Deck 11: Variable Pay and Executive Compensation

Question 1

In a TV interview, the CEO of Trevelyan, Inc., observed that the pay-for-performance system was working extremely well at her company. She explained it this way: "Now everyone is pulling in the same direction." Which of the following statements best clarifies what the CEO meant?

A)Important HR objectives, such as reduction in turnover and better attendance, have been achieved.
B)Employees are receiving higher total compensation.
C)The system is linking employee performance with the organization's strategic goals.
D)Employees are better aware of when their performance is outstanding.

Answer 1

C

Question 2

Which of the following is a strategic and financial metric for variable pay plans?

A)turnover cost reduction
B)increase in customer satisfaction levels
C)increase in market share
D)return on investment

Answer 2

D

Question 3

Which of the following is an assumption of variable pay systems?

A)Time spent each day is the primary measure of short-term contributions.
B)Some jobs contribute more to organizational success than others do.
C)Equality and equity in pay are both strong motivators of employee performance.
D)Length of time with the organization is the primary differentiating factor in employee performance levels.

Answer 3

B

Question 4

Which of the following statements best explains why bonuses are less costly to the organization than general wage increases?

A)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.

Question 5

Which of the following is associated with variable pay plans?

A)psychic satisfaction provided for employees
B)methods of tying compensation to the Consumer Price Index (CPI)
C)compensation that reflects the knowledge, skills, and abilities employees bring to the job
D)additional tangible rewards given for performance beyond normal expectations

Question 6

Consider why it is important for the employer to ensure that what it rewards is tied to organizational objectives. Which of the following indicates what employees tend to do?

A)avoid doing unpleasant tasks
B)produce what is convenient
C)produce what is measured and rewarded
D)guess what they think management wants done

Question 7

Which of these characteristics would work against developing effective individual incentive plans?

A)The organization puts an emphasis on teamwork.
B)Individual employee performances can be identified.
C)Employee growth and achievement are emphasized in the organizational culture.
D)Independent work is performed by employees.

Question 8

The CEO of FiberMaster Textiles spoke with the CEO of Golden Fleece Manufacturing while at a conference. There, he learned that Golden Fleece has had great success in implementing an individual pay-for-performance system. The CEO of FiberMaster has directed the vice president of HR to implement the Golden Fleece method at FiberMaster. Which of the following questions should be the first that the HR vice president addresses?

A)Can the plan be administered properly?
B)Does the plan fit with the business strategies and culture?
C)Does the plan reward the appropriate employee actions?
D)Can the company afford the plan?

Question 9

Bernard is 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. Which of the following is a reason for Bernard changing his mind about the system?

A)Bernard's base pay will be essentially frozen.
B)The pay-for-performance plan is phrased in vague, technical terms.
C)Bernard is the highest individual performer on his team.
D)Bernard is a low to average performer on his work team.

Question 10

Which of the following is an example of a group or team variable pay system?

A)deferred compensation
B)piece-rate
C)goalsharing
D)employee stock options

Question 11

Which of the following is classified as an individual variable pay plan?

A)cost reduction
B)profit sharing
C)employee stock options
D)piece-rate

Question 12

Caroline works on a design team that develops costumes for historically based and fantasy-based movies. The team's designs are executed by professional seamstresses and tailors. In terms of measuring performance, which statement provides the best assessment of Caroline's job?

A)Her job would be suited for individual pay for performance because one can objectively judge the artistic merits of the costumes.
B)Her job is ill suited for pay for performance because the work product of the team is mostly based on subjective judgment.
C)Individual performance can be isolated and measured separately from her team members' contributions.
D)Individual performance can be measured by the number of design drawings she produces, and her pay could effectively be tied to this number.

Question 13

A company wishes to evaluate the effectiveness of a pay-for-performance plan. In which of the following elements is it unnecessary to measure change?

A)return on investment
B)sales productivity
C)employee turnover
D)total compensation costs

Question 14

One effect of variable pay plans is to increase the competition among individuals. Which type of incentive is at work?

A)organizational
B)team
C)group
D)individual

Question 15

Which of the following provides an explanation of how a differential piece-rate system pays employees?

A)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)differential wages depending on the differing responsibilities in the production of each unit
D)a higher rate per piece for employees with more experience and seniority

Question 16

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. Under which of the following systems is Robert paid?

A)straight piece-rate
B)Scanlon
C)production commission
D)differential piece-rate

Question 17

Under which of these circumstances will an individual incentive system be counterproductive?

A)The organizational culture stresses individualism.
B)There is a dynamic technological environment.
C)The system results in competition among the employees.
D)The organization emphasizes teamwork and cooperation.

Question 18

Trident Industries sends employees their annual incentive pay in separate cheques rather than in their regular paycheques. Although this practice requires extra expense, which of the following is it intended to achieve?

