Chapter 11—Using Performance-Based Pay to Achieve Strategic Objectives
MULTIPLE CHOICE
1. In the chapter opening vignette “Managing Human Resources at the United States Postal Service”, the
success of the USPS’s approach to performance-based pay is due to:
a.
the support it has from top-level managers
b.
the use of clear and specific performance targets
c.
rewards that are clearly linked to performance
d.
pay consequences that are large enough to make a difference to employees
e.
all of the above
2. Decisions about how to design pay systems should follow a careful consideration of all of the possible
consequences associated with alternative forms of pay. Which of the following is the most important
reason for organizations to adopt the performance-based pay approach to compensating its employees?
a.
to reward top management
b.
to keep up with competitors
c.
to motivate employees
d.
to help achieve their strategic objectives
e.
to integrate the pay system with the organizational mission
3. The type of pay that the lowest percentage of employers ranked as most effective for achieving the
stated goal of achieving key strategic goals was:
a.
Base pay
b.
Deferred compensation
c.
Short-term bonuses
d.
Long-term bonuses
e.
Indirect compensation
4. As ranked by the highest percentage of employers, which strategic objective(s) was (were) achieved by
short-term bonuses?
a.
attracting and retaining top performers
b.
achieving strategic goals
c.
aligning participant behavior to business goals
d.
all of the above
e.
a and b only
5. Tying performance-based pay to achieving _____ usually improves performance in that area.
a.
growth
b.
profitability
c.
labor cost savings
d.
customer service excellence
e.
all of the above
6. _____ have spurred many organizations to reevaluate their use of merit raises.
a.
Value analyses
b.
Future cost considerations
c.
Governmental inquiries
d.
Legislative changes
e.
Social audits
7. Which of the following types of businesses would have the highest labor costs in proportion to other
costs?
a.
auto parts manufacturer
b.
Mississippi River barge transport company
c.
nursing home
d.
chicken-processing plant
e.
nuclear energy plant
8. Which of the following is true about performance-based pay:
a.
has no influence the decision of an applicant to not apply for a position
b.
seldom influences the final decision of an applicant to accept an offer of employment
c.
is more likely to attract good rather than poor performers
d.
allows the best performers to reap inconsequential rewards
e.
all of the above are true
9. The design choices for a performance management system include:
a.
types of performance pay
b.
rewards
c.
performance measures
d.
linking performance to rewards
e.
all of the above
10. In order for performance-based pay to be used effectively in an organization, it is necessary to:.
a.
link performance to outcomes important to management but not necessarily the employee
b.
develop valid performance measures
c.
promote a secret pay policy so everyone will work to their maximum
d.
do away with merit based pay increases
e.
reduce the cost of benefits so performance based pay can be afforded
11. Susan was referred to the Mastodon Company by her friend Angie. Susan has accepted a job in the
production department where Angie works. Angie is thrilled to have her friend working with her so
that they can now carpool to work. The company will pay Angie a(n) _______ bonus for encouraging
Susan to accept the company’s employment offer.
a.
acceptance
b.
up-front
c.
flat
d.
referral
e.
retention
12. In the feature Managing the Multicultural Workforce: Rewarding Managers Who Achieve Diversity
Goals, according to a study by the Society for Human Resource Management, most Fortune 500
companies do all of the following to create multicultural workforces EXCEPT:
a.
do not measure performance against diversity goals
b.
measure performance but do not use compensation to reward success
c.
rely on fair hiring methods to produce a multicultural organization
d.
pay managers to achieve diversity objectives
e.
all of the above are actions that Fortune 500 companies take to attain workforce diversity
13. By definition, there will be discrimination between employees in performance based pay plans.
Rewards awarded contingently cause low performers to improve and high performers to be more
satisfied. Which of the following answers the question “How can you do this fairly?”
a.
Make sure performance measures are subjective
b.
You can not be fair and discriminate at the same time
c.
Let the person closest to the performance – the immediate supervisor – make the reward
size decision
d.
Apply the same reward decision rules to all employees
e.
As long as you do not reward on the basis of gender, you are being fair.
14. As a compensation expert in the HR department, you have been assigned the responsibility for
reviewing the company’s reward system developing a performance-based pay system (PBPS) system.
All of the following are your responsibilities, except:
a.
working with line managers to establish the strategic objectives of the PBPS
b.
fairly implementing the PBPS
c.
monitoring the effects of the PBPS on employees and organizational outcomes
d.
develop and deliver training about PBPS to line managers and employees
e.
ensure the PBPS is consistent with other areas of HR
15. When tax rates for long-term capital gains are _____ relative to tax rates for ordinary income, stock
options become _____ popular.
a.
high, more
b.
low, more
c.
high, less
d.
low, less
e.
none of the above
16. Which of the following statements about merit pay plans is true?
a.
