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Chapter 13Variable Pay and Executive Compensation


1.Susan, the president of the school board for a rural school district, is interested in implementing a pay-for-performance compensation system in the school. The school board has called you in as an expert in incentive compensation to explore this option. You tell Susan thata.pay-for-performance is not appropriate for public sector employees.b.a teacher pay-for-performance system rarely works unless the teachers are involved in the design of the system.c.teachers unions usually support the idea of pay-for-performance because it increases teacher pay which is usually low.d.improvements in student test scores are a non-controversial measure of teacher performance.

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2.What are variable pay plans?a.methods of tying compensation to the Consumer Price Index (CPI) in order to keep up with inflationb.additional tangible rewards given to employees for performance beyond normal expectationsc.compensation that increases as employees gain new job-related knowledge, skills, and abilitiesd.incentives to meet required performance standards

ANS:BPTS:1DIF:ModerateREF:p. 392OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Definitional

3.Traditional compensation systems pay employees differently based on their job responsibilities and base employee increases mainly ona.level of performance.b.growth in capabilities.c.increasing length of service.d.changes in the labor market pay rates.

ANS:CPTS:1DIF:EasyREF:p. 392OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

4.Which of the following is an assumption of variable-pay systems?a.Some jobs contribute more to organizational success than others.b.Employee performance is more a function of the design of the job and organizational support than of individual differences in effort or abilities.c.Equality in pay is a strong motivator of exceptional employee performance.d.Both good and poor performing employees will perceive a pay system that rewards high performance as satisfying.

ANS:APTS:1DIF:ModerateREF:p. 392OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

5.As director of compensation for BlueBottle Enterprises, you have implemented a highly successful pay-for-performance system. This system has worked successfully for three years as measured by a number of financial and non-financial measures. Because of this success you are considering quitting BlueBottle and setting up your own consulting firm to promote this system. Which of the following statements is TRUE?a.This will be a successful undertaking because effective pay-for-performance systems are translatable across industries.b.You should target poor-performing firms as potential clients because most firms performance will be enhanced by a pay-for-performance system.c.As long as most employees will experience an increase in pay with this system, they will be satisfied with it.d.You need to have a way to evaluate organizational cultures in order to select the organizations in which your pay-for-performance system will be effective.

ANS:DPTS:1DIF:ChallengingREF:p. 393OBJ:1NAT:AACSB AnalyticLOC:HRMTOP:Application

6.Performance incentives include all the following EXCEPTa.team bonuses.b.piece-rate systems.c.annual increases.d.profit-sharing.

ANS:CPTS:1DIF:EasyREF:p. 393 | Figure 13-1OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

7.In a TV interview, the CEO of Trevelyan, Inc., commented that the pay-for-performance system was working well at her company because, Now everyone is pulling in the same direction. What does the CEO mean by this observation?a.The pay-for-performance system is linking employee performance and the organizations strategic goals.b.Employees have high levels of satisfaction with pay.c.Employees are receiving higher total compensation.d.Important HR objectives have been achieved, such as reduction in turnover and better attendance.

ANS:APTS:1DIF:ModerateREF:p. 393OBJ:1NAT:AACSB AnalyticLOC:HRMTOP:Application

8.The CEO of MasterFiber Textiles attended a conference where he spoke with the CEO of Golden Fleece Manufacturing. Golden Fleece has had great success in implementing an individual pay-for-performance system. The CEO of MasterFiber has directed the vice president of HR to implement the Golden Fleece method at MasterFiber. The FIRST concern of the VP of HR should bea.Does the plan reward the appropriate employee actions?b.Can the plan be administered properly?c.Does the plan fit with the business strategies and culture at MasterFiber?d.Can MasterFiber afford the plan?

ANS:CPTS:1DIF:ChallengingREF:p. 393OBJ:1NAT:AACSB AnalyticLOC:StrategyTOP:Application

9.Caroline works on a design team that develops costumes for historically-based and fantasy movies. The teams designs are executed by professional seamstresses and tailors. Carolines a.job would be suited for individual pay for performance because one can objectively judge the artistic merits of the costumes.b.individual performance can be isolated and measured separately from her team members contributions.c.job would not be suited for pay for performance because the quality of the work product of the team is mostly based on subjective judgment. d.individual performance can be measured by the number of design drawings she produces, and her pay could effectively be tied to this number.

ANS:CPTS:1DIF:ChallengingREF:p. 394OBJ:1NAT:AACSB AnalyticLOC:HRMTOP:Application

10.It is important to make sure that what is being rewarded by the compensation system is strongly tied to organizational objectives, because people tend toa.guess what they think management wants done.b.produce what is convenient.c.produce what is measured and rewarded.d.avoid doing unpleasant tasks.

ANS:CPTS:1DIF:EasyREF:p. 394OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

11.Max is studying the new pay-for-performance incentive plan. Max realizes that under the new standards if he continues his normal rate of production, which takes a steady effort over the work day with few slack times where he can rest, he can continue to earn what he earns now. But if he puts forward maximum effort all day long, which will leave him physically and mentally exhausted by the end of the day, he can earn an extra $10 before taxes. Maxs current pay is about $30 an hour. Which of the statements is most likely to be TRUE?a.Max is likely to continue to exert his typical effort.b.No incentive pay system is likely to motivate higher effort from Max.c.If this incentive plan is not effective in motivating extra effort from Max, he is a low-motivation employee whose turnover would be functional.d.Max is likely to exert maximum effort every day in order to earn this production incentive.

