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Defenders of runaway CEO pay argue that market forces are at work
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18 Feb 2026, 00:24
18 Feb 2026, 00:24
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Defenders of runaway CEO pay argue that market forces are at work determining executive compensation levels and CEOs are rewarded for increasing their company's stock prices. But are America's CEOs entitled to such lucrative pay deals based on their performance? In 1998, the business press exploded with stories of pay for mediocrity: When it comes to executive pay, stock option grants appear to have the Midas touch. As the stock market has broken record after record, they have become an increasingly popular form of executive compensation.
According to compensation analysts, stock options make up two-thirds of a CEOs pay, up from one-third in the 1960s. Instead of having to beat their competitors, CEOs with stock option-fueled compensation packages are graded on a curve: the rising stock market. As stock prices increase generally, even mediocre CEOs can realize large gains from their options. Analysts estimate that only a quarter of option grants awarded to CEOs contain any sort of link to performance, such as premium-priced or indexed stock options. But executive equity incentive plans can hurt shareholders. A recent research studied the largest U.S. companies by adjusting for the value of their executive's stock options. The study found that 11 firms went from profit to loss, and 13 had their profits halved. In addition, the study found that the average potential dilution of shareholder value from stock options is 9.2 percent for S&P 500 companies.
According to compensation analysts, stock options make up two-thirds of a CEOs pay, up from one-third in the 1960s. Instead of having to beat their competitors, CEOs with stock option-fueled compensation packages are graded on a curve: the rising stock market. As stock prices increase generally, even mediocre CEOs can realize large gains from their options. Analysts estimate that only a quarter of option grants awarded to CEOs contain any sort of link to performance, such as premium-priced or indexed stock options. But executive equity incentive plans can hurt shareholders. A recent research studied the largest U.S. companies by adjusting for the value of their executive's stock options. The study found that 11 firms went from profit to loss, and 13 had their profits halved. In addition, the study found that the average potential dilution of shareholder value from stock options is 9.2 percent for S&P 500 companies.
1. The primary purpose of the passage is
(A) to explain CEOs stock-option-fueled compensation packages.
(B) to criticize the excessive wages of corporate CEOs.
(C) to demonstrate the lack of parity among CEO compensation packages.
(D) to argue against non-performance-rated bonuses and point out the repercussions.
(E) to prove that paying CEOs through stock-options is doing more bad than good.
2. In the given passage, the author mentions the "Midas touch" near the end of first paragraph to
(A) compare the current economic situation to a historical one
(B) add a literary tone to a rather dreary financial text
(C) emphasize the lucrative nature of share option compensation packages
(D) criticize the mediocrity of some executives
(E) demonstrate the absurdity of share option compensation packages
3. According to the passage, which of the following is the basis on which the author criticizes CEOs stock-option compensation plans?
(A) They are determined by market forces.
(B) They have become an increasingly awarded form of compensation package.
(C) Their value is directly determined by company performance.
(D) They undermine the value of shares.
(E) They feature more and more as performance-based incentives.
4. According to the passage, keeping in view the CEOs stock option compensation packages, with which of the following would the author agree?
(A) Currently companies consider their stocks' performances more than their actual performances.
(B) The number of stock option compensation packages has risen two thirds over the last few decades.
(C) CEOs stock option compensation packages should consist of premium-priced or indexed stock options only.
(D) CEOs stock option compensation packages are unduly awarded to CEOs despite companies performing well in the market.
(E) CEOs stock option compensation packages enhance only stock market figures, especially in the case of the compensation packages of mediocre CEOs.
5. Which of the following would best categorize the author's attitude towards stock-optionbased CEO pay, as given in the passage?
(A) Restrained criticism
(B) Conditional approval
(C) Unconditional disgust
(D) Absolute intolerance
(E) Unjustified disapproval
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Defenders of runaway CEO pay argue that market forces are at work
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01 Mar 2026, 13:04
01 Mar 2026, 13:04
Expert Reply
EXPLANATION QUESTION #1
This is a main purpose question from the general category.
We have derived the main point already; let's analyze the options one by one.
(A) This option is incorrect because the author does more than just explain CEO's stock option-linked compensation packages. He makes an effective case against them as part of a CEO's pay. Had the option been "to explain the demerits of CEOs stock option-fueled compensation packages", it would have been correct.
