Logical Reasoning

PT21 · S2 · Q14 In most corporations the salaries of executives

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In most corporations the salaries of executives are set by a group from the corporations board of directors.

Conclusion (clearly = opinion)

The expectation that having a board of directors set executives' pay will prevent excessively large salaries is based on poor reasoning.

Evidence (after all)

Most members of a board of directors are themselves executives at some other corporation and can expect to benefit from setting generous benchmarks for executives' salaries.

Evaluate

How do you determine the salary of a CEO? Can't she potentially make her salary whatever she wants it to be, since she's in charge?

Yes, but that would be bad for the business overall. The business might need to pay her a lot to retain her talents, but they don't want to overspend, or else that cuts down on profitability.

The solution? Have the board of directors, rather than the CEO, set the CEO's pay. The idea is that the board will pay the CEO only what she's worth. The board members are incentivized to make the company as profitable as possible, so they will pay the CEO the least they can get away with.

The problem with this method, our author points out, is that the board members aren't just incentivized by making the company as profitable as possible. They're also incentivized by wanting their own pay to be as high as possible. They are CEO's at other companies, and they have boards of directors deciding on their pay too.

So giving this CEO of company X a higher salary helps shift industry expectations of what a CEO should make. That could lead to the CEO's sitting on this board to be awarded higher salaries in the future. Their boards of directors will think,

Goal

So our author is saying this common way of setting executive pay might fail to restrain CEO pay because ... members of the board have a personal incentive to make this CEO's pay very high.

14.

The point made by the author is that the most common way of setting executives’ salaries might not keep those salaries in bounds because

  1. most corporate executives, thanks to

    Unrelated to Goal

    We need an answer to be saying that this method won't work because the board members will be thinking, "the higher I set this CEO's salary, the higher my salary might one day be". This is saying that most CEO's don't sit on boards of directors for the sake of the extra part-time paycheck.

    1% picked this

  2. most corporate executive might be

    Unrelated to Goal

    We need an answer to be saying that this method won't work because the board members will be thinking, "the higher I set this CEO's salary, the higher my salary might one day be". This is saying that most CEO's would set a lower salary for themselves than the board does.

    1% picked this

  3. Correct

    many board members might let

    Why this is right

    We need an answer to be saying that this method won't work because the board members will be thinking, "the higher I set this CEO's salary, the higher my salary might one day be". This is saying that board members would set the CEO's salary based on this self-interested calculation. They're thinking about how a high CEO salary could affect their salary at their real job, as executives of other companies. As a board member of Company X, though, they're supposed to be thinking about how a high CEO salary might affect the profitability of Company X.

    Skill tested: Method · how this choice captures the argument's function is the move to repeat next time.

    88% picked this

  4. many board members who set

    Contradicted

    This is close, but it's saying that board members are also board members at other companies, where they hope to one day be executives. The passage was saying that the board members are actually executives at other companies, (where they hope to have their salary raised, in comparison to this new CEO pay benchmark they are helping to set at Company X).

    8% picked this

  5. many board members are remunerated

    Unrelated to Goal

    We need an answer to be saying that this method won't work because the board members will be thinking, "the higher I set this CEO's salary, the higher my salary might one day be". This is saying that board members are so grateful for this plush board member gig that they reward the CEO who appointed them there with high pay.

    3% picked this

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