ANS:APTS:1DIF:ChallengingREF:p. 395OBJ:1NAT:AACSB AnalyticLOC:Motivation ConceptsTOP:Application

12.As director of HR you need to calculate the return on investment of a new differential piece-rate system. To do this you need to calculatea.the ratio of the cost of the old incentive system to the cost of the new incentive system multiplied by the dollar value of the increase in production.b.the dollar value of the increase in production divided by the cost of the new incentive system.c.the ratio of the cost savings of the new incentive system compared with the return on investment which the shareholders expect.d.the dollar value of the additional production minus the cost of the new incentive system divided by the cost of the new incentive system

ANS:DPTS:1DIF:ChallengingREF:p. 395OBJ:1NAT:AACSB AnalyticLOC:HRMTOP:Application

13.Which of the following statements is TRUE?a.Global firms cannot use pay-for-performance systems because of variations in national culture.b.Global firms can use pay-for-performance systems if the organization has the same competitive strategy in each country in which it operates.c.Global incentive programs tend to be too complex to be understood by employees which undermines the programs effectiveness.d.Global firms can use incentive systems if they are adapted to appropriate goals in different geographic regions.

ANS:DPTS:1DIF:ChallengingREF:p. 395OBJ:1NAT:AACSB Reflective ThinkingLOC:Environmental InfluenceTOP:Conceptual

14.Potential metrics for variable pay plans include all of the following EXCEPTa.increase in market share.b.reduction of total compensation expense.c.increase in customer satisfaction levels.d.return on investment.

ANS:BPTS:1DIF:ModerateREF:p. 396 | Figure 13-2OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

15.HR-related performance measures for a variable pay plan include all the following EXCEPTa.absenteeism costs.b.turnover costs.c.customer satisfaction.d.accident rates.

ANS:CPTS:1DIF:EasyREF:p. 396 | Figure 13-2OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

16.Research shows that individual pay-for-performance compensation systems work best when they are accompanied bya.high levels of teamwork and cooperation among co-workers.b.directive supervision and strong central leadership.c.an entrepreneurial and individualistic organizational culture.d.employee distrust of top management motives.

ANS:CPTS:1DIF:ModerateREF:p. 397OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

17.An effect of variable pay plans is that ____ incentives increase the competition among individual employees.a.divisionalb.individual c.work teamd.organizational

ANS:BPTS:1DIF:EasyREF:p. 397OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

18.Bernard is very upset when he learns that the company is changing to a pay-for-performance system where lump-sum bonuses instead of raises will be used. The system will record the performance of each work team and reward everyone on the team equally. All of the following are reasons for Bernard to be upset EXCEPTa.Bernards base pay will be essentially frozen.b.Bernard is a low to average performer on his work team.c.Bernard is the highest individual performer on his team.d.The pay-for-performance plan is phrased in vague, technical terms.

ANS:BPTS:1DIF:ChallengingREF:p. 398 | p. 400OBJ:2NAT:AACSB AnalyticLOC:HRMTOP:Application

19.An individual incentive system will be counterproductive whena.the organization emphasizes teamwork and cooperation.b.there is a dynamic technological environment.c.it results in competition among the employees.d.the organizational culture stresses individualism.

ANS:APTS:1DIF:ModerateREF:p. 397OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

20.Which of the following statements is TRUE?a.The majority of employees covered by incentive systems are unhappy with them.b.A large majority of employers have incentive systems that cover all their employees.c.Unions tend to support monetary performance incentive plans if employers do not abandon pay for seniority.d.An assumption of variable pay systems is that some jobs contribute more to organizational success than do other jobs.

ANS:APTS:1DIF:ModerateREF:p. 392OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

21.Which of the following is classified as an individual variable pay plan?a.Scanlon planb.profit-sharingc.piece-rate d.employee stock options

ANS:CPTS:1DIF:EasyREF:p. 397 | Figure 13-3OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Definitional

22.After working five years as a service coordinator at BlueBottle Enterprises, Mandy has developed some timesaving shortcuts that allow her to process a higher volume of work than the other service coordinators. If Mandy would train her co-workers in her techniques, the entire department could be more efficient. The performance incentive system that would be LEAST likely to encourage Mandy to share her expertise with her co-workers would be a/ana.individual-level incentive system.b.team-based incentive system.c.organization-level incentive system.d.Scanlon plan.

ANS:APTS:1DIF:ModerateREF:p. 397OBJ:4NAT:AACSB AnalyticLOC:HRMTOP:Application

23.An individual-level pay-for-performance system would be LEAST effective for which of the following employees?a.an employee who guts chickens in a poultry processing plant.b.a sales clerk at a fashionable womens shoe store.c.the CEO of a middle-sized builder of manufactured housing.d.a marketing specialist on a cross-functional product development team.

