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30 Oct 2019, 21:49
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Question 1
B
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
35%
(medium)
Question Stats:
64% (03:24) correct
36%
(03:32) wrong
based on 546
sessions
History
Date
Time
Result
Not Attempted Yet
Question 2
D
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
25%
(medium)
Question Stats:
68% (01:18) correct 32%
(01:38) wrong
based on 583
sessions
History
Date
Time
Result
Not Attempted Yet
Question 3
D
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
35%
(medium)
Question Stats:
61% (01:02) correct 39%
(01:11) wrong
based on 585
sessions
History
Date
Time
Result
Not Attempted Yet
Question 4
E
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
85%
(hard)
Question Stats:
35% (01:34) correct 65%
(01:38) wrong
based on 555
sessions
History
Date
Time
Result
Not Attempted Yet
Question 5
A
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
65%
(hard)
Question Stats:
42% (01:15) correct 58%
(01:17) wrong
based on 537
sessions
History
Date
Time
Result
Not Attempted Yet
Question 6
B
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
45%
(medium)
Question Stats:
52% (00:50) correct 48%
(00:49) wrong
based on 512
sessions
History
Date
Time
Result
Not Attempted Yet
Chief Executive Officers are often driven more by their short-term personal interests than by the long-term good of their company. Therefore, it is a critical responsibility of the board of directors to ensure that executive compensation is linked to such performance targets that cannot be easily gamed by the CEO and so, can be achieved only if he creates actual and sustainable value for the company. Only such performance targets may be deemed to be good. Also, since they are difficult to manipulate, CEOs would statistically be as likely to meet these targets as to miss them; it is unlikely that, if no manipulation takes place, CEOs will just overperform most of the time. However, recent research has found that, in actual practice, CEOs meet their targets far often than they miss them.
The performance targets of CEOs are often based on a single metric such as quarterly profitability or earnings per share. Such a system can be easily manipulated by them – by, for example, cutting the research and development spending that is critical for the organization's future. In contrast, when their payouts depend on three to five performance targets – based on metrics that are not closely correlated – CEOs are found to be just as likely to miss a given target as they are to exceed it.
Boards often determine their CEO's performance goals based on the company and sector growth forecasts provided by external analysts and the CEO himself. In self-interest, CEOs often lowball forecasts to get easily achievable targets. However, the resulting low performance targets prevent their company from growing to its full potential. Another feature of the executive compensation structure compounds this problem. Most boards specify a minimum performance threshold for their CEOs, below which the CEO receives no bonus. Then, his rewards rise steeply until the target is reached. Rewards for performing beyond this target grow much more slowly and eventually taper off. Thus, a CEO does not receive much personal profit from achieving spectacular results as opposed to merely satisfactory ones and, therefore, rarely strives for them. The result of all this is a sated CEO but a stunted company.
Adapted from https://hbr.org/2017/09/comp-targets-that-work
The performance targets of CEOs are often based on a single metric such as quarterly profitability or earnings per share. Such a system can be easily manipulated by them – by, for example, cutting the research and development spending that is critical for the organization's future. In contrast, when their payouts depend on three to five performance targets – based on metrics that are not closely correlated – CEOs are found to be just as likely to miss a given target as they are to exceed it.
Boards often determine their CEO's performance goals based on the company and sector growth forecasts provided by external analysts and the CEO himself. In self-interest, CEOs often lowball forecasts to get easily achievable targets. However, the resulting low performance targets prevent their company from growing to its full potential. Another feature of the executive compensation structure compounds this problem. Most boards specify a minimum performance threshold for their CEOs, below which the CEO receives no bonus. Then, his rewards rise steeply until the target is reached. Rewards for performing beyond this target grow much more slowly and eventually taper off. Thus, a CEO does not receive much personal profit from achieving spectacular results as opposed to merely satisfactory ones and, therefore, rarely strives for them. The result of all this is a sated CEO but a stunted company.
Adapted from https://hbr.org/2017/09/comp-targets-that-work
1. The author of the passage would be most likely to attribute the research finding mentioned in the first paragraph to which of the following causes?
A. Most boards act in their personal best-interest even if it is to the detriment of their organization.
B. Most boards fail to set such executive performance targets that cannot be manipulated by the CEOs.
C. Most boards use closely correlated performance metrics to measure executive performance.
D. Most boards accept without debate the company and sector growth forecasts presented to them by the CEOs.
E. Most boards offer lucrative payouts to CEOs upon the achievement of the set performance targets.
A. Most boards act in their personal best-interest even if it is to the detriment of their organization.
B. Most boards fail to set such executive performance targets that cannot be manipulated by the CEOs.
C. Most boards use closely correlated performance metrics to measure executive performance.
D. Most boards accept without debate the company and sector growth forecasts presented to them by the CEOs.
E. Most boards offer lucrative payouts to CEOs upon the achievement of the set performance targets.
2. The passage implies that which of the following is likely to be true about metrics X, Y and Z if the CEOs who are given performance targets based on these three metrics are far more likely to meet their targets than to miss them?