A)to make clear to the employees that they have to re-earn their bonus every year
B)to ease employee income tax preparation
C)to highlight the difference in pay among employees
D)to pay a large bonus at the end of the year when employees most need it

Question 19

Which of the following is the main purpose of organizational incentives?

A)to aid in recruiting individualistic and entrepreneurial employees
B)to create an organizational culture of ethical behaviour
C)to reward each employee for the performance of the whole company
D)to motivate functional competition among employees to increase total performance

Question 20

Research shows that pay-for-performance works best when it is accompanied by something else. Which of these factors strengthens how well employees do?

A)directive supervision and strong central leadership
B)an entrepreneurial and individualistic culture
C)strong peer relationships among co-workers
D)social recognition and performance feedback

Question 21

Which of the following does NOT represent a common measure of sales effectiveness?

A)new product sales
B)sales relative to quota
C)sales staff satisfaction
D)account retention

Question 22

Which kind of effort are gainsharing plans designed to elicit from employees?

A)maximum possible
B)satisfactory
C)minimum acceptable
D)sustainable

Question 23

Poseidon Marine 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, what does the management of Poseidon probably hope to do?

A)encourage teamwork among the sales staff
B)increase the amount of service to existing Poseidon customers
C)eliminate opportunities for unethical behaviour by sales staff
D)motivate sales staff based on individual entrepreneurialism

Question 24

Which of the following conditions could hamper the successful use of group/team incentives?

A)Cooperation is necessary to do the jobs.
B)Inability to distinguish individual performances.
C)Perception among employees that the reward system is fair.
D)The incentive plan is designed by HR with input from top management.

Question 25

Which of the following statements explains what it means to distribute team incentives equitably?

A)Team members are paid incentives that vary according to individual performance.
B)Each team in the company receives the same amount of discretionary incentive dollars to distribute.
C)Teams that are in competition with one another are paid incentives based on their relative performance.
D)Each team member gets the same amount of bonus.

Question 26

Which of the following is a recognized downside of bonuses?

A)Employees who are passed over may become jealous of bonus recipients.
B)Bonuses are too trivial in amount to motivate exceptional behaviour.
C)A well-implemented bonus system may cost the firm more than base pay raises for improved performance.
D)They may cause low-performing employees to quit.

Question 27

Which of the following is NOT a typical performance measure used in gainsharing plans?

A)overtime hours
B)raw materials cost
C)labour costs
D)quality levels

Question 28

In one kind of gainsharing program, savings from productivity improvement in the number of work hours for a given number of units produced are shared between the company and the employees. Which of the following is the name of the program?

A)Improshare
B)Rucker plan
C)earnings-at-risk
D)Scanlon plan

Question 29

A consultant presenting a group/team incentive plan proposal stresses that the money to be used as incentive rewards will be generated by improved organizational performance. Which of the following principles is at work in such a plan?

A)zero investment
B)pay-as-you-go
C)financial independence
D)self-funding

Question 30

Arnold sells oil field equipment. He is paid 10 percent of the amount of the sales he has completed each quarter. This compensation is all that Arnold receives. Which type of pay system is he on?

A)retainer
B)straight commission
C)pay-as-you-go
D)deferred compensation

Question 31

Which of the following phrases best explains what a "draw" is?

A)a lump-sum payment or bonus at the end of the month
B)a means of making a sales employee's pay less secure in order to motivate higher performance
C)an amount advanced to a sales employee and repaid from future commissions
D)a system by which sales employees "draw down" their sales quotas

Question 32

Which of the following types of pay-for-performance systems is most likely to induce employees to behave unethically?

A)gainsharing
B)ESOP
C)performance awards
D)commission

Question 33

In designing the company's new team incentive plan, the vice president of HR wishes to make a strong link between the team's efforts and their effective performance. Which of the following periods is the way incentive payouts should be timed to achieve this?

A)quarterly
B)annually
C)semi-annually
D)monthly

Question 34

When Claudette found a flaw in a major outgoing order and corrected it before it was shipped, her boss gave her two vouchers to the best steak house in town. What is this type of incentive called?

A)a spot bonus
B)a surprise award
C)immediate payout
D)a spontaneous reward

Question 35

When the primary goal is to serve and keep existing clients rather than generating new sales and accounts, which of the following approaches to compensating sales staff is useful?

A)salary draw
B)salary only
C)salary plus commission
D)straight commission

Question 36

Lucerne Manufacturing is investigating the use of team incentives in its production plant. Each work group is composed of about 25 individuals. Given that you are the manager of HR, which of the following responses is the most appropriate for you to give?

A)expressing concern about the dilution of individual efforts on such large teams
B)urging management to go forward with the plan because every job can benefit from increased teamwork
C)recommending using equal payouts for each team member
D)recommending that management wait to implement any team incentive plan because this may trigger a union-organizing attempt

Question 37

Which of the following statements is TRUE about sales incentive plans?

