CEOs more likely to receive pay rise after a cyber attack. Wait, what?

Bosses are more likely to receive a pay rise after their firm suffers a cybersecurity breach, a study has found.

Researchers at Warwick Business School found that media reports of a cyber attack led to a stock market shock as investors sold their shares, but this only lasted a few days.

Security breaches did have a lasting impact on the way firms were run, as they typically paid lower dividends and invested less in research and development up to five years after the attack.

Yet they were no more likely to fire their chief executive. On the contrary, bosses were more likely to receive an increase in total and incentive pay several years after a security breach.

Average CEO pay at firms that were not targeted by hackers fell by more than $2 million a year over the same five year period.

Daniele Bianchi, assistant professor of finance at Warwick Business School, said: “Firms that suffer a data breach do not typically respond by firing the management, but by investing more in the existing CEO. At first sight, these results may look puzzling. However, they are consistent with the idea that the average response is to invest more in the management to address possible structural flaws, as well as maintaining the integrity of the firm in response to the reputational damage it has suffered.”

“In the long run security breaches appear to have a more significant impact on firms’ strategies and policies than their cash flow.”

The latest annual Cost of Data Breach Study for IBM estimates that the average cyber-attack cost $7.9 million in 2017. That equates to a record $225 cost for each record compromised

Dr Daniele Bianchi and Dr Onur Tosun, from Warwick Business School, analyzed data breaches at 41 publicly listed companies in the US between 2004 and 2016. They focused solely on breaches reported by the media, including stolen hardware, insider attacks, poor security and hacking. These occurred at large companies, with an average size of $35.4 billion in total assets, consistent with existing evidence that hackers are more likely to choose high-profile targets.

The share value and liquidity of a firm dropped significantly on the day a breach was disclosed and the day after, but this reaction vanished after just two days.

For example, shares in Sony Pictures plunged more than 10 per cent after hackers Guardians of Peace stole copies of unreleased films, emails, and the personal information about employees and their families in November 2014.

While operating performance recovered after a cyber-attack, these companies tended to invest less in research and development and paid lower dividends over the next five years as they sought to manage the financial risks caused by data breaches.

Onur Tosun, Assistant Professor of Finance at Warwick Business School, said: “Incidents of security breaches that reveal sensitive and confidential information can lead to litigation and government sanctions, but also to a loss of competitive edge against competitors through a reduction of resources dedicated to R&D, dividend payments, or investments more generally.

“For this reason, companies are often reluctant to reveal information about security breaches due to fear of both short-term and long-term market reactions. However, many firms won’t have a choice with tighter regulations demanding that firms report data breaches within 72 hours.

“Cybersecurity will therefore become an increasingly important consideration for companies to avoid the damaging fallout once a breach is made public.”