Many managers are influenced by dangerous myths about pay that lead to

Question

Many managers are influenced by dangerous myths about pay that lead to counter productive decisions about how their companies compensate employees. One such  myth  is that labor rates, the rate per hour paid to workers, are identical with labor costs, the money spent on labor in relation to the productivity of the labor force. This myth leads to the assumption that a company can simply lower its labor costs by cutting wages. But labor costs and labor rates are not in fact the same: one company could pay its workers considerably more than another and yet have lower labor costs if that company's productivity were higher due to the talent of its workforce, the efficiency of its work processes, or other factors. The confusion of costs with rates persists partly because labor rates are a convenient target for managers who want to make an impact on their company's budgets. Because labor rates are highly visible, managers can easily compare their company's rates with those of competitors. Furthermore, labor rates often appear to be a company's most malleable financial variable: cutting wages appears an easier way to control costs than such options as reconfiguring work processes or altering product design.

The myth that labor rates and labor costs are equivalent is supported by business journalists, who frequently confound the two. For example, prominent  business journals  often remark on the "high" cost of German labor, citing as evidence the average amount paid to German workers. The myth is also perpetuated by the compensation-consulting industry, which has its own incentives to keep such myths alive. First, although some of these consulting firms have recently broadened their practices beyond the area of compensation, their mainstay continues to be advising companies on changing their compensation practices. Suggesting that a company's performance can be improved in some other way than by altering its pay system may be empirically correct but contrary to the consultants' interests. Furthermore, changes to the compensation system may appear to be simpler to implement than changes to other aspects of an organization, so managers are more likely to find such advice from consultants palatable. Finally, to the extant that changes in compensation create new problems, the consultants will continue to have work solving the problems that result from their advice.    1 
 A 
 VRC000361-06 
1. The passage suggests that the “myth” mentioned in line 5 persists partly because

A. managers find it easier to compare their companies’ labor rates with those of competitors than to compare labor costs
B. managers tend to assume that labor rates affect their companies’ budgets less than they actually do
C. managers tend to believe that labor rates can have an impact on the efficiency of their companies’ work processes
D. the average amount paid to workers differs significantly from one country to another
E. many companies fail to rely on compensation consultants when making decisions about labor rates

2 
 D 
2. The author of the passage mentions business journals (line 39) primarily in order to

A. demonstrate how a particular kind of evidence can be used to support two different conclusions
B. cast doubt on a particular view about the average amount paid to German workers
C. suggest that business journalists may have a vested interest in perpetuating a particular view
D. identify one source of support for a view common among business managers
E. indicate a way in which a particular myth could be dispelled

3 
 B 
 VRC000361-05 
3. It can be inferred from the passage that the author would be most likely to agree with which of the following statements about compensation?

A. A company’s labor costs are not affected by the efficiency of its work processes.
B. High labor rates are not necessarily inconsistent with the goals of companies that want to reduce costs
C. It is more difficult for managers to compare their companies’ labor rates with those of competitors than to compare labor costs.
D. A company whose labor rates are high is unlikely to have lower labor costs than other companies.
E. Managers often use information about competitors’ labor costs to calculate those companies’ labor rates.

4 
 A 
4. The author of the passage suggests which of the following about the advice that the consulting firms discussed in the passage customarily give to companies attempting to control costs?

A. It often fails to bring about the intended changes in companies’ compensation systems.
B. It has highly influenced views that predominate in prominent business journals.
C. It tends to result in decreased labor rates but increased labor costs.
D. It leads to changes in companies’ compensation practices that are less visible than changes to work processes would be.
E. It might be different if the consulting firms were less narrowly specialized.

5 
 E 
5. According to the passage, which of the following is true about changes to a company's compensation system?

A. They are often implemented in conjunction with a company's efforts to reconfigure its work processes.
B. They have been advocated by prominent business journals as the most direct way for a company to bring about changes in its labor costs.
C. They are more likely to result in an increase in labor costs than they are to bring about competitive advantages for the company.
D. They sometimes result in significant cost savings but are likely to create labor-relations problems for the company.
E. They may seem to managers to be relatively easy to implement compared with other kinds of changes managers might consider.

