CHAPTER 10—PAY–FOR-PERFORMANCE: INCENTIVE REWARDS
TRUE/FALSE
1. Historically, incentive plans have NOT been a major element of strategic compensation management.
2. The performance “threshold” in incentive plans is the name given to the amount of the award.
3. Incentive plans can create an organizational environment of “shared commitment” since individuals
contribute to organizational success.
4. Meshing compensation and organizational objectives helps employees assume ownership of their jobs,
improve effort, and improve performance.
5. More than 80 percent of companies globally are offering variable pay programs.
6. For incentive plans to work effectively, employees must see a clear connection between the incentive
payments they receive and their performance.
7. Management must be careful to ensure that incentive payments are viewed as both a reward and an
entitlement.
8. Incentive plans may fail because employees have little ability to affect performance standards.
9. Incentive plans based on productivity can reduce labor costs.
10. For incentive plans to be successful, one of the most critical requirements is that managers be willing
to grant incentives based on differences in individuals, teams, or organizational criteria.
11. Organizational goals can impact choice of incentive plans.
12. Employees receive a specified payment for each unit produced under a straight piecework program.
13. Differential piece rate plans guarantee employees at least a base pay.
14. Under a differential piece rate plan, employees whose performance (i.e., production) exceeds the
standard amount of output receive a higher rate for all of their work than the rate paid to those who
have not exceeded the standard amount.
15. Under a straight piecework plan, five minutes is the standard time to produce one unit. The employee’s
hourly rate is $7.50. The piece rate is $1.50 per unit.
16. Major advantages of piecework systems are that the wage payment is simple to compute and the
organization can predict labor costs with reasonable accuracy.
17. Fixed pay is more flexible than variable pay.
18. Piecework may be inappropriate where technology changes are frequent.
19. Generally, a bonus plan does NOT become part of base pay.
20. The standard hour plan provides a monetary bonus for completing work in less than the specified time.
21. Standard hour plans are based on specific production standards set for individual jobs.
22. Standard hour plans are popular in service departments in automobile dealerships.
23. A bonus is supplemental to base wages.
24. Spot bonuses are usually provided for some employee effort that is not directly tied to an established
performance standard.
25. Merit raises may be perpetuated year after year even if performance declines.
26. Unlike a bonus, a merit raise may be perpetuated year after year even when performance declines.
27. Merit pay plans have been criticized because the merit increase may not be sufficient to raise all
employees’ base pay.
28. Employees may not believe that their compensation is tied to effort and performance and may not be
able to differentiate between merit pay and other types of pay increases.
29. Research clearly shows that noncash incentive awards are most effective as motivators when the award
is combined with a meaningful employee recognition program.
30. The operation of a merit pay plan depends on the effectiveness of the performance appraisal system.
31. Under a Scanlon or Improshare program, psychological ownership can play a stronger role in
employee performance than financial ownership.
32. Under an employee stock ownership plan, employees do not actually buy shares in an ESOP.
33. Generally, ESOPs are more likely to serve their intended purposes in privately held
companies than in publicly held ones.
34. Sales incentives can be affected by external factors beyond the salespersons control.
35. An advantage of using a straight salary plan to compensate sales employees is that employees can be
paid for performing only sales effort.
36. Under a straight commission plan, compensation is based entirely on a percentage of sales.
37. The percentage of cash compensation paid out in commissions is called a draw.
38. Under a straight commission plan sales people may be allowed a salary draw.
39. An analysis of executive salaries shows that the largest portion of executive pay is received in
long-term incentive rewards and bonuses.
40. Straight commission plans may induce salespeople to grant price concessions.
41. Executive-base salaries represent between 10-20 percent of total annual compensation.
42. Annual bonuses represent the main element of executive short-term incentives.
43. The principal reason guiding executive stock options as an incentive is for senior managers to have a
significant stake in the success of the business.
44. Stock options are rights attached to the achievement of specific organizational objectives.
45. A major criticism of short-term incentives for executives is that they place too much emphasis on
short-term performance, which may lead to negligence of longer-term considerations such as research
and development.