Under merit pay plans, performance is usually measured objectively.
b.
Traditional merit pay plans entail considerable risk for employees.
c.
With merit pay plans, base pay is set at the market rate.
d.
Merit pay raises will be removed if performance declines.
e.
The size of merit pay adjustments is typically greater than that awarded under the
incentive and earnings-at-risk plans.
17. Besides merit pay, two other types of performance-based pay are:
a.
retained earnings and reinvested pay
b.
incentive pay and 401K plans
c.
earnings at risk and protected earnings
d.
earnings at risk and incentive pay
e.
incentive pay and retained earnings
18. Which of the following statements about incentive pay plans is true?
a.
Unlike merit pay plans, base pay is set at the market rate for incentive plans.
b.
With incentive pay, high performers earn more but no permanent adjustment is made to an
employee’s base pay.
c.
Once earned, the incentive pay becomes a part of the employee’s base pay.
d.
Caps are used to keep incentive pay levels even with the industry pay level.
e.
There is no difference between how merit pay plans and how incentive pay plans are used
to reward employee performance
19. With which of the employee payment plans could an employee actually earn less than the market rate
if the employer considered his or her performance to be unsatisfactory?
a.
earnings-at-risk pay plan
b.
merit pay plan
c.
vested pay plan
d.
incentive pay plan
e.
none of the above because such a scenario is illegal
20. With _____, high performers earn more but no permanent adjustment is made to an employee’s base
pay.
a.
incentive pay
b.
equity pay
c.
fixed earnings
d.
retained earnings
e.
merit pay
21. Henry was able to bring his project to retool the plant to completion 10-days ahead of schedule. For
this achievement, Henry received (as promised) a payment of $1,000 per day for each day he saved,
plus an all-expense-paid one-week trip to Paris for him and his significant other. Which of the
following is true?
a.
the monetary payment is performance-based pay, the trip is a benefit
b.
the monetary payment is performance-based pay, the trip is a perk
c.
the monetary payment is performance-based pay, the trip is a performance-based
nonmonetary reward
d.
Neither of these qualifies as performance-based pay/rewards because Henry is a manager,
not a production employee.
22. An executive’s average incentive payout is about _____ percent of base pay compared to the average
technical/professional’s incentive payout of 8 percent.
a.
200
b.
100
c.
30
d.
50
e.
25
23. To be effective, performance-based systems must do all of the following except:
a.
specify and measure performance
b.
specify method for linking pay to performance
c.
specify level of aggregation for reward distribution
d.
gain employee acceptance
e.
all of the above are necessary
24. _____ are used to determine which employees are covered by various components of a total pay plan.
a.
Rules of earnings dispensation
b.
Eligibility rules
c.
Equal Pay Act guidelines
d.
Rules for qualification
e.
The principles of pay equity
25. A manager might decide to move from measuring performance on an individual basis to a team basis
if:
a.
individual performance can only be evaluated by subjective supervisory ratings
b.
the tie of pay to individual performance is not critical
c.
in order to be productive, employees cooperate
d.
competition among employees is dysfunctional
e.
any or all of the above conditions exist
26. ______________ is the form of pay that managers view as the most effective for improving
performance.
a.
Long-term incentives
b.
Lump-sum bonuses
c.
Profit sharing
d.
Gainsharing
e.
Team pay
27. Which of the following statements about specifying and measuring performance is true?
a.
Many firms rely heavily on financial performance measures
b.
One of the easiest to use measures for employee performance is a qualitative measure such
as customer satisfaction.
c.
Organizations should look for ways to measure employee results not employee behavior.
d.
Organizations should take the same approach to measuring performance whether taking a
long-term or short-term perspective.
e.
Traditional commissions focus on long-term performance.
