QUESTION TEXT: The profitability of a business is reduced…
QUESTION TYPE: Necessary Assumption
CONCLUSION: It is unwise to pay senior staff in stock options, because it increases the wage gap.
REASONING: Employees with only a fixed salary won’t benefit from stock options. Anything that undermines morale is bad.
ANALYSIS: Necessary assumption questions are often easier than they look. You just have to find where the argument skipped a step.
We know that anything that damages morale is bad. Great. But the argument doesn’t show that wage gaps or stock options damage morale.
Oops. So we have no way of knowing stock options are bad.
The conclusion is very specific. It says that low morale is the reason that stock options reduce profits. Any answer that doesn’t help link stock options to low morale is wrong.
- CORRECT. This tells us that wage gaps lower morale. We know that anything bad for morale reduces profitability. This gives us a reason to believe that wage gaps are bad.
- Who cares? If reductions in morale usually come from natural disasters or incompetence (for example), that doesn’t tell us whether stock options are a good idea or a bad idea.
- This is just correlation. It doesn’t tell us that the stock options cause low profits.
- This doesn’t help link a wage gap to low morale. The argument said low morale was the reason profit sharing would hurt profits.
- This talks about sharing profits with employees, which is a different issue. The argument’s point is that you shouldn’t increase a wage gap by giving senior executives a share of profits.
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