46. Perquisites are special benefits given to executive employees.
47. Compensation committees justify large executive salaries and bonuses in part because good executive
talent is in high demand.
48. Team bonuses may be paid out equally to each team member, in proportion to their base pay, or in
proportion to their relative contribution to the team.
49. Gainsharing plans are designed to increase employee job satisfaction and improve customer
awareness.
50. The idea behind the Scanlon Plan is that employees should not only offer ideas to improve
productivity, but should also be rewarded for those ideas.
51. The incentive payout under the Scanlon Plan is based upon increases in the sales volume of the
organization’s products.
52. Improshare plans promote interaction and support between management and employees.
53. Enterprise incentive plans allow all organizational members to participate in the plan’s payout.
54. In most profit-sharing plans, about 20 to 25 percent of net profits are shared with employees.
55. A weakness of profit-sharing plans is that employees do not have total control over the profitability of
the organization.
56. Because profit-sharing plans often fail to pay off for several years in a row, they can have limited
motivational value.
57. Stock options have become popular in service organizations, but have lost favor in manufacturing
firms.
58. Because of failing popularity and media scandal, most experts advocate abolition of stock options.
59. By using ESOPs, employers can provide retirement benefits for their employees at a relatively low
cost.
60. Employers use stock ownership incentive plans to increase employee “ownership” in the company.
61. ESOPs have been criticized because the pensioner can become dependent on the stock price.
62. Employees are comfortable with ESOPs because the federally established Pension Benefit Guaranty
Corporation guarantees them.
MULTIPLE CHOICE
1. The performance threshold in incentive pay programs is:
a.
piecework
b.
a minimum level an employee must reach in order to qualify for variable pay
c.
an organizational objective that signifies profitability
d.
an entitlement program
2. Contemporary reasons given by organizations for implementing incentive plans are:
a.
to improve or maintain high levels of productivity.
b.
to focus employee efforts on specific performance targets.
c.
to link compensation rewards to the achievement of results.
d.
all of the above.
3. Enterprise incentive plans include:
a.
Scanlon Plan
b.
Rucker Plan
c.
Stock options
d.
Sales incentives
4. More than _____ of companies globally are offering variable pay programs.
a.
20 percent
b.
40 percent
c.
60 percent
d.
80 percent
5. Group incentive plans include:
a.
Standard hour plan
b.
Improshare
c.
Stock options
d.
Sales incentives
6. Enterprise incentive plans include:
a.
Scanlon plans
b.
stock options
c.
executive incentive plans
d.
bonuses
7. A study of 20,000 employees found that ____ of “high potential” employees planned to leave their
company by the end of 2010 due to perceived pay inequity.
a.
27 percent
b.
38 percent
c.
47 percent
d.
58 percent
8. Which of the following is NOT an advantage of an incentive pay program?
a.
Incentives focus employee efforts on specific performance targets.
b.
Incentives are a way to increase equity and justice in an organization.
c.
Incentive payouts are fixed costs linked to the achievement of results.
d.
Incentives are a means to reward or attract top performers when salary budgets are low.
9. Studies have shown that variable pay plans may not achieve their proposed objectives or lead to
organizational improvements due to each of the following, EXCEPT:
a.
incentive plans sometimes fail to satisfy employee expectations for pay gains
b.
taxes are often a demotivator
c.
management may have failed to give adequate attention to the design and implementation
of the plan
d.
employees may have little ability to affect performance standards
10. When setting performance measures for incentive systems, we can say that the best measures are:
a.
quantitative, simple to understand, and show a clear relationship to improved performance.
b.
qualitative, flexible, and create competition between employees.
c.
those that allow employers to “ratchet up” standards and base rewards on qualitative
standards.
d.
those that reduce administrative costs, determine rewards based only on quantity, and
reward only exceptional employees.
11. According to Sammer, which of the following is NOT a characteristic of a successful incentive plan?
a.
Identify important organizational metrics that encourage employee behavior.
b.
Involve employees. Incentive programs should seem fair to employees.
c.
