Climate Regulatory Risks and Executive Compensation: Evidence from U.S. State-Level SCAP Finalization

Abstract

Different U.S. state governments have begun to adopt climate adaptation strategies and action plans to prepare for and combat the significant threat of climate change. The finalization of these strategies and action plans results in a state-level climate adaptation plan—the SCAP. We find that the finalization of a state’s SCAP leads to a significant increase in perceived climate regulatory risks faced by local firms and a significant reduction in their executive pay. Moreover, the negative effect of SCAP finalization on executive pay is greater for firms in states with less-detailed goals and objectives in their SCAPs and for firms that are more sensitive to climate regulatory risks or facing greater external threats, but weaker for firms with more entrenched or powerful CEOs. Finally, after SCAP finalization, local firms’ executive pay becomes less sensitive to corporate financial performance and stock volatility but more likely to be linked to corporate environmental performance. Taken together, our findings suggest that climate regulatory risks significantly affect corporate executive compensation and incentives.

Keywords: SCAP Finalization; Executive Compensation; Climate Regulatory Risks

JEL Classification: G32; M12; Q54