The conclusion of the stimulus is "this expectation (that the board of directors setting the salaries of executives will safeguard the economic health of the corporation rather than make its executives rich) is based on poor reasoning."
Why? We are told that a lot of the members of a corporation's board are themselves executives of some corporation and would be likely to benefit from setting generous benchmarks for other executives' salaries.
Ultimately the author points out that though the goal of having the board of directors set the executives salaries was to safeguard the economic health of the corporation, it actually works counter to this goal because many of these directors are themselves executives of other companies and would benefit from setting a high standard for executives salaries
Answer choice (C) states "many board members might let their self-interest as executives interfere with properly discharging their role, as board members, in setting executives' salaries."
This is exactly the point made by the author, that making the directors set the salaries is based on poor reasoning since a lot of the board members might let their self-interest get in the way of making unbiased decisions when setting executives' salaries.
Hope that was helpful! Please let us know if you have any other questions.
AMeyesNovember 4, 2014
Thank you very much for the detailed explanation; appreciate it.
KathSeptember 27, 2019
In this sentence "a lot of the members of a corporation's board are themselves executives of some corporation", are the "some corporation" the corporation the board resides? If not, how could the members of the board benefit from setting the benchmark executives salaries?
shunheJanuary 8, 2020
Hi @Kath,
Thanks for the question! The "some corporation" part actually refers to other corporations, and not the corporation that the board presides over. Say George and Joe are board members of corporation A. They themselves might be executives of corporations B and C; this is what is meant. In this case, members of the board might benefit from setting benchmark executives' salaries high because then they create a social norm that these salaries are supposed to be high, and so everyone else (including corporations B and C, where they are executives) also sets them high. If you can make the board members of corporations B and C think that a normal amount to pay an executive is $100 million, they're more likely to do it, which benefits you. Does that make sense? Hope it helps.