ANS:DPTS:1DIF:ModerateREF:p. 397OBJ:2NAT:AACSB AnalyticLOC:HRMTOP:Application

24.____ is an example of a group or team variable pay system.a.Sales compensationb.Gainsharingc.Employee stock options.d.Deferred compensation

ANS:BPTS:1DIF:ModerateREF:p. 397 | Figure 13-3OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Definitional

25.Robert is paid by the number of bicycle tires he attaches to wheel rims. If he attaches more than his daily quota of tires, he receives 25 cents extra per extra tire. Robert is paid under a ____ system.a.pro-rated bonusb.differential piece-ratec.straight piece-rated.straight commission

ANS:BPTS:1DIF:ModerateREF:p. 397OBJ:2NAT:AACSB AnalyticLOC:HRMTOP:Application

26.A differential piece-rate system pays employeesa.one piece-rate wage for standard production, but less if producing below quota.b.one piece-rate wage for units produced up to a standard output, and a higher piece-rate wage for units produced over the standard.c.a higher rate per piece for employees with more experience and seniority.d.differential wages depending on the differing responsibilities in the production of each unit.

ANS:BPTS:1DIF:ModerateREF:p. 397OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Definitional

27.When Claudette found a flaw in a major outgoing order and corrected it before it was shipped, her boss immediately gave her a voucher to the best day spa in town. This type of incentive is called ana.immediate payout.b.spot bonus.c.golden handshake.d.spontaneous reward.

ANS:BPTS:1DIF:EasyREF:p. 398OBJ:2NAT:AACSB AnalyticLOC:HRMTOP:Application

28.The downside of bonuses is thata.they may cause low performing employees to quit.b.employees who are passed over may become jealous of the bonus recipient.c.a well-implemented bonus system may be more expensive to the firm than base pay raises for improved performance.d.bonuses are too trivial in amount to actually motivate exceptional behavior.

ANS:BPTS:1DIF:ModerateREF:p. 398OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

29.Bonuses are less costly to the organization than general wage increases, becausea.bonuses receive preferential tax treatment.b.the annual amount given as a bonus tends to be smaller than the annual amount given as a raise.c.bonuses are frequently given in the form of non-cash items.d.bonuses do not become part of employees' base wages.

ANS:DPTS:1DIF:ChallengingREF:p. 398OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

30.If a company has an annual competition to reward the store manager with the highest dollar sales in each state with a paid vacation to a luxury resort it will probablya.improve sales at the stores with the historically lowest dollar sales.b.help retain the store managers who feel they have a chance to win the award in the upcoming year.c.encourage teamwork among the store managers.d.increase morale of most of the store managers.

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31.The disadvantage of employee of the month type awards is thata.they can be seen as favoritism.b.they are typically awarded on the basis of objective criteria.c.it is difficult to link these awards with specific performance criteria.d.eventually all employees will have been employee of the month and the award will have lost its distinctiveness.

ANS:APTS:1DIF:ModerateREF:p. 399OBJ:2NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

32.At the annual awards banquet, all employees who have been with the company 30 years or more received their choice of a cruise or a week at a resort. This type of special incentive program is called a ____ award.a.recognitionb.golden handshakec.serviced.performance

ANS:CPTS:1DIF:ModerateREF:p. 399OBJ:2NAT:AACSB AnalyticLOC:HRMTOP:Application

33.The most common type of group/team incentive plan used by organizations is payinga.all team members the same base pay with equal bonuses based on team performance.b.team members different base pay, with equal bonuses based on team performance.c.all team members the same base pay with varying bonuses based on individual contribution to the teams performance.d.team members different base pay, with varying bonuses based on individual contribution to the teams performance.

ANS:BPTS:1DIF:ChallengingREF:p. 400OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

34.Distributing team incentives equitably means thata.each team member gets the same amount of bonus.b.team members are paid incentives that vary according to individual performance.c.teams that are in competition with one another are paid incentives based on their relative performance.d.each team in the company receives the same amount of discretionary incentive dollars to distribute.

ANS:BPTS:1DIF:ChallengingREF:p. 400OBJ:4NAT:AACSB Reflective ThinkingLOC:Motivation ConceptsTOP:Conceptual

35.One of the differences between individual incentives and group incentives is thata.individual incentives are more likely to be monetary whereas group incentives are more likely to be non-monetary.b.group incentives carry high trophy value for the members who receive them.c.incentives for group members tend to be allocated equitably whereas individual incentives tend to be allocated equally among employees.d.group incentives place social pressure on group members.

ANS:DPTS:1DIF:ModerateREF:p. 400OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

36.In designing the companys new team incentive plan, the vice president of HR wishes to strongly link the teams efforts with its effective performance. The timing of incentive payouts should bea.monthly.b.quarterly.c.semiannually.d.annually.

ANS:APTS:1DIF:EasyREF:p. 400OBJ:4NAT:AACSB AnalyticLOC:Motivation ConceptsTOP:Application

37.All of the following are conditions supporting successful use of group/team incentives EXCEPTa.cooperation is necessary to do the job.b.individual performance cannot be identified.c.group members decide how to allocate bonuses.d.employees understand how bonuses are earned and calculated.

