alam

Student’s Signature

Evaluator’s comments:
_____________________________________________________________________

Marks obtained: ___________ out of ______________________

Content of Homework should start from this page only:

 Term paper
Of
HRM
[Golden Handshake: HR perspective]

SUBMITTED TO: - SUBMITTED BY:-

Mr. Devdhar Shetty Md. Sagir Alam
Regd. no.10906119
Sec – RS1901 (B39)
 Acknowledgemen
t

First of all I would like to take this opportunity to express my

gratitude towards all those people who have helped me in the successful
completion of this term paper, directly or indirectly. I would also like to express
my sincere gratitude towards “Mr. Devdhar Shetty” for his guidance and help
which she willingly provided at every step of my term paper.

Finally, I would like to thank all my faculty members and friends for their
encouragement, support and good wishes.

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”.

Generous severance pays to an employee, often as an incentive for his/her early

retirement. This is a very complicated issue of workplace discrimination. When

companies are having financial troubles they often let employees go. Sometimes

they offer “early retirement” packages to their older employees. Essentially what

is happening here is what is termed as the “golden handshake”, a forced early

retirement, because the person in question makes too much money for the company

to continue supporting them.

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

public and private employers to reduce their workforces.

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.

As compensation pay package to executives increase, because

1. The pressures on executives to perform have grown; however, the

incumbency of executives to produce performance results has shrunk. That
is, corporate executives are under pressure from shareholders and
institutional investors to produce profits; however, if executives are not able
to show immediate results to the owners of the firm, they may not be able to
hold onto their posts for the full duration of their employment contract. In
other words, corporate executives are being ushered to the exit door sooner
than usual by vigilant board of directors, and are increasingly scrutinized by
impatient shareholders and insatiable institutional investors, who force
immediate changes in management. The instantaneous removal from office
of corporate executives by conscientious boards of director is not without
penalty to owners of the firm. The departing executive is paid a payoff in
exchange for relinquishing his post in the corporate hierarchy along with
early termination of his employment contract from the corporation. In
essence, the corporate executive is given a golden handshake to sever all
executive ties and dissolve all employment relationships with the
 corporation. “A ‘golden handshake’ occurs where an employer pays money
by way of compensation to an employee on his agreeing to take early
retirement” from his post with 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.

2. Eligibility to participate in these programs usually requires that a retiree satisfy a

specific age or service requirement. The most common form of incentive is an
improvement in pension benefits through the augmentation of existing benefits
with a lump sum cash payment, increased medical benefits, a reduction or
elimination of pension penalties for opting for early retirement, or a combination of
these incentives.

3. Other incentive plans offer workers an acceleration of age or years of service.

Additionally, many of the plans are offered for a limited time period. Despite the
perception by some authors that early retirement incentives are "golden
handshakes" providing older workers with a windfall upon retirement, numerous
lawsuits have been brought against employers alleging that the plans violated the
Age Discrimination in Employment Act (ADEA).

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.

2. The number of employees offered a Golden Handshake is limited to the number

of positions to be cut.

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

In the competitive time of globalization and liberalization the system of Voluntary

retirement with golden handshake is widely prevalent both in public and private
sectors in order to reduce the surplus manpower which for most of public sector
undertakings is a major cause of losses. This is very often preceded by downsizing,
and since there is statutory regulation of job losses, the system of voluntary
retirement with the so called ‘golden handshake’ is widely prevalent, both in public
and private sectors. The Trade Union Act provides that seven or more members of
a trade union are required for its registration, whereas industry wants to restrict the
forming of unions. The government has already proposed some changes in the
Trade Union Act. One of the major changes would make it compulsory for a trade
union to have a membership of at least ten percent or one hundred, whichever is
less. The trade unions have argued that the right to organize is a fundamental right.

Tax Benefit of Golden Handshake

Compensation received at the time of voluntary retirement is exempt from tax if

the following conditions are satisfied:

* Compensation is received at the time of voluntary retirement.

* If conforms to the prescribed guidelines.

* Maximum amount exempt from tax is Rs. 5, 00,000/-.

* 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.

1. Taxpayers can frame different schemes of voluntary retirement for different

classes of their employees. However, these schemes have to conform to the
aforesaid guidelines prescribed in rule 2BA of the Income-tax Rules.

2. It is the last salary drawn which is to form the basis for computing the
amount of payment.

3. One of the requirements in the guidelines prescribed for schemes of

voluntary retirement is that the scheme should apply to an employee of a
company or authority who has completed ten years of service or forty years
of age. Since the employee of a company or concern (presuming that he is
less than forty years of age) which has been set up less than ten years ago,
cannot satisfy the aforesaid requirement, the amount receivable by him shall
not be entitled to income-tax exemption under section 10(10C).

4. The scheme of voluntary retirement should be drawn to result in overall

reduction in the existing strength of the employees of a company or
authority. This requirement reflects the criterion of economic viability for
framing the schemes of voluntary retirement. The scheme which does not
result in overall reduction in the existing strength of the employees of a
company or concern will not be in accordance with the guidelines for the
purposes of section l0 (l0C).
Other implementation issues: Alternatives on how to set up
the payment system for the golden handshake:

It is interesting to note here that, in Ghana, World Food Programme commodities

were used for quite a few months as part of the severance package given to civil
servants being dismissed. In Uganda, UNDP funds were used to downsize the
army. (Langseth, 1995)

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.

Pilot operations research projects are advisable in adopting any of these

approaches. One could start by dismissing some 500-1000 civil servants under
different dismissal schemes, with tracer studies over two years. Such pilot schemes
have the advantage of getting an overly apprehensive government interested,
allaying fears about the political costs and helping identify difficulties in the
implementation of a large programme later.