Payout formulas should be technically detailed, quantitative and extremely thorough to
prove that management took significant effort to create the plan.
d.
Establish a clear link between performance and payout.
12. One word, _____, describes the design of individual incentive plans.
a.
motivation
b.
comprehensiveness
c.
flexibility
d.
consistency
13. When employees receive a certain rate for each unit produced, they are working under which incentive
plan?
a.
differential piece rate
b.
standard piece rate
c.
straight piecework
d.
individual rate pay
14. When employees receive a higher rate of pay for all of their work if production exceeds a standard
level of output, they are working under which incentive plan?
a.
differential piece rate
b.
standard piece rate
c.
exception bonus rate
d.
individual rate pay
15. The standard time for producing one unit of work in a job paying $12.75 per hour was set at twelve
minutes. The piece rate would be ____ per unit.
a.
$1.95
b.
$2.55
c.
$2.95
d.
$3.15
16. A study on bonus vs. actual pay raises showed that improving one’s pay through merit increases by 1
percent would increase future performance by ___ percent.
a.
2
b.
5
c.
8
d.
10
17. Research shows that a merit increase in the range of _____ is necessary to serve as a pay motivator.
a.
3 to 5 percent
b.
7 to 9 percent
c.
11 to 13 percent
d.
15 to 17 percent
18. Rate busting refers to:
a.
increased productivity
b.
an increase in output that results in the disapproval of fellow employees
c.
setting incentive performance standards
d.
decreased productivity
19. Piecework is appropriate when:
a.
technology changes are frequent
b.
quality is more important than quantity
c.
productivity standards are difficult to develop
d.
the job is fairly standardized
20. If employees’ pay is based not on the actual amount of time it takes them to complete a job but instead
on a predetermined amount of time for completing the job, which incentive plan are they working
under?
a.
piece-rate plan
b.
standard hour plan
c.
time division plan
d.
completion pay system
21. An incentive given for a special employee contribution not directly tied to a performance standard is:
a.
a piece rate plan
b.
a differential piece rate
c.
a merit pay
d.
a spot bonus
22. An appropriate reward for a consumer service representative who worked long hours to fill a new
customer’s large order is:
a.
a piece rate
b.
a differential piece rate
c.
a merit pay
d.
a spot bonus
24. In 2011, a study by the American Psychological Association found that _____ of employees feel they
receive inadequate nonmonetary awards and recognition for their contributions at work.
a.
16 percent
b.
25 percent
c.
34 percent
d.
43 percent
25. These individuals are over the age of 60 and are less likely to spend money on themselves.
a.
Generation X
b.
Generation Y
c.
Baby Boomers
d.
Traditionalists
26. In order for organizations to minimize the problems of merit raises, they should use:
a.
labor market comparisons.
b.
employee input.
c.
merit guidelines.
d.
the opinions of several managers.
27. This group is between the ages of 25 and 41 and values a balanced lifestyle of work and play.
a.
Generation X
b.
Generation Y
c.
Traditionalists
d.
Baby Boomers
28. The straight commission plan is limited by all of the following disadvantages, EXCEPT:
a.
Salespeople will stress low-priced products
b.
Customer service after the sale is likely to be neglected
c.
Earnings tend to fluctuate widely between good and poor periods of business, and
turnover of trained sales employees tends to increase in poor periods
d.
Salespeople are tempted to grant price concessions
29. A grant of units equal in value to the fair market value or book value of a share of stock on a specified
date the executive will be paid the appreciation in the value of the units up to that time. This is known
as:
a.
Stock appreciation rights
b.
A stock purchase
c.
Restricted stock
d.
Phantom stock
30. A cash or stock award determined by increase in stock price during any time chosen by the executive
in the option period, which does not require executive financing is known as:
a.
Phantom stock
b.
Stock appreciation rights
c.
Restricted stock
d.
Performance shares
31. In most profit-sharing plans, about _____ of the net profit is shared.
a.
5 to 10 percent
b.
10 to 15 percent
c.
15 to 20 percent
d.