ANS:CPTS:1DIF:ChallengingREF:p. 400OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

38.Lucretia Toys is investigating the use of team incentives in its production plant. Each work group is composed of about 25 individuals. As the manager of HR youa.recommend using equal payouts for each team member.b.express concern about the dilution of individual efforts on such large teams.c.urge management to go forward with the plan because every job can benefit from increased teamwork.d.recommend that management wait to implement any team incentive plan because this may trigger a union organizing attempt in a manufacturing environment.

ANS:BPTS:1DIF:ChallengingREF:p. 401OBJ:4NAT:AACSB AnalyticLOC:HRMTOP:Application

39.A consultant presenting a plan for a group/team incentive plan stresses that the money to be used as incentive rewards will be generated by improved organizational performance. This aspect of the plan is called the ____ principlea.liquidatingb.zero-sum-gamec.pay-as-you-god.self-funding

ANS:DPTS:1DIF:ModerateREF:p. 402OBJ:4NAT:AACSB AnalyticLOC:HRMTOP:Application

40.All of the following are typical performance measures in gainsharing plans EXCEPTa.overhead cost.b.labor costs.c.overtime hours.d.quality levels.

ANS:APTS:1DIF:ModerateREF:p. 402OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

41.The purpose of organizational-level incentives is toa.reward each employee for the performance of the entire company.b.aid in recruiting individualistic and entrepreneurial employees.c.motivate functional competition among employees to increase total performance.d.create an organizational culture of ethical behavior.

ANS:APTS:1DIF:ModerateREF:p. 403OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

42.Gainsharing plans are designed to elicit ____ effort from employees.a.minimum acceptableb.sustainablec.satisfactoryd.maximum possible

ANS:DPTS:1DIF:EasyREF:p. 402OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

43.To be effective, an organizational incentive program shoulda.give higher rewards to employees whose individual efforts are outstanding.b.include everyone from non-exempt employees to managers and executives.c.pay out every year regardless of whether the organization is profitable.d.reward the shareholders for investing in the business.

ANS:BPTS:1DIF:ModerateREF:p. 403OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

44.The primary objectives of organizational incentive systems includes all of the following EXCEPTa.to enhance employee innovation.b.to attract and retain employees.c.to increase productivity.d.to improve employee morale.

ANS:APTS:1DIF:ModerateREF:p. 403OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

45.A medium-sized law firm every year distributes a bonus to its employees, from clerks to partners, based on the fees it has earned on the cases it has won. Even though every employee has not worked on every case, the senior partners of the law firm feel that such a bonus motivates employees to cooperate with one another and assist each other in times of high work loads. This is a type of ____ incentive.a.groupb.teamc.individuald.organizational

ANS:DPTS:1DIF:ModerateREF:p. 403OBJ:4NAT:AACSB AnalyticLOC:HRMTOP:Application

46.For a profit-sharing plan to be effective, management musta.increase innovative solutions to technical problems.b.not have high expectations of performance impact in the first year of the program.c.be willing to disclose financial and profit information to employees.d.stabilize profits so that the annual payoff is consistent.

ANS:CPTS:1DIF:ModerateREF:p. 403-404OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

47.All of the following are drawbacks of profit-sharing plans EXCEPTa.profits of the organization are not entirely under employees control.b.they are not self-funding.c.employees rewards come a long time after their improved performance.d.management may resist disclosing financial and profit information.

ANS:BPTS:1DIF:ChallengingREF:p. 404-405OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

48.Melanie has worked for 20 years for a manufacturer of specialized paint for the auto industry. Melanie stayed with the company rather than taking other job offers because of the generous ESOP. Which of the following statements is FALSE?a.ESOPs are a low-risk way for employees like Melanie to be capitalists.b.The ESOP probably has made Melanie more focused on the companys performance than she would have been otherwise.c.If the company goes bankrupt, Melanie may lose some of her anticipated retirement.d.The ESOP was a successful retention tool in Melanies situation.

ANS:APTS:1DIF:ModerateREF:p. 404OBJ:5NAT:AACSB AnalyticLOC:HRMTOP:Application

49.Andrew is excited about the new program at work. He will be allowed to purchase 20 shares of stock at $45 per share for a limited period of time. Andrew is planning to take advantage of this ____ plan because he expects that the market price of the stock will far exceed $45 in a couple years.a.windfall incentiveb.gainsharingc.stock optiond.employee stock ownership (ESOP)

ANS:CPTS:1DIF:EasyREF:p. 404OBJ:5NAT:AACSB AnalyticLOC:HRMTOP:Application

50.The main advantage for an employer in setting up an employee stock ownership plan isa.increased protection against union organizing attempts.b.reduction of financial risk for employees and consequent reduction in employee turnover rate.c.increased employee productivity.d.favorable tax treatment on earnings earmarked for use in the ESOP.