A. The boards which set performance targets based on X, Y and Z metrics do not consult external analysts before deciding the targets.
B. X, Y and Z are quantitative metrics and, therefore, easy to track.
C. X, Y and Z encompass a broad range of corporate activities.
D. Achievement of the target value of one of the three metrics automatically results in achievement of the target values of the other two.
E. X, Y and Z are popular metrics used in executive performance targets.
A. The boards which set performance targets based on X, Y and Z metrics do not consult external analysts before deciding the targets.
B. X, Y and Z are quantitative metrics and, therefore, easy to track.
C. X, Y and Z encompass a broad range of corporate activities.
D. Achievement of the target value of one of the three metrics automatically results in achievement of the target values of the other two.
E. X, Y and Z are popular metrics used in executive performance targets.
3. According to the passage, which of the following is not a feature of good performance targets set by a board for its CEO?
A. They involve multiple metrics.
B. They are challenging to achieve.
C. They cannot be easily gamed by the CEO.
D. They reward the CEO for superlative performance.
E. They are aligned to the long-term good of the company.
A. They involve multiple metrics.
B. They are challenging to achieve.
C. They cannot be easily gamed by the CEO.
D. They reward the CEO for superlative performance.
E. They are aligned to the long-term good of the company.
4. Which of the following rationale to taper off CEO rewards for performance beyond the set targets can be inferred from the passage?
A. Most boards are concerned that executive compensation should seem reasonable to the shareholders.
B. It is highly unlikely that CEOs will achieve beyond their set targets.
C. CEOs are usually more interested in earning their bonus than in improving their performance beyond the set targets.
D. If the rewards are not capped around the set targets, CEOs are encouraged to game their performance.
E. If payouts increase at a constant rate relative to performance, CEOs are likely to take excessive risks to achieve higher and higher payouts.
A. Most boards are concerned that executive compensation should seem reasonable to the shareholders.
B. It is highly unlikely that CEOs will achieve beyond their set targets.
C. CEOs are usually more interested in earning their bonus than in improving their performance beyond the set targets.
D. If the rewards are not capped around the set targets, CEOs are encouraged to game their performance.
E. If payouts increase at a constant rate relative to performance, CEOs are likely to take excessive risks to achieve higher and higher payouts.
5. The passage supports each of the following statements EXCEPT
A. The performance targets of most CEOs are not aligned to their company's mission and values.
B. If the bonus of a CEO depends only on the earnings per share of his company, then he is likely to make a strategic choice that improves earnings per share even if it hurts revenue growth.
C. Most CEOs strive hard to hit the performance targets that are linked to their compensation.
D. The boards of most companies fail to set multiple performance targets for their CEOs.
E. In most companies, CEO rewards for performance do not increase at a steady rate.
A. The performance targets of most CEOs are not aligned to their company's mission and values.
B. If the bonus of a CEO depends only on the earnings per share of his company, then he is likely to make a strategic choice that improves earnings per share even if it hurts revenue growth.
C. Most CEOs strive hard to hit the performance targets that are linked to their compensation.
D. The boards of most companies fail to set multiple performance targets for their CEOs.
E. In most companies, CEO rewards for performance do not increase at a steady rate.
6. The author is primarily concerned with
A. Analyzing the consequences of an entity's behavior
B. Discussing the flaws in the way an entity discharges its duty
C. Giving counter-examples against a claim made about an entity
D. Enumerating the responsibilities of an entity
E. Suggesting a better way to execute a particular task
A. Analyzing the consequences of an entity's behavior
B. Discussing the flaws in the way an entity discharges its duty
C. Giving counter-examples against a claim made about an entity
D. Enumerating the responsibilities of an entity
E. Suggesting a better way to execute a particular task
Source: Manhattan Review
13 Nov 2019, 09:13
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Official Explanation
2. The passage implies that which of the following is likely to be true about metrics X, Y and Z if the CEOs who are given performance targets based on these three metrics are far more likely to meet their targets than to miss them?
Explanation
This question involves three performance metrics: X, Y and Z. 'Three to five metrics' were mentioned in the second paragraph of the passage. Quoting the relevant, simplified sentence from the Passage Analysis:
"(three to five performance metrics that are not closely correlated) cannot be gamed by the CEO."
So, if X, Y and Z were not closely correlated, they could not have been gamed by the CEOs.
Now, the question states that CEOs who are given X, Y and Z as the performance metrics are far more likely to meet their targets than to miss them. That is, these CEOs are able to game the performance metrics. It follows that X, Y and Z are in fact, closely correlated. That is, a change in one metric automatically leads to a corresponding change in the other metrics.