20 to 25 percent
32. Performance of sales people can be affected by all of the following external factors except:
a.
the sales territory
b.
changes in demand
c.
change in the sales volume standard
d.
seasonal fluctuations
33. A sales incentive plan that permits salespeople to be paid for performing various duties not reflected
immediately in their sales volume is known as:
a.
a merit plan.
b.
a straight salary plan.
c.
lump-sum merit pay.
d.
a standard hour plan.
34. According to the National Center for Employee Ownership, in 2010 approximately _____
organizations have employee stock ownership plans.
a.
3,500
b.
10,500
c.
17,500
d.
24,500
35. A compensation plan that compensates sales employees based on a percentage of sales is known as a:
a.
straight ratio plan.
b.
straight salary plan.
c.
straight commission plan.
d.
straight bonus plan.
36. Which of the following is NOT one of the simple rules for maintaining motivation among
professionals?
a.
provide clear goals
b.
give prompt feedback
c.
reward performance quickly
d.
eliminate autonomy in work
37. Executive compensation consists of all of the following except:
a.
base salary.
b.
proficiency adjustments.
c.
perquisites.
d.
short-term incentives or bonuses.
38. Executive base salaries represent between ____ percent of the total annual compensation.
a.
10 to 20
b.
20 to 30
c.
30 to 40
d.
40 to 50
39. The greatest influence on executive base salary is most likely:
a.
the amount of short-term incentives received.
b.
the amount of long-term incentives received.
c.
the levels of competitive salaries in the job market.
d.
the time spent in the occupation.
40. When computing executive pay, ____ link operational yardsticks to traditional gauges.
a.
performance markers
b.
global standards
c.
application rewards
d.
balanced scorecards
41. Management should guard against incentive payments being seen as _____.
a.
too competitive
b.
equitable
c.
permanent
d.
an entitlement
42. Which of the following is not an executive long-term incentive program?
a.
stock price appreciation grants
b.
restricted stock and restricted cash grants
c.
assigned benefits
d.
performance-based grants
43. Long-term incentive plans in which rights are granted to executives to purchase shares of their
company’s stock at a fixed price for a fixed period of time are known as:
a.
stock options.
b.
stock grants.
c.
restricted stock.
d.
performance shares.
44. Which plan provides opportunities for executives to purchase shares of their organization’s stock
valued at full market or a discounted price?
a.
Stock options
b.
Stock appreciation rights
c.
Stock purchase
d.
Phantom stock
45. Which of the following is an individual type of incentive plan?
a.
Improshare
b.
lump sum merit pay
c.
stock options
d.
employee stock ownership plans
46. Special benefits given to executive employees, such as assigned chauffeurs, country club
memberships, and special vacation policies, are known as:
a.
executive rewards
b.
perquisites
c.
golden parachutes
d.
assigned benefits
47. Compensation committees justify large executive compensation packages for all of the following
reasons except:
a.
effective executives create shareholder value
b.
good executive talent is in demand
c.
the pay gap between the CEO and employees builds credibility
d.
large incentive reward superior performance
48. A major concern of executive compensation involves:
a.
timing of the bonus.
b.
the amount of compensation.
c.
the lack of perquisites.
d.
lack of objective market data.
49. Group incentive plans do all of the following except:
a.
enable employees to share the benefits of improved efficiency
b.
encourage cooperation
c.
reduce free-ride effect
d.
reward for total contribution to organizational performance
50. A problem with creating team incentive plans is:
a.
they encourage cooperative rather than individualistic behavior
b.
not all teams are alike
c.
they enable employees to share efficiency gains
d.
they pay only when agreed-upon standards are met or exceeded
51. Team incentive bonuses may be paid out in all of the following ways except:
a.
distributed equally among team members
b.
distributed in proportion to each member’s base pay
c.
distributed in proportion to each member’s relative contribution to the team
d.
distributed on the basis of individual performance appraisal
52. Common output measures for productivity include:
a.
sales
b.
materials
c.
labor
d.
total costs
53. The gainsharing plan that has as its most significant feature effective employee participation through
committee representation is:
a.
profit sharing.
b.
the Rucker Plan.
c.
the Scanlon Plan.
d.