6 
 D 
6. The primary purpose of the passage is to

(A) describe a common practice used by managers to control labor costs
(B) examine the relation between labor costs and other costs incurred by businesses
(C) explain why labor rates are a more significant factor than labor costs for most businesses
(D) identify a common misperception held by managers and point out some of the reasons for its persistence
(E) distinguish between a factor that companies can easily control and another that is more difficult to change

ID 00361

Sujeet07 · Accepted Answer

Many managers are influenced by dangerous myths about pay   that lead to counterproductive decisions about how their companies compensate employees .  One such myth is that labor rates, the rate per hour paid to workers, are identical with labor costs, the money spent on labor in relation to the productivity of the labor force . This myth leads to the assumption that a company can simply lower its labor costs by cutting wages.  But labor costs and labor rates are not in fact the same :  one company could pay its workers considerably more than another and yet have lower labor costs if that company's productivity were higher due to the talent of its workforce, the efficiency of its work processes, or other factors .  The confusion of costs with rates persists partly   because labor rates are a convenient target for managers who want to make an impact on their company's budgets. Because labor rates are highly visible, managers can easily compare their company's rates with those of competitors.   Furthermore ,  labor rates often appear to be a company's most malleable financial variable: cutting wages appears an easier way to control costs than such options as re-configuring work processes or altering product design.

The myth that labor rates and labor costs are equivalent is supported by business journalists ,  who frequently confound the two. For example, prominent business journals often remark on the "high" cost of German labor, citing as evidence the average amount paid to German workers .  The myth is also   perpetuated by the compensation-consulting industry, which has its own incentives to keep such myths alive. First, although some of these consulting firms have recently broadened their practices beyond the area of compensation, their mainstay continues to be advising companies on changing their compensation practices. Suggesting that a company's performance can be improved in some other way than by altering its pay system may be empirically correct but contrary to the consultants' interests. Furthermore, changes to the compensation system may appear to be simpler to implement than changes to other aspects of an organization, so managers are more likely to find such advice from consultants palatable. Finally, to the extant that changes in compensation create new problems, the consultants will continue to have work solving the problems that result from their advice.

I read only the bold part and skip the strike part but you can skim also.(A/q to your reading process)

P1 :- Talking about one myth i.e. labor rates are identical with labor costs. And then author perspective about this myth.
P2: - Who supported this myth.

1) The passage suggests that the “myth” mentioned in the highlighted text persists partly because

Background - It is mention in P1 - The confusion of costs with rates persists partly because labor rates are a convenient target for managers............

A.  managers find it easier to compare their companies’ labor rates with those of competitors than to compare labor costs  ---Correct , aligned with above mentioned background.
B. managers tend to assume that labor rates affect their companies’ budgets  less than they actually do 
C. managers tend to believe that labor rates can have an impact  on the efficiency of their companies’ work processes 
D. the average amount paid to workers differs significantly from  one country to another 
E. many companies fail to rely  on compensation consultants  when making decisions about labor rates --- It is mentioned in P2

2) The author of the passage mentions business journals the highlighted text primarily in order to

Background - Business Journal mentioned in p2 , so need to reed that part.This is role base question so just apply concept of CR. It is mentioned to make reader know that who supports the myth.

A. demonstrate how a particular kind of evidence can be used to  support two different conclusions 
B.  cast doubt on a particular view about the average amount paid to German workers 
C. suggest that business journalists may have a vested interest  in perpetuating a particular view 
D.  identify one source of support for a view common among business managers 
E. indicate a way in which a particular myth  could be dispelled

4) The author of the passage suggests which of the following about the advice  that the consulting firms(CF) discussed in the passage customarily give to companies attempting to control costs ?

Background : - Consulting Firm mentioned in p2 so need to read that part of p2. Author suggest three things about the advice of the CF.
Suggesting that a company's performance can be improved .................
Furthermore, changes to the compensation system ....................... 
Finally, to the extant that changes in compensation create new problems, the consultants will continue to have work solving the problems that result from their advice.