28. Which of the following is a highly popular indicator used to evaluate the effectiveness of
performance-based pay?
a.
employee productivity
b.
employee retention
c.
employee surveys
d.
labor costs
e.
profits
29. Employees oppose the implementation of performance-based pay plans especially if:
a.
such change generally precede mergers
b.
a change in pay plans typically indicates a change in job descriptions
c.
such plans typically reward only a small percentage of the work force
d.
pay practices put earnings at risk.
e.
employees are not concerned about the financial future of their employers
30. To gain employee support for the implementation of a performance-base pay plan, the implementing
organization can:
a.
make sure the plan is understood, and bonuses are easy to calculate
b.
provide methods for employees to lodge an appeal if they feel they were treated unfairly
c.
let the employees have a hand in establishing and administering the plan
d.
gain the employees’ trust and make them believe they have job security
e.
do all of the above
31. As a bank teller, Diane realized there was a problem in how customers waited in line. She made a
suggestion that reduced the average customer wait by two minutes, causing an increase in customer
satisfaction. Diane received a special plaque from the president of the bank and a $200 check. This is
an example of a(n):
a.
spot award
b.
gainsharing award
c.
Scanlon plan
d.
Improshare plan
e.
Third generation plan
32. The most popular recognition award that firms use is
a.
cash
b.
certificates and plaques
c.
gift certificates
d.
travel
e.
company merchandise
33. Which of the following statements about earnings-at-risk pay plans is true?
a.
Earnings-at-risk plans involve upside risk for the employer.
b.
Earnings-at-risk plans set base pay at or above the market rate.
c.
Salespeople who work on straight commissions are paid through at earnings-at-risk plan.
d.
Earnings-at-risk plans all have caps that prevent the employer from having to pay above a
certain predetermined level.
e.
Employees prefer earnings-at-risk plans to all other performance-based pay plans
34. Dixie Manufacturing uses a strict merit pay system. Angel is one of 12 assembly line workers in your
department, and she has been a good performer for the last nine years. But this year, her performance
has been significantly below average. Angel has not mentioned problems at home, but you noticed in
the crime section of the local paper that her teenage son was convicted for driving under the influence
at New Year’s, and in the legal postings you learned she divorced her husband for desertion at Easter.
The local paper also carried a story about children with learning disabilities, and you noticed that
Angel’s youngest daughter was featured. What should Angel’s merit raise be this year? Angel’s raise
should be
a.
an average of what she earned in previous years. She is obviously a good employee who is
going through a hard time.
b.
the average raise that everyone else in the department is getting. Otherwise, Angel will get
discouraged, and you may lose a good employee.
c.
a high raise. Angel has higher need for income since her husband deserted her and her
family.
d.
zero. Poor performance cannot justify a raise.
e.
Under a strict merit raise system, none of the above is a correct response.
35. Carmen is in the first quartile (bottom) of the pay range and she has displayed superior performance
this year. Hugo is in the fourth quartile (top) of the pay range and he has also displayed superior
performance this year. In terms of percentage of pay:
a.
Carmen will receive a higher raise than Hugo
b.
Hugo and Carmen will receive equal raises
c.
Hugo will receive a higher raise than Carmen
d.
Carmen will receive the same raise as Hugo, but she will be promoted to the second
quartile.
e.
None of the above are correct.
36. Under a merit pay system with a small merit pool, it is likely that _____ will be dissatisfied with their
raises.
a.
poor performers
b.
average performers
c.
high performers
d.
new employees making the entry level rate
e.
employees being paid at market rate
37. How does merit pay differ from incentive pay?
a.
Merit pay is awarded to salaried employees while incentive pay is a reward for those who
are wage-employees.
b.
Merit pay typically relies on subjective performance appraisal ratings, and incentive pay is
often based on the achievement of performance that can be quantified.
c.
Incentive pay is a permanent increase, and merit pay is a one-time increase in pay.
d.
Merit pay plans give managers more latitude in determining large distributions of rewards
e.
Merit pay is more closely tied to the organizational vision, strategy, and culture than
incentive pay.
38. _____ are among the oldest and most popular forms of incentive pay.
a.
Earnings at risk
b.
Profit sharing
c.
Individual incentives
d.
Team stock options
e.
Gain sharing
39. Todd’s grandmother makes quilts for a New York City gallery. For each completed full-size quilt she
completes and delivers to the gallery buyer, she earns $350. What payment plan is used by the gallery
to pay Todd’s grandmother for her work?
a.
the differential piece rate plan
b.
the standard hour plan
c.
the merit pay plan
d.
the base rate plus standard output plan
e.
the straight piecework plan
40. Kiely’s mother is paying her to read this summer. For every chapter of David Copperfield that she
reads and prepares a written synopsis of in one and one-half hours, she receives $3. If she completes
the task in less than the allotted time she still receives $3. What payment plan is Kiely’s mother using
to encourage Kiely to read at the faster rate?
a.
the differential piece rate plan
b.
the standard hour plan
c.
the merit pay plan
d.
the base rate plus standard output plan
e.
the commission plan
41. Dakota stopped by the alteration shop yesterday. In the shop was posted a sign that said, “Buttons put
on for $3, zippers repaired for $8, dresses hemmed for $10, pants hemmed for $8.50, all other prices
based on job.” From this information, you should be able to tell that the alteration shop uses a:
a.
differential piece rate plan
b.
standard hour plan
c.
merit pay plan
d.
base rate plus standard output plan
e.
straight piecework plan
42. When designed appropriately, team-based incentives offer four major advantages when compared with
individual incentive systems. Which of the following statements describes one of those advantages?
a.
