It’s been an urgent question since the start of the Great Recession: Does equity-based CEO compensation encourage excessive risk taking? Or is it a useful incentive for taking necessary risks? Hundreds of studies have yielded no clear answer. Our research refines a theory from the 1990s, demonstrating that equity pay can both encourage and discourage risk taking: A CEO’s potential gains from options (prospective wealth) increase risk taking, while growth in the value of accumulated holdings (current wealth, which can be lost) curbs the appetite for risk. The effect that prevails depends on the mix of the two. Boards should manage this mix to encourage behavior that’s best for their company.