Is Bank CEO Pay Sensitive to Operational Risk Event Announcements?

51 Pages Posted: 31 Jan 2023 Last revised: 19 Oct 2023

See all articles by Kevin Amess

Kevin Amess

Nottingham University Business School

Ahmed Barakat

Nottingham University Business School

Anna Chernobai

Syracuse University - M. J. Whitman School of Management

Hurvashee Gya

Nottingham University Business School

Date Written: September 1, 2023

Abstract

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 sensitivity of different components of U.S. banks’ CEO compensation to operational risk event announcements during the 1992-2016 period. Our findings suggest that CEOs’ pay sensitivity to operational risk is weakened in periods of elevated operational risk with internal root causes, but is strengthened for external fraud type events. We find that banks’ compensation committees are effective in improving the sensitivity of CEO pay to Clients, Products, and Business Practices-type operational risk events when designing CEO compensation contracts. Our evidence suggests that compensation committees are selective in which components of CEO compensation to use to penalize CEOs for elevated operational risk. The sensitivity of CEO pay to operational risk was weakened during the financial crisis, and the Dodd-Frank Reform has not been effective in strengthening the sensitivity of CEO pay to operational risk.

Keywords: Operational risk, executive compensation, banking, risk management

JEL Classification: G21, G30, C58

Suggested Citation

Amess, Kevin and Barakat, Ahmed and Chernobai, Anna and Gya, Hurvashee, Is Bank CEO Pay Sensitive to Operational Risk Event Announcements? (September 1, 2023). Available at SSRN: https://ssrn.com/abstract=4343911 or http://dx.doi.org/10.2139/ssrn.4343911

Kevin Amess

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

HOME PAGE: http://www.nottingham.ac.uk/business/lizka1.html

Ahmed Barakat

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Anna Chernobai (Contact Author)

Syracuse University - M. J. Whitman School of Management ( email )

721 University Ave
Syracuse, NY 13244-2450
United States
(315) 443 3357 (Phone)

HOME PAGE: http://https://sites.google.com/a/g.syr.edu/anna-chernobai/

Hurvashee Gya

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

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