The performance of one group member can serve as a model, encouraging other team
members to imitate successful behavior.
b.
The mere presence of team members who have control over rewards evokes more
vigorous and persistent behavior than is evidenced when individuals work alone.
c.
The strength of the team-based incentive reward is increased since it is now paired with
group-administered rewards such as praise and camaraderie.
d.
The likelihood that peer pressure will evoke counterproductive control over behavior is
reduced.
e.
All of the above statements describe advantages inherent in the team-based incentive
plans.
43. When compared to merit pay, incentives tied to unit or companywide performance
a.
can be more subjectively based
b.
is a permanent increase in pay
c.
is not as useful in tying rewards to outcomes as merit pay
d.
can create an ownership mentality in employees
e.
is accurately described by all of the above
44. Gain-sharing plans are premised on the assumption that:
a.
all employees deserve to be rewarded
b.
costs can be reduced and productivity improved by eliminating wasted materials and labor,
developing new or better products, or working smarter
c.
if top management is highly motivated to succeed, then the organization will naturally
follow suit
d.
performance-based pay must be closely linked with organizational strategy for the pay
system to be effective
e.
positive reinforcement is superior to negative reinforcement
45. The Scanlon and Rucker plans for gain sharing are based on the principle that:
a.
individuals can evaluate ideas better than committees
b.
employees are more likely to make suggestions when the suggestion system is informal
c.
management should adopt a philosophy of employee participation
d.
employees should not be made to participate in gain sharing unless they want to
e.
management takes responsibility for implementing all change and employees do the actual
implementation; that way both are rewarded through gain sharing
46. The Scanlon Plan
a.
is appropriate for use only in startup firms
b.
focuses only on labor cost savings
c.
uses complex measures of performance
d.
was developed during the Industrial Revolution
e.
All of the above
47. Improshare
a.
requires the full involvement of all employees
b.
includes nonproduction workers in the measurement of the organization’s productivity
c.
ties all incentives to savings plans
d.
does not include non-production workers in the measurement of the organization’s
productivity
e.
is not appropriate for service-providers like schools and hospitals
48. Profit-sharing plans:
a.
typically have clear strategic objectives
b.
have a proven motivational impact on employees, even in the deferred version
c.
are designed to pay out incentives when the organization is most able to afford them
d.
often include employees in their administration
e.
are accurately described by all of the above
49. Current distribution plans:
a.
place earnings in an escrow account for distribution upon termination, disability, or death
b.
create retirement funds
c.
are the fastest growing type of profit sharing plan
d.
provide a percentage of profits to be distributed quarterly or annually to employees
e.
are devised to relate short-term profitability to top management performance
50. Deferred distribution plans:
a.
are types of gain-sharing plans
b.
are devised to relate long-term profitability to top management performance
c.
place earnings in an escrow account for distribution upon retirement, termination,
disability, or death
d.
are not as popular as current distribution plans because they lack immediacy
e.
are accurately described by all of the above
51. Combined distribution plans:
a.
are types of gain-sharing plans
b.
are devised to relate long-term profitability to top management performance
c.
distribute a portion of profits immediately to employees, setting the remaining amount
aside in a designated account.
d.
are not as popular as current distribution plans because they lack immediacy
e.
are accurately described by all of the above
52. Which of the following questions need to be answered when an organization is establishing a
commission pay program?
a.
Can the company afford to do this?
b.
How do we guarantee everyone receives the same commission payout?
c.
Are the methods to be used to measure performance flexible enough to allow for any
possible sales event?
d.
To what measures should commissions be tied to curb salespersons’ behaviors that could
negatively affect the organization?
e.
Does each salesperson have the same number of accounts?
53. In setting up a combined payment plan for salespeople, the most critical question for an organization to
answer is,”
a.
“What percentage of total compensation should be salary and what percentage should be
commission?”
b.
“How much of the salesperson’s time should be spent selling and how much in nonselling
activities?”
c.
