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 idiosyncratic and operational risk event announcements signal ineffective risk management. We examine the impact of operational risk announcements on different components of U.S. banks' CEO compensation during 1992-2016. We find that banks' compensation committees are effective in considering operational risk in designing CEO compensation, and this efficiency has improved with recent regulations. Operational risk negatively impacts options-based compensation; Clients, Products, and Business Practices events are the primary drivers of this result. We find 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