A.  It often fails to bring about the intended changes in companies’ compensation systems.  --- From third point we can infer this.
B. It has highly influenced views  that predominate in prominent business journals. 
C.  It tends to result in decreased labor rates but increased labor costs. 
D. It leads to changes in companies’ compensation practices  that are less visible  than changes to work processes would be. --- Author talk something about performance but not what this option is telling.
E. It might be different if the consulting  firms were less narrowly specialized .

According to the passage, which of the following is true about changes to a company’s compensation system?

Background :- Answer for this question will be explicitly mentioned in the passage. "Changes to a company’s compensation system. --- mentioned in p2--"changes to the compensation system may appear to be simpler to implement than changes to other aspects of an organization"

A. They are often implemented in conjunction with a company’s efforts to reconfigure its work processes.
B. They have been advocated by prominent business journals as the most direct way for a company to bring about changes in its labor costs.
C. They are more likely to result in an increase in labor costs than they are to bring about competitive advantages for the company.
D. They sometimes result in significant cost savings but are likely to create labor-relations problems for the company.
E.  They may seem to managers to be relatively easy to implement compared with other kinds of changes managers might consider.

Thanks,
S

MamtaKrishnia · Answer

Hi, I mainly used process of elimination to solve these questions. I am putting down my line of reasoning ... Do tell me if it is correct.

1. The passage suggests that the “myth” mentioned in line 5 persists partly because A. managers find it easier to compare their companies’ labor rates with those of competitors than to compare labor costs B. managers tend to assume that labor rates affect their companies’ budgets less than they actually do C. managers tend to believe that labor rates can have an impact on the efficiency of their companies’ work processes D. the average amount paid to workers differs significantly from one country to another E. many companies fail to rely on compensation consultants when making decisions about labor rates The answer to this Q is clearly stated in the passage . 2. The author of the passage mentions business journals (line 39) primarily in order to A. demonstrate how a particular kind of evidence can be used to support two different conclusions B. cast doubt on a particular view about the average amount paid to German workers. C. suggest that business journalists may have a vested interest in perpetuating a particular view D. identify one source of support for a view common among business managers E. indicate a way in which a particular myth could be dispelled I used process of elimination to ans this Q. Out of all the options option D seems to be most appropite cuz of the line "so managers are more likely to find such advice from consultants palatable" . This seems to be one of the reasons why business managers have started to beleive that its best to reduce labor rates. 3. It can be inferred from the passage that the author would be most likely to agree with which of the following statements about compensation? A. A company’s labor costs are not affected by the efficiency of its work processes. B. High labor rates are not necessarily inconsistent with the goals of companies that want to reduce costs C. It is more difficult for managers to compare their companies’ labor rates with those of competitors than to compare labor costs. D. A company whose labor rates are high is unlikely to have lower labor costs than other companies. E. Managers often use information about competitors’ labor costs to calculate those companies’ labor rates. used process of elimination once again. A. A company's labor costs are infact affected by the efficiency of its work processes. B. This options seems to be correct because of what is stated in lines 14-20. The labors may be getting paid better however they are doing a better jb and hence providing more revenue to the company. C. infact its the opposite. D. lines 14-20 negates this fact. E. no such information is stated in the passage. 4. The author of the passage suggests which of the following about the advice that the consulting firms discussed in the passage customarily give to companies attempting to control costs? A. It often fails to bring about the intended changes in companies’ compensation systems. B. It has highly influenced views that predominate in prominent business journals. C. It tends to result in decreased labor rates but increased labor costs. D. It leads to changes in companies’ compensation practices that are less visible than changes to work processes would be. E. It might be different if the consulting firms were less narrowly specialized. I wasnt sure what should be the Ans to this Q. I just went ahead wit my gut feeling .

OA time

PiyushK · Answer

13min 3/4

I differ from OA of the last question.

Q.4 - OA - A
4. The author of the passage suggests which of the following about the advice that the consulting firms discussed in the passage customarily give to companies attempting to control costs?
A. It often fails to bring about the intended changes in companies’ compensation systems.

As per my understanding of the passage consulting firms are often successful in persuading managers to make changes in compensation system and
these changes lead to other types of problem. Therefore, consulting companies' intentions are meeting successfully to bring intended changes to create
more problems.