A)Sales targets are effective in generating sales productivity over targets in most cases.
B)Sales incentive plans are frequently changed in most firms.
C)Sales staff are most satisfied when they are paid on straight commission plans because they are simple to calculate and result in high payouts.
D)Most companies are satisfied with their sales incentive plans.

Question 38

In the most common type of group or team incentive plan used by organizations, how are team members paid?

A)all team members paid the same base pay with varying bonuses based on individual contribution to the team's performance
B)team members paid different base pay with varying bonuses based on individual contribution to the team's performance
C)team members paid different base pay with equal bonuses based on team performance
D)all team members paid the same base pay with equal bonuses based on team performance

Question 39

At its annual awards banquet, a company gave all employees who had been with it 20 years or more their choice of a cruise or a week at a resort. How is the award most associated with this type of special incentive program best described?

A)golden handshake
B)recognition
C)service
D)performance

Question 40

Which of the following is the most frequently used form of sales compensation?

A)salary plus commission
B)straight commission
C)draw
D)differential commission

Question 41

For a profit-sharing plan to be effective, which of the following possible actions must management be willing to take?

A)to stabilize profits so that the annual payoff is consistent
B)to increase innovative solutions to technical problems
C)to lower expectations of performance impact in the program's first year
D)to disclose financial and profit information to employees

Question 42

Which of the following terms is most associated with use of the company helicopter, country club memberships, first-class air travel, and a chauffeured limousine?

A)perquisites
B)golden handcuffs
C)motivators
D)executive mandates

Question 43

Regarding benefits, which of the following statements describes the pattern that applies most to executives?

A)They often have health plans with no co-payments and no limitations on deductibles.
B)They typically have the same health benefits plans that other employees have.
C)They typically pay higher deductibles on their health-care plans than do other employees.
D)They usually "self-insure" for their health care.

Question 44

Which of the following is the main reason executives value perks?

A)visible symbols of status
B)linked to corporate performance
C)deferrable until retirement
D)low cost to the company

Question 45

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. Andrew has chosen to take advantage of this plan because he expects that the market price of the stock will exceed $45. Which kind of plan is it?

A)stock option
B)gainsharing
C)employee stock ownership (ESOP)
D)windfall incentive

Question 46

Why do organizations offer deferred compensation to executives?

A)to emphasize long-term performance of the organization
B)to hide excessive one-time bonuses earned by executives.
C)to help executives with tax liabilities caused by incentive plans
D)to place "golden handcuffs" on key executives so they won't leave prematurely

Question 47

From an employer's perspective, which of the following is the main advantage in setting up an employee stock ownership plan?

A)favourable tax treatment on earnings earmarked for use in the ESOP
B)reduction of financial risk for employees and consequent reduction in employee turnover rate
C)increased protection against union-organizing attempts
D)increased employee productivity

Question 48

Which of the following criteria does NOT provide a reliable base for allocating profits among employees?

A)each employee's earnings
B)the union status of each employee
C)the performance level of each employee
D)each employee's years of service with the company

Question 49

Which of the following statements does NOT accurately characterize the Scanlon plan?

A)Employees share in pre-established cost savings based on employee effort.
B)Research results indicate that productivity and quality are increased and costs are reduced.
C)Formal employee participation is necessary.
D)The norm is that worker bonuses are all paid out each time.

Question 50

Which of the following statements best puts into perspective the base salary of the CEO of a large for-profit organization?

A)It is typically20 times larger than the salary of the average worker in the organization.
B)It is typically the largest part of the CEO's total compensation.
C)It is likely less than half of the CEO's total compensation.
D)It is often deferred until after the CEO retires.

Question 51

Organizational incentive systems have several objectives. Which option does NOT represent a primary objective?

A)increasing productivity
B)enhancing employee morale
C)attracting and retaining employees
D)promoting employee innovation

Question 52

In one kind of gainsharing program, the employees receive a bonus if the ratio of labour costs to the sales value of production is below a set standard. Which of the following is the name of the program?

A)Scanlon plan
B)Improshare
C)earnings-at-risk
D)Rucker plan

Question 53

In order to motivate top corporate executives to focus on long-term organizational performance, which kinds of financial targets should incentives be based on?

A)monthly
B)annual
C)multiple year
D)quarterly

Question 54

Which of the following statements best describes the Rucker plan's approach to gainsharing?

A)The ratio measuring the gain compares labour costs to the value added in production.
B)The gain is the decrease in labour hours needed to produce a unit of product.
C)Employees receive a bonus if the ratio of labour costs to the sales value of production is below a set standard.
D)Base wage dissatisfaction is created that, in turn, triggers greater effort directed toward performance.

