"[T]he phenomenon of 'loss aversion' (people's tendency to fear loss more than they appreciate gains) ... helps to explain why an executive compensation package that carries little risk can have a higher perceived value than one where both the gains -- and the risks of not achieving those gains -- are higher. Given that employers generally want to pay for performance, their challenge is to find that sweet spot where the perceived value of the package they're offering is higher than that of the competition. The way to do this is to base the comparison on a single number: the certainty equivalent."

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