High-stakes CEO bonuses might actually be a rational insurance premium rather than a symptom of corporate greed.
April 23, 2026
Original Paper
Chief Executive Officer Pay in "Winner-take-all" Settings
SSRN · 6622919
The Takeaway
Massive payouts for winning CEOs in winner-take-all markets often result from logical contracts signed before any success is guaranteed. Boards of directors use these outrageous sums as a mechanism to offset the high risk of total career failure. The public usually assumes these bonuses are evidence of board capture or unfair extraction of company wealth. This model suggests that the pay is a necessary price for attracting talent to high-volatility industries. It changes the debate from a moral one about greed to a functional one about market insurance.
From the abstract
Some recent chief executive officer (CEO) compensation contracts have extremely large ex ante expected values, raising concerns that such pay is unfairly excessive. However, these contracts pay out substantial sums only when the CEO hits especially aggressive performance targets and pay out small sums if the CEO fails to achieve these targets. The observation that only some of the CEOs succeed raises the possibility that such compensation contracts are rational and not the result of a CEO captur