Improshare.
54. The philosophy behind the Scanlon Plan is that:
a.
employees should make suggestions to improve performance and be rewarded for their
contributions.
b.
organizational profits should improve through sales efforts.
c.
managers and employees should establish quality and quantity goals for optimum
organizational performance.
d.
rewards are shared with employees based on improved profits.
55. When the determination of a bonus includes both production employees and nonproduction employees
and this bonus is based on overall group productivity, which type of gainsharing program is being
used?
a.
profit sharing
b.
the Rucker Plan
c.
Improshare
d.
the Scanlon Plan
56. Profit sharing refers to any procedure by which an employer pays employees:
a.
an incentive based on their merit.
b.
an incentive based on labor cost savings.
c.
a bonus based on the overall productivity of their particular work group.
d.
current or deferred sums based on the organization’s financial performance.
57. The purpose of a profit-sharing plan is to:
a.
allow workers to contribute specific knowledge to improving the organization.
b.
motivate a total commitment to the organization as a whole.
c.
enable workers to share in labor cost savings.
d.
instill commitment to the employee’s immediate work group.
58. The success of the Lincoln Electric Company profit-sharing plan rests largely on:
a.
contributions by employees.
b.
objective standards.
c.
comparison data between departments.
d.
economics of the review period.
59. Disadvantages of profit sharing include all of the following except:
a.
because payments are made only once a year, they may lose their motivational value.
b.
plans may not pay off for several years in a row.
c.
effective profit-sharing plans require a second HR program.
d.
employee morale could drop during time periods after no bonus has been given.
60. A popular and prevalent method used in many different industries for motivating and compensating
hourly, salaried, and executive personnel is:
a.
Rucker Plan
b.
Stock options
c.
Scanlon Plan
d.
Perquisites
61. ESOPs can qualify as tax-exempt employee trusts under section ____ of the Internal Revenue Code.
a.
402(k)
b.
457(k)
c.
401(a)
d.
407(k)
62. Advantages of ESOPs include all of the following except:
a.
employers are able to provide retirement benefits to employees at a relatively low cost.
b.
the employees’ pensions are less vulnerable due to diversification.
c.
ESOPs can increase employees’ pride of ownership.
d.
ESOPs can provide an incentive for employees to increase productivity.
63. A major problem of ESOPs is that:
a.
motivation of employees is rarely achieved with ESOPs.
b.
employees view the ESOP as a form of management control.
c.
ESOPs place employees’ pensions at risk because they are tied to the market performance
of the organization.
d.
because of the cash involved, ESOPs can be damaging to the financial well-being of the
organization.
64. According to one budget survey, what percentage of reporting organizations use variable pay?
a.
100
b.
80
c.
60
d.
40
65. Noncash incentive rewards are most effective as motivators when the award:
a.
is a complete surprise to the recipient
b.
is combined with a meaningful employee recognition program
c.
grows every year it is given
d.
is tailored to individual employees
66. Compensation specialists recognize all the following generations of employees except:
a.
Generation X
b.
Generation Y
c.
Boomers
d.
Synthesizers
67. The most widely used sales incentive program is the ____________________ plan.
a.
straight salary
b.
straight commission
c.
combined salary and commission
d.
commission plus bonus
68. As early as 1984, management guru Peter F. Drucker argued that CEO pay had ________.
a.
fallen way too low
b.
barely kept up with inflation
c.
been too much influenced by government regulation
d.
rocketed out of control
ESSAY
1. Briefly discuss three individual incentive plans.
2. Discuss the problems identified with merit raises. As a manager what would you do to insure that
merit raises fulfilled their intended value?
3. Identify the principal methods for compensating salespersons and the advantages of each method.
ANS:
4. Briefly describe the Scanlon Plan.
5. What are the pros and cons of high executive pay?
6. Discuss the advantages of incentive pay programs.
ANS:
The advantages of incentive pay programs include the following:
