Corporate response to catastrophic events: an analysis of executive compensation strategies following Hurricane Katrina disasters

Purpose

While extensive research has examined the impacts of natural disasters on the economy and financial markets, there is limited insight into how these events influence chief executive officer (CEO) pay structures. This study, as such, aims to explore the adjustments in CEO compensation following major natural disasters, such as Hurricane Katrina in the USA.

Design/methodology/approach

Our analysis employs a comprehensive dataset of CEO compensation before and after Hurricane Katrina. We utilize various econometric methods, including the difference-in-differences model, entropy balancing and generalized method of moment (GMM) techniques, to ensure the robustness of our findings against various selection bias and endogeneity issues, considering different disaster scenarios and their proximity to the affected companies.

Findings

The results indicate that CEOs tend to receive higher compensation, primarily in the form of cash (salaries and bonuses), following a disaster like Hurricane Katrina. This trend is more pronounced when the disaster occurs closer to the company’s operations and is particularly evident among female CEOs, who generally prefer less risky compensation packages.

Practical implications

These findings suggest that companies may need to reconsider their compensation strategies in light of increasing natural disaster risks. Understanding the adjustments in CEO pay following disasters can help corporations better prepare and adapt their governance practices to meet these challenges effectively.

Originality/value

This research contributes to the limited literature on the effect of natural disasters on executive compensation. By highlighting the tendency of firms to adjust CEO pay in response to catastrophic events, this study enriches the broader discourse on corporate governance and executive compensation strategies in the context of major external shocks.