Let us analyze the options one by one.
A. This option is incorrect. The passage provides no grounds to suppose that 'performance targets that get gamed' are those in whose setting external analysts were not consulted. The relation of external analysts and the game-ability of performance targets has not been discussed or hinted at in the passage.
B. This option is incorrect. The trackability or quantitative nature of metrics is outside the scope of the passage.
C. This option is incorrect. Metrics that represent a 'broad range' of corporate activities may be 'uncorrelated' or 'closely correlated.' It would be impossible to make any conclusion about the extent of their correlation till one knows exactly what corporate activities they encompass.
D. This option is correct. It is in line with the analysis done above.
E. This option is incorrect. The game-ability of the metrics suggests their close correlation and not their popularity.
Answer: D
Explanation
This question involves three performance metrics: X, Y and Z. 'Three to five metrics' were mentioned in the second paragraph of the passage. Quoting the relevant, simplified sentence from the Passage Analysis:
"(three to five performance metrics that are not closely correlated) cannot be gamed by the CEO."
So, if X, Y and Z were not closely correlated, they could not have been gamed by the CEOs.
Now, the question states that CEOs who are given X, Y and Z as the performance metrics are far more likely to meet their targets than to miss them. That is, these CEOs are able to game the performance metrics. It follows that X, Y and Z are in fact, closely correlated. That is, a change in one metric automatically leads to a corresponding change in the other metrics.
Let us analyze the options one by one.
A. This option is incorrect. The passage provides no grounds to suppose that 'performance targets that get gamed' are those in whose setting external analysts were not consulted. The relation of external analysts and the game-ability of performance targets has not been discussed or hinted at in the passage.
B. This option is incorrect. The trackability or quantitative nature of metrics is outside the scope of the passage.
C. This option is incorrect. Metrics that represent a 'broad range' of corporate activities may be 'uncorrelated' or 'closely correlated.' It would be impossible to make any conclusion about the extent of their correlation till one knows exactly what corporate activities they encompass.
D. This option is correct. It is in line with the analysis done above.
E. This option is incorrect. The game-ability of the metrics suggests their close correlation and not their popularity.
Answer: D
Hope it helps
13 Nov 2019, 09:19
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Official Explanation
5. The passage supports each of the following statements EXCEPT
Explanation
We are looking for the one statement that is NOT supported by the passage.
Let us analyze the options one by one.
A. This option is correct. It is NOT supported by the passage. The passage only suggests that the performance targets of most CEOs are such that they can be – and are – manipulated by the CEOs. This, the passage suggests, may not be in the long-term interests of the company. However, the passage does not indicate that these targets are not aligned to the company's mission and values.
B. This option is incorrect. It is supported by the passage. The first line of the passage states that a CEO is likely to act in his own self-interest even if it hurts the interests of his company. So, if his bonus depends on EPS, he will strive to maximize EPS even if this hurts other vital metrics of the company (such as revenue growth).
C. This option is incorrect. It is supported by the passage. The passage provides many examples of how the CEOs even manipulate their performance so as to hit the targets that are linked to their compensation. The research finding quoted in the first paragraph also states that most CEOs hit their performance targets.
D. This option is incorrect. It is supported by the passage. The second paragraph mentions that the performance targets of CEOs are often based on a single metric.
E. This option is incorrect. It is supported by the passage. The third paragraph explains how the executive payouts are zero below the minimum threshold, then increase rapidly till the set target, and taper off above the target. So, the payouts do not increase steadily with the performance.
Answer: A
Explanation
We are looking for the one statement that is NOT supported by the passage.
Let us analyze the options one by one.
A. This option is correct. It is NOT supported by the passage. The passage only suggests that the performance targets of most CEOs are such that they can be – and are – manipulated by the CEOs. This, the passage suggests, may not be in the long-term interests of the company. However, the passage does not indicate that these targets are not aligned to the company's mission and values.
B. This option is incorrect. It is supported by the passage. The first line of the passage states that a CEO is likely to act in his own self-interest even if it hurts the interests of his company. So, if his bonus depends on EPS, he will strive to maximize EPS even if this hurts other vital metrics of the company (such as revenue growth).
C. This option is incorrect. It is supported by the passage. The passage provides many examples of how the CEOs even manipulate their performance so as to hit the targets that are linked to their compensation. The research finding quoted in the first paragraph also states that most CEOs hit their performance targets.
D. This option is incorrect. It is supported by the passage. The second paragraph mentions that the performance targets of CEOs are often based on a single metric.
E. This option is incorrect. It is supported by the passage. The third paragraph explains how the executive payouts are zero below the minimum threshold, then increase rapidly till the set target, and taper off above the target. So, the payouts do not increase steadily with the performance.
Answer: A
Hope it helps
