Impact of vertical pay dispersion on operational risk in banks

ABSTRACT

We explore the linkage between vertical pay dispersion, a critical aspect of bank compensation scheme, and the frequency and severity (total monetary loss) of operational risk. Using operational risk events panel data from Chinese domestic commercial banks, we find that vertical pay dispersion positively impacts both the frequency and total loss severity of operational risk events, and such impacts increase marginal effects via quantile regression.

KEYWORDS:

• Vertical pay dispersion
• operational risk
• tournament theory
• risk-taking behaviour

JEL CLASSIFICATION:

• G32
• G21

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work is supported by the National Natural Science Foundation of China [No.71701193 and 71804040]. We appreciate Prof.Gao Xiang for his data support.