Practice question · Multiple choice
A CEO paid mostly in share options presides over a huge, badly-timed bet that pays off. Which governance problem does the outcome hide?
Hints
- Draw the CEO's payoff against the share price. What does it look like below the strike?
- Ask what the same bet would have paid the CEO had it failed.
Show the answer
C. Options reward the upside and cap the downside at zero
Why
An option is worthless below the strike and unbounded above, so it prices volatility rather than performance and pays the same for luck as for skill. Aligning incentives is not the same as aligning them correctly, which is why the shape of the payoff matters more than its size.
Practise Corporate Governance
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