Is Bank CEO Pay Sensitive to Operational Risk Event Announcements?

Bank CEOs are held personally accountable for firms' performance, including the downside risk. Operational risk is largely idiosyncratic and operational risk event announcements signal flaws in banks' internal control systems and ineffective risk management. We examine the impact of operational risk event announcements on different components of U.S. banks' CEO compensation over the 1992-2016 period. We find that banks' compensation committees are effective in considering operational risk in designing CEO compensation contracts, and this efficiency has improved with recent financial regulations. We find that operational risk event announcements negatively impact options-based compensation and that the events of type Clients, Products, and Business Practices are the primary drivers of this result. We also find evidence that director resources devoted to the remuneration committee help reduce CEO bonuses following internal fraud events, and that higher ratios of independent directors improve pay-for-performance sensitivity for all event types but only for stock grants and stock options. Our evidence suggests that compensation committees are selective in which components of CEO compensation to use to penalize CEOs for elevated operational risk