“How can the sales program compensation plan be devised so as not to cause other
employees to become unmotivated?”
d.
“How long will the plan be operational before it needs to be evaluated?”
e.
“What is the strategic basis for the plan and how will its implementation be monitored?”
54. Employee stock ownership plans (ESOPs):
a.
are types of broad-based stock ownership plans
b.
grant shares of stock to employees as a means of long-term savings and retirement
c.
usually do not link stocks that can be purchased to individual or group performance
indicators
d.
vary in when payments are made
e.
are accurately described by all of the above
55. Stock option plans:
a.
give an employee the right to buy stock during a specified period of time or under other
specified conditions.
b.
are being considered too hazardous after the Enron collapse in 2002
c.
are restricted to executives
d.
are always based on individual performance
e.
all of the above are true
56. Broad-based stock option plans
a.
are easy to develop because performance measures are easy to locate and quantify
b.
seldom include cash payments
c.
always relate incentives to the attainment of corporate or strategic business unit goals
d.
seldom put earnings at risk.
e.
are accurately defined by none of the above
57. A _____ plan is an award of shares with restrictions that require a predetermined length of service to
elapse before vesting occurs.
a.
premium-priced stock option
b.
performance-vested restricted stock
c.
time-based restricted stock
d.
time-restricted stock option
e.
indexed stock option
58. As one approach to implementing performance-based pay plans, indexed stock options:
a.
allow employees to buy stock at a premium price
b.
are also called premium-priced options
c.
are used more often than any other plan
d.
are designed to ensure that employees are not punished with the economy takes a
downturn
e.
are accurately described by all of the above
59. What challenges does a multinational company face in using performance-based pay?
a.
Differences in laws, tax regulations, and cultural values all affect the applicability of
performance-based pay.
b.
Any incentive system developed in the parent country would immediately become policy
in the host country.
c.
Compensation for incentive systems is always paid in the currency of the host country.
d.
Stock option plans are typically more valued by employees working in host countries as
they are by employees working in the parent country.
e.
Compensation for incentive systems is always paid in the currency of the parent country.
TRUE/FALSE
1. Performance based pay recognizes that people working in the same job can contribute to the
organization at a different level in terms of value and seeks to provide an incentive for maximizing
their contribution.
2. When the strategic goal is growth, it is reasonable to reward employees for achieving growth targets.
3. Cash rewards that are tied to some aspect of performance and paid in lump sums rather than as raises
are known as merit pay.
4. In terms of labor costs, it is advantageous for a firm to tie added compensation to performance and
maintain stable base pay rates.
5. When a reward is paid in a lump sum, it seems to have more impact than when it is paid out as small
additions to employees’ weekly or monthly paychecks.
6. By paying for performance, a company signals that it is interested in employees who want to be paid
for good performance.
7. When performance measures are deficient or contaminated, employees are less likely to feel that their
efforts directly influence the performance measures used to determine performance-based pay.
8. Incentive pay pegs base pay near the market average and employees earn additional monetary
compensation for excellent performance.
9. With incentive pay, there is substantial downside risk for employees and there is less upside potential.
10. A requirement of implementing a pay for performance system is to eliminate nonmonetary rewards at
an organization.
11. Performance-based systems can only use monetary rewards as incentives.
12. The general pattern is that proportionately less incentive pay is used for employees higher in the
hierarchy.
SHORT ANSWER
1. List four types of performance-based pay.
2. How is the base pay set when merit pay plans are used?
3. What are the three levels of aggregation for performance-based pay?
4. In what four domains do proponents of balanced scorecards argue that organizations should monitor
their performance?
5. What are two disadvantages of merit pay?
6. What criticism can be leveled against merit pay?
7. Differentiate between merit pay and incentive pay.
8. What three factors have reduced the use of stock options as incentives?
ESSAY
1. Comment on the following statement: The expected outcome of a properly administered
performance-based pay system is that it will help the organization achieve its strategic objectives by
attracting, retaining, motivating and rewarding employees.
2. During a period where individual employee performance was poor, which pay system would give the
employer lowest labor costs? Why?
3. What are the advantages and disadvantages of delaying payout of performance-based pay, rather than
paying the reward immediately?
4. Since performance can be measured at the individual, work team, department, plant, strategic business
unit, or organizational level, how does a company specify the level of aggregation for reward
distribution?
5. Substantial research supports the conclusion that performance-based pay can improve productivity.
However, other research also shows that under some conditions, performance- based pay has no effect
or even detrimental effects. Discuss why this could occur.