A is just telling opposite of what I inferred.

Skywalker18 · Answer

-The author describes a common myth held by business managers
-He then goes on to describe how that myth is concurred by business journals and hence is finding widespread acceptance

Took 9 mins in total, including 3 mins to read .

1. Because labor rates are highly visible, managers can easily compare their company’s rates with those of competitors
Answer A

2. "The myth that labor rates and labor costs are equivalent is supported by business journalists, who frequently confound the two. For example, prominent business journals"
Since the business journals support the common view held my managers, option (D) is the right answer choice.

3.
The author is trying to point out that labor rates and labor costs are not connected and that managers would not try to reduce labor rates to reduce costs. The author is stating that high labor costs could still bring about a reduction in a company’s overall costs.
Answer B

4. "Finally, to the extent that changes in compensation create new problems, the consultants will continue to have work solving the problems that result from their advice"

Since the changes in compensation create new problems, it is contrary to its intended effect and hence option (A) is the right answer

5.
"Furthermore, changes to the compensation system may appear to be simpler to implement than changes to other aspects of an organization, so managers are more likely to find such advice from consultants palatable"

Answer E

Will2020 · Answer

Official Explnation - Question 3

Inference

This question depends on understanding the author’s overall points about compensation (labor rates) and its relation to labor costs. The author makes clear that compensation is only one element of labor costs, which also have to do with workforce talent, work-process efficiency, product design, and other factors. Managers may focus on labor rates rather than labor costs because labor rates are easily identifiable numbers that can be compared across companies.

A The author explicitly identifies work-process efficiency as one of the factors that is likely to affect a company’s labor costs.
B Correct. The author states that companies often reduce labor rates because doing so seems like an easy way to control costs, and the author argues that this strategy may not achieve the desired effect. The author also identifies other strategies for lowering costs and suggests that a company that followed these other strategies might be able to reduce costs considerably while maintaining high labor rates.
C The author states that comparing labor rates is easy, because such rates are highly visible; it is comparing labor costs that is difficult.
D The author states clearly that a company with high labor rates could easily have lower labor costs than a company with lower labor rates, for labor rates are only one factor in a company’s labor costs.
E The author suggests that managers are much more likely to have information about competitors labor rates, because such rates are highly visible, than they are to have information about competitors’ labor costs. Thus managers are more likely to use labor rates to calculate competitors’ labor costs than the other way around.

The correct answer is B.

PriyankaPalit7 · Answer

GMATNinja   GMATNinjaTwo

Can you pleas explan why the answer to Question 4 is A?

I inferred that the Consulting firm's goal is to reduce labor costs. Even though better alternatives are available, consulting firms suggest that companies reduce the labor costs by cutting down the labor rate. Even managers see that this is an "easy to implement" solution.  So the consulting firms are successful in bringing about the intended changes in companies’ compensation system , even though these changes create further problems and continue to provide work for the consultants.

GMATNinjaTwo · Answer

You bring up a great point here.

Can anyone confirm the OA with a screenshot of the question?

krndatta · Answer

AndrewN , 
Can you please throw some light on option B of question 3? 
I am not getting the hang of this inference. I marked this based on elimination. 
But how is this an inference?

AndrewN · Answer

Remember,  krndatta , an inference comes in one of two basic forms in RC:

An answer choice conveys the same idea as one that is stated in the passage, but uses somewhat different language (e.g., if the passage says that X is more efficient than Y, a correct answer choice might say that Y is not as efficient as X).   An answer choice may stitch together different parts of the passage to form a single statement that is not directly expressed as such in the passage.

We are looking at more of a type 1 inference here, the easier of the two. The passage tells us in the first paragraph that  labor costs and labor rates are not in fact the same: one company could pay its workers considerably more than another and yet have lower labor costs if that company's productivity were higher due to the talent of its workforce, the efficiency of its work processes, or other factors . This idea is more concisely expressed in answer choice (B):

Perhaps the inference is clearer now. Thank you for thinking to ask.

