Question

“Based on an examination of twenty-two companies that announced large layoffs during 1994, a study found a positive correlation (0.31) between size of the layoff and the compensation of the CEOs” A news report quoted the study and stated that “a recent study showed that CEOs higher salaries cause companies to layoff more employees”.

1) Do you agree with the statement of the news report? Why?

2) Provide a possible explanation for the observed association between CEOs’ pays and size of layoff.

Answer 1

1)

We do not agree with the statement of the news report. Correlation does not imply causation. The positive correlation between size of the layoff and the compensation of the CEOs suggests that the with the increase in compensation of the CEOs, we observe increase in size of the layoff and viceversa.

2)

There can be a confounding variable which can be the cause of increase in compensation of the CEOs and size of the layoffs.

For example economy slowdown may have caused large layoffs but CEO's salaries may have increased to work hard to make the company's perform in adverse conditions.