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

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.