(B) This option is incorrect because the author did not explicitly express that he has an issue with the excessive pay of CEOs. The author has an issue with the mechanism of payment-stock options. Perhaps the author is fine with the excessive pay if it is linked to profit of the company or another indicator rather than stock prices.
(C) This option is incorrect because the author does not discuss lack of parity (equality) among CEO compensation packages. In fact, he implies that all CEOs, even the mediocre ones, get paid too highly.
(D) This option is incorrect because the author does not argue against bonuses. He argues against excessive pay. This is a tricky option because the author does suggest that performance-linked pay is not as bad as pay given for stock market performance of the company. However, he does not argue as much against bonuses as against compensation packages.
(E) This is the correct answer. This matches our deductions. He does criticize the rising pay of CEOs via stock options. He quotes examples of companies undergoing losses, and dilution of shareholder value.
The correct answer is E .
This is a main purpose question from the general category.
We have derived the main point already; let's analyze the options one by one.
(A) This option is incorrect because the author does more than just explain CEO's stock option-linked compensation packages. He makes an effective case against them as part of a CEO's pay. Had the option been "to explain the demerits of CEOs stock option-fueled compensation packages", it would have been correct.
(B) This option is incorrect because the author did not explicitly express that he has an issue with the excessive pay of CEOs. The author has an issue with the mechanism of payment-stock options. Perhaps the author is fine with the excessive pay if it is linked to profit of the company or another indicator rather than stock prices.
(C) This option is incorrect because the author does not discuss lack of parity (equality) among CEO compensation packages. In fact, he implies that all CEOs, even the mediocre ones, get paid too highly.
(D) This option is incorrect because the author does not argue against bonuses. He argues against excessive pay. This is a tricky option because the author does suggest that performance-linked pay is not as bad as pay given for stock market performance of the company. However, he does not argue as much against bonuses as against compensation packages.
(E) This is the correct answer. This matches our deductions. He does criticize the rising pay of CEOs via stock options. He quotes examples of companies undergoing losses, and dilution of shareholder value.
The correct answer is E .
Re: Defenders of runaway CEO pay argue that market forces are at work
[#permalink]
01 Mar 2026, 13:05
01 Mar 2026, 13:05
Expert Reply
EXPLANATION QUESTION #2
Let us deduce what point the author makes around this phrase to understand why the author mentions it. The author uses the phrase "Midas touch" and states that the share option packages are extremely lucrative in nature because he talks about stock markets breaking records. Thus, he wants to emphasize that stock options are like "gold" and have the "Midas touch" because their value will appreciate greatly.
Let's analyze the options one by one.
(A) This option is incorrect because no historical economic situation has been discussed that involves "Midas". The author does compare compensation packages from today to those of the 1960s, but he does not mention "Midas touch" for that purpose.
(B) This option is incorrect because the author does not make any literary emphasis or comparison.
(C) This is the correct answer. This matches our deductions. The author does use the phrase to explain how lucrative the stock options are.
(D) This option is incorrect because the author does not criticize mediocre CEOs, but criticizes the fact that mediocre CEOs get paid as much as any other CEO.
(E) This option is incorrect because the author does not use of this phrase to prove that stock option compensation packages are absurd (illogical). He makes that point in the next paragraph.
The correct answer is C.
Let us deduce what point the author makes around this phrase to understand why the author mentions it. The author uses the phrase "Midas touch" and states that the share option packages are extremely lucrative in nature because he talks about stock markets breaking records. Thus, he wants to emphasize that stock options are like "gold" and have the "Midas touch" because their value will appreciate greatly.
Let's analyze the options one by one.
(A) This option is incorrect because no historical economic situation has been discussed that involves "Midas". The author does compare compensation packages from today to those of the 1960s, but he does not mention "Midas touch" for that purpose.
(B) This option is incorrect because the author does not make any literary emphasis or comparison.
(C) This is the correct answer. This matches our deductions. The author does use the phrase to explain how lucrative the stock options are.
(D) This option is incorrect because the author does not criticize mediocre CEOs, but criticizes the fact that mediocre CEOs get paid as much as any other CEO.
(E) This option is incorrect because the author does not use of this phrase to prove that stock option compensation packages are absurd (illogical). He makes that point in the next paragraph.
The correct answer is C.
