That’s not a rational way to evaluate compensation. Would a reasonable person rather take a guaranteed $1000 or a 10% chance of a $1 million?
A "reasonable person", or a more commonly used "rational agent", is an idealized notion that doesn't actually exist in a real world. Actual humans are not expected-utility-maximizers. See e.g.[1].
Also importantly, the scenario (evaluating the value of option-based compensation) is not like "guaranteed $1000 or a 10% chance of a $1 million" scenario you're describing. Rather, it's like "pay $50-100k/year in opportunity cost for entry to the lottery in which you can win some unknown prize that's almost surely below $5M, at even more unknown probability". Even an expected-utility-maximizer, a "reasonable person", cannot really make a reasonable calculation of the expected utility.
A "reasonable person", or a more commonly used "rational agent", is an idealized notion that doesn't actually exist in a real world. Actual humans are not expected-utility-maximizers. See e.g.[1].
Also importantly, the scenario (evaluating the value of option-based compensation) is not like "guaranteed $1000 or a 10% chance of a $1 million" scenario you're describing. Rather, it's like "pay $50-100k/year in opportunity cost for entry to the lottery in which you can win some unknown prize that's almost surely below $5M, at even more unknown probability". Even an expected-utility-maximizer, a "reasonable person", cannot really make a reasonable calculation of the expected utility.
[1] - https://sci-hub.tw/https://www.sciencedirect.com/science/art...