Question 55

Which of the following ideas is at the heart of most executive compensation plans?

A)Executives are more focused on their base compensation than they are on the variable pay.
B)Executive compensation should be focused on the organization's current performance in the stock market.
C)Executives should be rewarded if the organization grows in profitability and value over a period of years.
D)Executives view status and image as important as compensation.

Question 56

A medium-sized law firm every year distributes a bonus to its employees based on the size of the cases it has won. Even though not every employee has worked on every case, the senior partners of the law firm feel that such a bonus motivates employees to cooperate with and assist one another in times of high workloads. Which type of incentive are they using?

A)team
B)organizational
C)individual
D)group

Question 57

Jessica is an employee for one of the largest corporations in Canada. She makes the average pay of workers in this organization. The CEO of Jessica's company earns many times more than what she earns. Which of the following numbers is the closest multiplier?

A)200
B)10
C)50
D)100

Question 58

Enron, WorldCom, Tyco, and other companies underwent executive compensation scandals. Which of the following were mainly subject to abuse?

A)stock options
B)executive perks
C)deferred compensation
D)ESOPs

Question 59

According to research, which of the following do managers who adopt an earnings-at-risk incentive plan NOT need to be aware of?

A)the importance of employee participation in developing the plan
B)the need for an environment that does not put newer employees at a disadvantage
C)the level of personal control employees have over targeted performance behaviours
D)the negative reactions employees may have

Question 60

What must an organizational incentive program do in order to be effective?

A)include everyone from non-exempt employees to managers and executives
B)reward the shareholders for investing in the business
C)pay out every year regardless of whether the organization is profitable
D)give higher rewards to employees whose individual efforts are outstanding

Question 61

The addition of e-sales to sales generated by traditional personal-selling techniques has simplified the compensation of organizational sales staff.

Question 62

In order to send a clear motivational message, an organization must choose either an individual or an organization-wide pay-for-performance plan, rather than using both simultaneously.

Question 63

If a team incentive plan pays out the same bonus for each team member, most employees will be satisfied.

Question 64

People tend to produce what is measured and rewarded.

Question 65

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. The TV reporter asks, "Are you really worth $50 million a year to your company?" All but one of the following are plausible responses to the reporter's question. Which response is the CEO unlikely to make?

A)"I don't make as much as Julia Roberts does."
B)"Just like professional athletes, corporate executives have limited top earning years."
C)"I am in charge of the company, and I am responsible for the results."
D)"I have to make major decisions, and I work endless hours under great pressure."

Question 66

Which of the following outlines the usual composition of the compensation committee?

A)a subgroup of the board of directors, including officers of the firm
B)a subgroup of the board of directors who are not officers of the firm
C)compensation consultants without executive management involvement
D)executives from other companies who serve on a committee that is separate from the board of directors, but which reports to it

Question 67

The board of directors of Clementine Minerals and Mining (CMM) has been challenged by shareholders about the total compensation of the CEO. In order to examine whether the CEO's pay is reasonable, the board of directors is addressing all of the following questions but one. Which question has it most likely chosen to ignore?

A)Would another company hire this CEO?
B)How does the CEO's compensation compare with that of CEOs in other companies in the same industry?
C)What would an investor pay for the CEO's level of performance?
D)Is the CEO's pay more than 20 times higher than the pay of the average employee at CMM?

Question 68

A straight-commission approach is best when an organization emphasizes servicing and retaining existing accounts over generating new sales and accounts.

Question 69

Research shows that social recognition increases employee productivity significantly even when no pay-for-performance system is in place.

Question 70

When quality concerns are paramount, a piece-rate system of compensation is inappropriate.

Question 71

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

Question 72

Which of the following is NOT a financial measure that can be used to judge executive performance?

A)return on equity
B)earnings per share
C)net income before taxes
D)market share

Question 73

A person who is individualistic with a desire to "win" would be a good match with a company that uses an organizational-level pay-for-performance system.

Question 74

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

Question 75

What is the role of a compensation committee of the board of directors?

A)to make recommendations to the board of directors on overall pay policies, salaries for top officers, stock options, and additional perks for executives
B)to develop a compensation package that ties the organization's overall compensation system to the organization's goals and objectives
C)to assist the HR unit in developing overall pay and benefit programs for the organization
D)to make recommendations to the shareholders on the compensation formula for members of the board of directors

Question 76

It is not always appropriate to link pay to performance.

Question 77

Many companies have introduced team-based incentives, finding that teams are eager to handle pay decisions for co-workers.

Question 78

Piece-rate pay systems encourage work-safe practices.

Question 79

The most common group or team incentives are gainsharing or goalsharing goals.

Question 80

Enterprise incentive management systems are most useful for small firms that have difficulties in calculating complex sales commissions for their staff.