ANS:DPTS:1DIF:ModerateREF:p. 404OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

51.The ____ type of pay-for-performance system is most likely to induce employees to behave unethically.a.commissionb.ESOPc.performance awardsd.gainsharing

ANS:APTS:1DIF:ModerateREF:p. 405OBJ:3NAT:AACSB Reflective ThinkingLOC:Ethical ResponsibilitiesTOP:Conceptual

52.A ____ approach for compensating sales staff is useful when serving and retaining existing client accounts is significantly more important than generating new sales and accounts.a.straight commissionb.salary-onlyc.salary plus commissiond.salary draw

ANS:BPTS:1DIF:ModerateREF:p. 405OBJ:3NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

53.Arnold sells oil field equipment. He is paid 10 percent of the dollar amount of the sales he has completed each quarter. This is Arnolds only compensation. He is on the ____ system.a.retainerb.pay-as-you-goc.deferred compensationd.straight commission

ANS:DPTS:1DIF:EasyREF:p. 405OBJ:3NAT:AACSB AnalyticLOC:HRMTOP:Application

54.The most frequently used form of sales compensation is thea.draw.b.straight commission.c.salary plus commission.d.differential commission.

ANS:CPTS:1DIF:EasyREF:p. 406OBJ:3NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

55.Poseidon Oceanic Supply has introduced a new sales compensation system that rewards sales staff based on a combination of individual goals and group sales goals. In implementing this program, the management of Poseidon hopes toa.motivate sales staff on the basis of individual entrepreneurialism.b.increase the amount of service to existing Poseidon customers.c.reduce opportunities for unethical behavior by sales staff.d.encourage teamwork among the sales staff.

ANS:DPTS:1DIF:ChallengingREF:p. 406OBJ:3NAT:AACSB AnalyticLOC:HRMTOP:Application

56.A major factor in making global incentive systems workable isa.the spread of U.S.-style individualism among workers in other countries.b.the development of Internet-based management software.c.the development of a large group of global workers who hold management and sales jobs in numerous countries throughout their careers.d.technology improvements that allow employees to telecommute worldwide.

ANS:BPTS:1DIF:EasyREF:p. 406OBJ:3NAT:AACSB TechnologyLOC:Information TechnologiesTOP:Conceptual

57.Gainsharing and goalsharing plans are ____ -level incentivesa.individualb.groupc.organizationald.industrial

ANS:BPTS:1DIF:EasyREF:p. 402OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

58.What is a "draw?"a.an amount advanced to a sales employee and repaid from future commissionsb.a system by which sales employees draw down their sales quotasc.a type of income equalization for tax purposes in which sales representatives can draw down their earnings from a high-income year and transfer them to a low-income yeard.a lump-sum payment or bonus at the end of the month

ANS:APTS:1DIF:ModerateREF:p. 406OBJ:3NAT:AACSB Reflective ThinkingLOC:HRMTOP:Definitional

59.At the heart of most executive compensation plans is the idea thata.at the executive level, status and image are as important as actual compensation.b.executives should be rewarded if the organization grows in profitability and value over a period of years.c.executive compensation should be based on the organizations current performance in the stock market.d.executives are more focused on their base compensation than they are on the variable pay.

ANS:BPTS:1DIF:ModerateREF:p. 407OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

60.Which of the following statements is TRUE about sales incentive plans?a.Most companies are satisfied with their sales incentive plans.b.Sales incentives are effective in generating sales productivity over targets in most cases.c.Most firms frequently change sales incentive plans.d.Sales staff are most satisfied when they are paid on straight commission plans because they are simple to calculate and result in high payouts.

ANS:CPTS:1DIF:ChallengingREF:p. 407OBJ:3NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

61.James is a sales representative for a large international import/export firm. For the past three years James has received an annual bonus, the maximum possible, between $37,000 and $42,000 because he met his sales targets. This year, James is planning on using his bonus to buy a new car, so he and his wife have been test driving cars. Which of the following statements is most likely to be TRUE?a.We can be fairly certain that James has exerted intense discretionary effort in the last four years.b.The actual dollar amount of the bonus is less important to James than its prestige effect.c.The bonus system in this company does not pay out a sufficiently large bonus to motivate maximum effort.d.James probably feels entitled to his anticipated bonus.

ANS:DPTS:1DIF:ChallengingREF:p. 407OBJ:3NAT:AACSB AnalyticLOC:Motivation ConceptsTOP:Application

62.All of the following are common measures of sales effectiveness EXCEPTa.sales relative to quota.b.sales staff satisfaction.c.new product sales.d.account retention.

ANS:BPTS:1DIF:EasyREF:p. 407 | Figure 13-7OBJ:3NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

63.Jessica works for one of the largest corporations in the U.S.. She makes the average pay of workers in this organization, $30,000. It would be a good guess that the CEO of Jessicas company makesa.$300,000.b.$1,500,000c.$3,000,000.d.$11,000,000.

ANS:DPTS:1DIF:ModerateREF:p. 408OBJ:6NAT:AACSB AnalyticLOC:HRMTOP:Application

64.In large for-profit organizations, the CEOs base salary isa.typically the largest part of his/her total compensation.b.often deferred until after the CEO retires.c.likely to be less than half of his/her total compensation.d.typically 20 times larger than the salary of the average worker in the organization.

ANS:CPTS:1DIF:ModerateREF:p. 408OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

65.The main reason for giving CEOs large incentive payments is toa.motivate high performance resulting in improved financial performance of the company.b.make it easier to attract and keep top executives.c.prevent top executives from taking unethical actions to increase their pay.d.satisfy the financial needs of top executives.

