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There is little correlation between CEO compensation and the company's

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There is little correlation between CEO compensation and the company's  [#permalink]

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New post 02 Oct 2018, 08:59
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Difficulty:

  35% (medium)

Question Stats:

73% (01:40) correct 27% (01:59) wrong based on 77 sessions

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There is little correlation between CEO compensation and the company's performance. If there were a considerable correlation, the companies that paid their CEOs the most would have highest growth in profits, revenue, and stock price. Most of companies that have performed best in terms of profit, revenue, and stock price growth over the last 2 decades have been the ones whose CEOs are their founders.



If the statements above are true, which of the following must be true?

A. None of the top performing companies over the past 2 decades have been led by CEO’s who are not founders of the company.
B. A company that pays its CEO a very high compensation is likely to perform worse than a company that does not compensate its CEO as well.
C. Founders of most of the companies that show highest growth in profit, revenue, and stock price are not amongst the highest paid CEOs in the industry.
D. CEOs who are also Founders of the company do not get paid as much as CEOs who are not.
E. If a company is not led by a founder, it will not be a top performing company in the future.
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There is little correlation between CEO compensation and the company's  [#permalink]

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New post 03 Oct 2018, 00:30
zac123 wrote:
There is little correlation between CEO compensation and the company's performance. If there were a considerable correlation, the companies that paid their CEOs the most would have highest growth in profits, revenue, and stock price. Most of companies that have performed best in terms of profit, revenue, and stock price growth over the last 2 decades have been the ones whose CEOs are their founders.



If the statements above are true, which of the following must be true?

A. None of the top performing companies over the past 2 decades have been led by CEO’s who are not founders of the company.
B. A company that pays its CEO a very high compensation is likely to perform worse than a company that does not compensate its CEO as well.
C. Founders of most of the companies that show highest growth in profit, revenue, and stock price are not amongst the highest paid CEOs in the industry.
D. CEOs who are also Founders of the company do not get paid as much as CEOs who are not.
E. If a company is not led by a founder, it will not be a top performing company in the future.


Let's break down the logic of the passage:
Claim: There is little correlation between CEO compensation and company performance (profits, revenues prices)
Evidence: Most companies that have performed best have founder CEOs.

As our statements are both statistical ('little correlation', 'most companies') and compare clearly separate categories (founder vs. non-founder, high profit vs. low profit) most likely our correct answer will have to do with the logic connecting these concepts, namely that of weighted average. Which is why we'll go for a Logical approach of inferring the answer based on what we know about weighted averages (and overlapping sets).

In particular, as the 'average CEO' of a high-profit company is a 'founder', then it can't also be that the average salary of a 'founder' is very high because that would imply a direct correlation between 'high-performing companies' (via 'founder CEOs') to 'high salary', in contradiction to the claim.

Looking through our answers, this is exactly what (C) tells us.

(C) is our answer.
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There is little correlation between CEO compensation and the company's &nbs [#permalink] 03 Oct 2018, 00:30
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There is little correlation between CEO compensation and the company's

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