Chief Executive Officers are Often Driven more by their Short-Term Personal Interests GMAT Reading Comprehension

Reading Passage Question

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.

“Chief Executive Officers are often driven more by their short-term personal interests.”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension. This GMAT Reading Comprehension consists of 6 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analysing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

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?

1. Most boards act in their personal best-interest even if it is to the detriment of their organization.
2. Most boards fail to set such executive performance targets that cannot be manipulated by the CEOs.
3. Most boards use closely correlated performance metrics to measure executive performance.
4. Most boards accept without debate the company and sector growth forecasts presented to them by the CEOs.
5. 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?

1. The boards which set performance targets based on X, Y and Z metrics do not consult external analysts before deciding the targets.
2. X, Y and Z are quantitative metrics and, therefore, easy to track.
3. X, Y and Z encompass a broad range of corporate activities.
4. Achievement of the target value of one of the three metrics automatically results in achievement of the target values of the other two.
5. 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?

1. They involve multiple metrics.
2. They are challenging to achieve.
3. They cannot be easily gamed by the CEO.
4. They reward the CEO for superlative performance.
5. 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?

1. Most boards are concerned that executive compensation should seem reasonable to the shareholders.
2. It is highly unlikely that CEOs will achieve beyond their set targets.
3. CEOs are usually more interested in earning their bonus than in improving their performance beyond the set targets.
4. If the rewards are not capped around the set targets, CEOs are encouraged to game their performance.
5. 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

1. The performance targets of most CEOs are not aligned to their company's mission and values.
2. 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.
3. Most CEOs strive hard to hit the performance targets that are linked to their compensation.
4. The boards of most companies fail to set multiple performance targets for their CEOs.
5. In most companies, CEO rewards for performance do not increase at a steady rate.

6. The author is primarily concerned with

1. Analyzing the consequences of an entity's behavior
2. Discussing the flaws in the way an entity discharges its duty
3. Giving counter-examples against a claim made about an entity
4. Enumerating the responsibilities of an entity
5. Suggesting a better way to execute a particular task

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