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

1. Today’s port strike deferred

The Financial Express, Dhaka: Apr 12, 2010.

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.

2. California National Guard extends golden handshakes to cut costs

Andrew McIntosh &McClatchy -Tribune Business News. Washington: Jun 19,

2009.

Abstract

Jun. 19--The California National Guard is offering golden handshakes to as many

as 17 members of its active duty force, including senior officers, to cut costs even
as other departments and agencies issue layoff notices.

3. Boomtime politicians will not rein in the bankers

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?

4. Council decides to lay off 14 city employees

Scott Jason. McClatchy - Tribune Business News. Washington: May 5, 2009.

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.

5. Golden handshakes Executive pay

Economist.com /Global Agenda. London: Jan 5, 2007. pg. 1

Abstract (Summary)

Excessive executive pay in America provokes expressions of awe, envy and

outrage like little else. There are reasons to believe that the disconnection between
corporate pay and performance may now diminish. In 2006, the Securities and
Exchange Commission introduced new rules that will force firms to disclose more
about how various top bosses are compensated. Starting this month, companies
will have to put a dollar figure on their chiefs' pay, perks and pensions and the
board will have to explain why they are worth it. Simply revealing what bosses
earn will not necessarily help. The new rules do not give shareholders any formal
powers over pay. There is evidence of a growing desire by shareholders to tighten
corporate governance, along with a mood of conciliation among bosses.
Shareholder democracy and greater accountability seems on the advance. In
defense of the bosses, they do face some risks along with their high pay.

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.

7. BBVA golden handshakes put under spotlight; [LONDON 1ST EDITION]

LESLIE CRAWFORD. Financial Times. London (UK): Mar 1, 2006. pg. 26

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.

8.Tax on golden handshakes in all of Europe?

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.

9. `Golden handshake' for all civil servants.

| January 12, 2005 |

(From New Straits Times (Malaysia))

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.

10.Golden handshake for 103 employees of Mobarakganj Sugar Mills, THE.

| August 05, 2003 |

(From Worldsources (English))

Byline: Carol Costello, Rym Brahimi

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,

Sahara dismisses reports of strike, No golden handshake, NOC.

| February 16, 2006

Sahara dismisses reports of strike, No golden handshake, NOC

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.

12.National condemns `golden handshake'.

| June 27, 2005 |

(From The Dominion Post)

Byline: PALMER Rebecca

A LABOUR DEPARTMENT staffer restructured out of a job has been paid more
than $150,000 -- prompting National Party claims of a "golden handshake".

The department confirmed the payout to a parliamentary select committee, saying

the unnamed staff member received a redundancy payment of between $150,000
and $180,000 since July 1 last year. The exact amount would not be divulged for
privacy reasons. Two others received payments of between $10,000 and $50,000
and one person received less than $10,000.

14.Golden handshake policy for casual labourers in Arunachal.

| June 09, 2007 |

Golden handshake policy for casual labourers in Arunachal

Itanagar, June 9 (PTI) the Arunachal Pradesh Government is going to introduce

Golden Handshake Policy for casual labourers, mostly non-tribals from other
states who have been working in government departments for less than 15 years.
According to Government spokesman Take Dabi, no state government has ever
engaged such a large army of 30,000 labourers for so long.

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.

• In other cases, employers have structured settlements in a questionable manner,

involving unjustifiably high tax-free compensatory payments.

• Secrecy clauses have featured in most of the agreements we have seen.

It seems, that many severance payments are also open to criticism because the
employer has failed to establish, and follow, fundamental employment

Practices – resulting in the needless termination of the employment Relationship.

The principles of good employment practice are well known:

• A fair and transparent recruitment and appointment process;

• A clear and comprehensive employment agreement – with express provisions

regarding termination and redundancy;

• Regular reviews of performance against measurable benchmarks; and

• A clear and well-documented process for resolving disputes.

So golden handshake proved to be both effective and ineffective in different

situations. In some cases such as of ONGC as VRS appeared golden handshake
attracted top level executives, but in case of Kenya civil services it helped
government in reducing the future expenses. But certain organizations were using
this tool in wrong way by giving huge amount as compensation to their executives.
Companies are not following the government norms.
 Conclusion
Losing a job means more than losing present wages; it means exit from the pension
plan one hoped would grow to meet the needs of old age. All too often employees'
expectations are dashed when they are forced to leave what they considered to be
lifetime jobs. Employees are faced not only with a loss of employment, but also
with loss of the pension funding that is contingent upon working. They may also
have to make very difficult choices about how and when to leave a job they had
hoped to keep until retirement. Motivated by a desire to reduce their workforces
efficiently, expeditiously and humanely, many firms offer sweeteners or
enhancements to vest and non vested benefits in order to accelerate employees'
departure from the company and lessen employee misery and the diminution of the
company's good will. . They often include some type of severance payment, an
opportunity to immediately accrue enhanced benefit eligibility in a pension plan, or
some promise that non vested benefits, like health insurance, will remain in force.
In every case, the firm rids itself, and saves the cost of, what it considers to be
superannuated employees. On the other hand it also indicates that the early retirees
may have been primed for early retirement before downsizing was a reality.
Although their jobs were comparable to the stayers', the retirees were disenchanted
with work several years before they retired and identified less with the company.
They were also in better financial condition and showed more interest in
recreational activities than those who stayed. Although the early retirees typically
saw many more pleasures than problems in retirement and were well satisfied with
their lives, resentments toward the company surfaced if the exodus was managed
poorly.

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