ANS:BPTS:1DIF:ModerateREF:p. 408OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

66.Regarding benefits, executivesa.typically have the same health benefits plans that other employees have.b.typically pay higher deductibles on their health care plans than do other employees.c.usually self-insure for their health care.d.often have health plans with no co-payments and no limitations on physician choice.

ANS:DPTS:1DIF:ModerateREF:p. 409OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

67.Organizations offer deferred compensation to executives in order toa.emphasize long-term performance of the organization.b.help executives with tax liabilities caused by incentive plans.c.place "golden handcuffs" on key executives to prevent their leaving prematurely.d.hide excessive one-time bonuses earned by executives.

ANS:BPTS:1DIF:ModerateREF:p. 408OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

68.Which of the following statements is FALSE?a.Research has not shown a strong relationship between CEO stock options and firm performance.b.The Sarbanes-Oxley Act was motivated by abuse of stock options by top executives.c.Even at the level of CEO, it is necessary to have formal, measurable performance targets in order for a discretionary bonus system to be effective.d.Perquisites are becoming less-widely used because most of them are now taxed as income to the executive.

ANS:APTS:1DIF:ModerateREF:p. 409-411OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

69.Use of the company helicopter, country club memberships, first class air travel, and a chauffeured limousine are examples ofa.executive mandates.b.perquisites.c.golden handcuffs.d.performance incentives.

ANS:BPTS:1DIF:EasyREF:p. 409OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Definitional

70.Executives value perks for all of the following reasons EXCEPTa.perks are status symbols.b.perks are continued after the executive retires.c.perks are often not taxed as income.d.perks are generally low cost to the company.

ANS:BPTS:1DIF:ModerateREF:p. 409OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

71.The executive compensation scandals at Enron, WorldCom, Tyco and others mainly involved abuse ofa.ESOPs.b.stock options.c.executive perks.d.deferred compensation.

ANS:BPTS:1DIF:ModerateREF:p. 410OBJ:6NAT:AACSB AnalyticLOC:Legal ResponsibilitiesTOP:Application

72.The most widely used long-term incentives for executives is/area.generous perquisites.b.ESOPs.c.stock options.d.annual cash incentives.

ANS:CPTS:1DIF:EasyREF:p. 410OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

73.The Board of Directors of Clementine Minerals and Mining has been challenged by shareholders about the total compensation of the CEO. In order to examine whether the CEOs pay is reasonable, the Board of Directors is addressing all of the following questions EXCEPTa.Would another company hire this CEO?b.How does the CEOs compensation compare with that of CEOs in other companies in the mining industry?c.Has the CEOs pay decreased in years when CMM lost money?d.What would an investor pay for the CEOs level of performance?

ANS:CPTS:1DIF:ChallengingREF:p. 410OBJ:6NAT:AACSB AnalyticLOC:Ethical ResponsibilitiesTOP:Application

74.The CEO of a major corporation is being interviewed by a reporter from a TV news show. The CEO makes over $50 million a year, and the reporter asks, Are you really worth $50 million a year to your company, especially when most of your employees make minimum wage? All of the following are plausible responses to the reporters question EXCEPTa.I have to make major decisions, and I work endless hours under great pressure.b.I am in charge of the company, and I am responsible for the results.c.Like a professional athlete, the top earning years of corporate executives are very limited.d.All George Clooney and Brad Pitt have to do is look handsome to make huge acting fees. I have the responsibility for a major corporation.

ANS:CPTS:1DIF:ChallengingREF:p. 411 | Figure 13-8OBJ:6NAT:AACSB AnalyticLOC:Ethical ResponsibilitiesTOP:Application

75.Financial measures that can be used to judge executive performance include all of the following EXCEPTa.earnings per share.b.net income before taxes.c.market share.d.return on equity.

ANS:CPTS:1DIF:ModerateREF:p. 411OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

76.What is the usual composition of the compensation committee?a.a subgroup of the Board of Directors including officers of the firmb.a subgroup of the Board of Directors who are not officers of the firmc.executives from other companies who serve on a committee that is separate from the Board of Directors, but which reports to itd.compensation consultants without executive management involvement

ANS:BPTS:1DIF:ModerateREF:p. 412OBJ:6NAT:AACSB Reflective ThinkingLOC:Ethical ResponsibilitiesTOP:Conceptual

77.OnionDome Manufacturing has suffered major losses in the last few years. Last year the board of directors fired the CEO and hired Simon Simple from one of its major competitors. Simple has laid off 20 percent of the hourly employees and 15 percent of the managers and professional staff in the company. He has sold off two unprofitable subsidiaries, and for the first time in five years the company has posted a small profit. This year the board of directors has given Simple a multi-million dollar bonus. Which of the following statements is TRUE?a.It is unusual for a company that has experienced mass layoffs to give executives large bonuses.b.Simple should not receive a performance bonus this year because the profits are due to manipulation.c.The Sarbanes-Oxley Act prohibits this type of bonus.d.The employees at OnionDome may feel that it is unethical for Simple to have received this bonus.