- Andrew

Namangupta1997 · Answer

Hi  AndrewN

IN question 4, I'm a bit thrown off by the correct answer. Nowhere in the passage it is mentioned that the advice given by the firms FAILS to bring about the intended changes in companies’ compensation systems. It is however stated that that the implementation of the advice brings about NEW problems. Does the influx of NEW problems necessarily mean that the advice failed completely? Isn't the language a bit extreme? Maybe the advice did bring about an intended change and new problems were an effect of that change.

Also, why isn't option E correct? The whole mention of the firms seems to revolve around the basic idea of biasness in the nature of advice given by the compensation firms. Due to their limited scope of work, they are bound to give advices that are inclined to increase the business within the firms.

AndrewN · Answer

Hello,  Namangupta1997 . Have you seen  this post  at the top of the page? It also questions the viability of (A). Answer choice (E) might have been what I picked when I first laid eyes on the passage: it was the one question I missed from the set. The following line in particular stands out:

That is not a far cry from what answer choice (E) says.

We seem to be in agreement for now. I would let go of this one and move on to other passages.

- Andrew

IN2MBB2PE · Answer

GMATNinja  and  karishmaB  Question 4 seems to be giving some confusion among all of us, can we get some expert explanations? Thanks!

GMATNinja · Answer

We wouldn't worry too much about question 4 until someone can verify the OA with a screenshot. It's not clear whether question 4 appears on the official practice tests at all.

If anyone has a screenshot of the question and OA, please post it here! Unless we can verify the question's legitimacy, it isn't worth your time.

Sajjad1994 · Answer

Just for your information: I google the question: A website "Maintest.com" has this passage and question with OA as (A) Link: https://www.maintests.com/gmat/reading- ... sbk-1.html Another website "beatthegmat.com" has this passage and question with OA as (A) Link: https://gmatclub.com/forum/?href=-managers-t58335.html Yet another website "gmat.kmf.com" has this passage and question with OA as (A) Link: http://gmat.kmf.com/question/991jmk.html

egmat · Answer

Question 3

Understanding the Author's Key Argument

The passage is built around dismantling one dangerous myth: that labor rates (hourly wages) equal labor costs (actual expense relative to productivity). Think of it this way - if Worker A makes $50/hour but produces 100 units, while Worker B makes $25/hour but only produces 40 units, who's actually more expensive? Worker B costs more per unit despite the lower wage!

Let's tackle this systematically:

Step 1: Identify the Author's Position 
The author believes that companies focusing solely on cutting wages are missing the bigger picture. The real equation is:
Labor Costs = Labor Rates ÷ Productivity

Notice how the author explicitly states: "one company could pay its workers considerably more than another and yet have lower labor costs if that company's productivity were higher."

Step 2: Apply This Understanding to the Answer Choices

Looking at our options:

(A)  Says efficiency doesn't affect labor costs - but wait, the passage explicitly mentions "efficiency of its work processes" as a factor. This contradicts the author's point.

(B)  Says high labor rates aren't necessarily inconsistent with cost reduction goals -  this aligns perfectly  with the author's argument! A company can pay high wages but still have low costs through high productivity.

(C)  Claims it's harder to compare labor rates than costs - but the passage says the opposite: rates are "highly visible" and "easy to compare."

(D)  This is the myth itself! It assumes high rates = high costs, which is exactly what the author argues against.

(E)  The passage doesn't support this - managers focus on rates because they're visible, not because they're calculating from costs.

The Answer:   (B)  captures the sophisticated understanding that paying workers more can actually reduce costs if it leads to higher productivity.

---

Want to master the complete framework for tackling RC inference questions like this? You can check out the  step-by-step solution on Neuron by e-GMAT  to understand how to systematically identify author's viewpoints and avoid common inference traps. You can also explore  other GMAT official RC questions with detailed solutions on Neuron  for structured practice that builds your inference skills consistently.

thekingslay · Answer

Hi, can someone explain Q no 3? 
Is not B opposite to what the author is saying? I do not get why B is the correct answer !

Bunuel · Answer

Please review the thread:
 # 1  # 2  # 3

Many managers are influenced by dangerous myths about pay that lead to

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Reading Comprehension (RC) Questions

Many managers are influenced by dangerous myths about pay that lead to

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards