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Profit skimming, asymmetric benchmarking, or the effects of implicit incentives? Evidence from natural disasters

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  • Reza, Syed Walid

Abstract

We evaluate competing hypotheses on profit skimming, asymmetric benchmarking, and the effects of implicit incentives using natural disasters as shocks to firm-specific performance. We find that compensation of both CEOs and other top executives are adjusted for exogenous changes in firm-specific performance. Moreover, the change in pay-for-performance sensitivity is greater for favorably rather than adversely affected firms. These results are stronger in firms with independent boards, new outside CEOs, and younger CEOs, where optimal contracting is more likely. Overall, our results support Feriozzi’s (2011) hypothesis that asymmetric pay-for-performance sensitivity can result from implicit incentives, which trigger after negative shocks.

Suggested Citation

  • Reza, Syed Walid, 2020. "Profit skimming, asymmetric benchmarking, or the effects of implicit incentives? Evidence from natural disasters," Journal of Multinational Financial Management, Elsevier, vol. 57.
    • Handle: RePEc:eee:mulfin:v:57-58:y:2020:i::s1042444x20300438
    DOI: 10.1016/j.mulfin.2020.100654
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    More about this item

    Keywords

    CEO compensation; Pay-For-Luck; Benchmarking; Natural disasters;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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