ANS:DPTS:1DIF:ModerateREF:p. 412OBJ:6NAT:AACSB AnalyticLOC:Ethical ResponsibilitiesTOP:Application

78.What is the role of a compensation committee of the Board of Directors?a.To assist the HR unit in developing overall pay and benefit programs for the organization.b.To develop a compensation package that ties the organizations overall compensation system to the organizations goals and objectives..c.To make recommendations to the shareholders on the compensation formula for members of the board of directors.d.To make recommendations to the Board of Directors on overall pay policies, salaries for top officers, stock options, and additional perks for executives.

ANS:DPTS:1DIF:ModerateREF:p. 412OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual


1.Unless incentives are monetary, employees are not motivated to exert discretionary effort.

ANS:FPTS:1DIF:ModerateREF:p. 392OBJ:1NAT:AACSB Reflective ThinkingLOC:Motivation ConceptsTOP:Conceptual

2.Some form of pay for performance program is appropriate for every organization.

ANS:FPTS:1DIF:ModerateREF:p. 393OBJ:1NAT:AACSB Reflective ThinkingLOC:StrategyTOP:Conceptual

3.If a sewing machine operator is paid mainly for the number of jeans he hems, he will sew as many hems as he can with little concern for the quality of the work.

ANS:TPTS:1DIF:EasyREF:p. 394OBJ:1NAT:AACSB AnalyticLOC:Motivation ConceptsTOP:Application

4.It is the dollar amount of incentives that motivates employee performance, not their trophy value.

ANS:FPTS:1DIF:ModerateREF:p. 398OBJ:2NAT:AACSB Reflective ThinkingLOC:Motivation ConceptsTOP:Conceptual

5.Team harmony is enhanced when team members decide as a group how to distribute performance bonuses to each team member.

ANS:FPTS:1DIF:ModerateREF:p. 400OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

6.A manager at your firm has recruited an individual who is individualistic and has a strong will to win. As the HR director, you think this individual will be a good match with the company because you are about to roll out an organizational level pay-for-performance system.

ANS:FPTS:1DIF:ChallengingREF:p. 401OBJ:1NAT:AACSB AnalyticLOC:Motivation ConceptsTOP:Application

7.If a gainsharing plan is successful, it will generate financial gains for the company over and above the extra pay that it is providing employees.

ANS:TPTS:1DIF:ModerateREF:p. 402OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

8.Gainsharing is an example of an incentive system that is self-funding.

ANS:TPTS:1DIF:ModerateREF:p. 402OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

9.Gainsharing encourages employees to increase their discretionary effort because the extra effort will produce financial gains.

ANS:TPTS:1DIF:ModerateREF:p. 402OBJ:4NAT:AACSB Reflective ThinkingLOC:Motivation ConceptsTOP:Conceptual

10.An organization should not attempt to implement a profit-sharing plan if employees are distrustful of management.

ANS:TPTS:1DIF:ModerateREF:p. 403-404OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

11.Unions sometimes oppose profit-sharing plans because the level of profits can be influenced by such things as accounting decisions made by management rather than employees efforts.

ANS:TPTS:1DIF:ModerateREF:p. 403OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

12.Stock option plans are restricted to employees who are managers or who are classified as exempt.

ANS:FPTS:1DIF:ModerateREF:p. 404OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

13.Technically, ESOPs are not employee incentive systems because the funds are not available to employees until they retire.

ANS:FPTS:1DIF:ChallengingREF:p. 404OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

14.ESOPs are very popular among employees because they reliably provide increased financial security in retirement.

ANS:FPTS:1DIF:ChallengingREF:p. 404OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

15.For profit-sharing to work, management must be willing to disclose financial and profit information to the employees.

ANS:TPTS:1DIF:ModerateREF:p. 404OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

16.Straight sales commission systems are not an appropriate compensation system when ethical concerns are paramount.

ANS:TPTS:1DIF:EasyREF:p. 405OBJ:3NAT:AACSB Reflective ThinkingLOC:Ethical ResponsibilitiesTOP:Conceptual

17.The traditional sales performance measure is individual sales revenue against established quotas.

ANS:TPTS:1DIF:EasyREF:p. 406OBJ:3NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

18.A straight-commission approach is best it is extremely important for the firm to retain existing clients as well as to lure new clients to the firm.

ANS:FPTS:1DIF:ModerateREF:p. 407OBJ:4NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

19.The ratio of executive pay to average employee pay in the U.S. is comparable to that of executives in other developed nations.

ANS:FPTS:1DIF:EasyREF:p. 408OBJ:6NAT:AACSB Reflective ThinkingLOC:Environmental InfluenceTOP:Conceptual

20.Perquisites may offer substantial tax savings for executives because some perks are not taxed as income.

ANS:TPTS:1DIF:ModerateREF:p. 409OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

21.The most widely used long term executive performance incentive is the ESOP.

ANS:FPTS:1DIF:EasyREF:p. 410OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

22.The Sarbanes-Oxley Act of 2002 regulates certain aspects of executive compensation.

ANS:TPTS:1DIF:EasyREF:p. 410OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

23.CEO performance is meaningfully measured only if financial objectives such as return on investment are considered. Non-financial measures are too easily manipulated to accurately reflect CEO performance.

ANS:FPTS:1DIF:ModerateREF:p. 411-412OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

24.Members of the board of directors who are also officers of the firm are barring by some firms from serving on the compensation committee.

ANS:TPTS:1DIF:ModerateREF:p. 412OBJ:6NAT:AACSB Reflective ThinkingLOC:Ethical ResponsibilitiesTOP:Conceptual

25.Amanda, a CEO of a large marketing firm, has been asked to serve on the compensation committee of another large marketing firm. If Amanda agrees to serve, she can except to be paid a large fee.

ANS:TPTS:1DIF:ModerateREF:p. 412OBJ:6NAT:AACSB AnalyticLOC:Ethical ResponsibilitiesTOP:Application


1.What factors will contribute to a successful variable pay plan?

ANS:A variable pay plan will be successful if it includes the following factors. (1) The variable pay plan is clear and understandable, and it is communicated to employees continually. (2) The employees see incentives as desirable. (3) The plan is appropriate for the organizations culture. (4) It uses realistic performance measures. (5) The plan is kept current. (6) it is linked to organizational objectives. (7) The performance results are clearly linked to payouts that truly recognize performance differences. Finally, (8) variable pay incentives are separate from employees base pay.

PTS:1DIF:ModerateREF:p. 392-395OBJ:1NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

2.Should performance incentives for teams be equal for all team members or based on individual performance?

ANS:If a team performs exceptionally well and is given an incentive, the incentive can either be awarded equally to all team members or it can be distributed in different amounts to different team members on some equitable arrangement. If all team members get the same reward regardless of salary level, seniority, performance or other factor, there may be less overall conflict among team members, but the high-performing members may be resentful. Research shows that there is more overall satisfaction with rewards that are based on individual performance than those that are equal for all. If incentives for team performance are allocated differentially among team members, those who receive smaller awards may be resentful. Consequently, there is no clear answer to this question, as the appropriateness of equality or equity depends on the individuals involved and the organizational circumstances.

PTS:1DIF:ModerateREF:p. 400-401OBJ:4NAT:AACSB Reflective ThinkingLOC:Motivation ConceptsTOP:Conceptual

3.Describe the various methods of compensating sales employees.

ANS:Compensation paid to sales employees is typically partly or entirely tied to sales performance. Plans include salary-only, straight commission, draw system, salary-plus-commission or bonuses. Although all plans are supposed to encourage the employee to sell more products or services, the plans have different effects. Salary-only encourages the least selling effort and focuses effort on servicing existing clients. Straight commission forces the employee to sell in order to have any compensation. A draw against straight commission still forces the employee to sell, but allows the employee to borrow against future (potential) sales and relieves him/her of some of the insecurity of working on commission. Salary-plus-commission or bonuses gives the stability of a salary with the sales motivation of a commission.

PTS:1DIF:ModerateREF:p. 405-406OBJ:3NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

4.Give two examples of organizational level incentives and explain how they link individual and firm performance.

ANS:Profit-sharing plans and ESOPs are two types of organizational level incentives. Both reward the employee if the organization as a whole performs well. Every employee in the program benefits if the organization is profitable (and, in the case of ESOPs, is successful in the long term). The purpose is to encourage cooperation and a sense of ownership among the employees. Profit-sharing distributes a percentage of profits to employees at the end of the year. Employees have to trust that management is being truthful about the level of profits, especially in years when payouts are low. ESOPs transfer stock ownership to the employee. If the stock has grown in value when the employee retires, the employee will benefit financially. Of course, if the firm does not prosper, neither do the ESOPs or the employees who rely on them for retirement funds.

PTS:1DIF:ModerateREF:p. 403-404OBJ:5NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual

5.How does executive compensation differ from the compensation packages provided for other employees in the organization? Describe some of the incentives available for executives.

ANS:At the heart of most executive compensation plans is the idea that executives should be rewarded if the organization grows in profitability and value over a period of years. Therefore, variable pay is a much larger proportion of executive pay than of pay for other employees. Although executive salaries can be high, they may be less than 30 percent of the executives total compensation. Executives receive special benefits in addition to regular benefits available to non-executives, including more generous health insurance plans. Since executive pay is so high, tax consequences are significant. This has led to the use of deferred compensation plans as well as estate-planning and tax guidance services for executives. Stock options are the most common method of rewarding executives for long run performance of the firm, but past unscrupulous manipulation of stock options led to the passage of the Sarbanes-Oxley Act that places more restrictions on these plans. Executives also receive various perks, such as club memberships, first class plane travel, chauffeurs, and cars. Finally, executives receive financial incentives and bonuses that may (or may not) be tied to the financial or non-financial performance of the firm. Ideally, the executive would be rewarded for the firms performance over a number of years, but in practice many incentives are based on shorter term objectives and have sometimes been manipulated by unethical executives. The link between executive performance and firm performance is sometimes tenuous.

PTS:1DIF:ModerateREF:p. 415-420OBJ:6NAT:AACSB Reflective ThinkingLOC:HRMTOP:Conceptual