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1. Payments calculated directly on the basis of the time worked by employees are called _____.
a.
benefits
b.
commissions
c.
salaries
d.
wages
ANSWER:
d
2. According to the Fair Labor Standards Act, if a state‘s minimum wage is higher than the federal minimum wage, _____.
a.
employers must pay the higher wage
b.
employers must pay the lower wage
c.
employers are free to choose between either of the two
d.
employers must pay the difference as employee benefits
ANSWER:
a
3. The FLSA established overtime pay requirements for nonexempt employees at 1.5 times the regular pay rate for all
hours worked over _____.
a.
50 in a week
b.
45 in a week
c.
40 in a week
d.
35 in a week
ANSWER:
c
4. The act that does not require employers to pay overtime for salaried exempt jobs is the _____.
a.
Employment Non-Discrimination Act
b.
Equal Pay Act
c.
Fair Labor Standards Act
d.
Civil Rights Act
ANSWER:
c
5. The rate paid for a job by a majority of the employers in the appropriate geographic area determines _____.
a.
commission
b.
gainsharing
c.
monetary incentives
d.
prevailing wages
ANSWER:
d
6. Most federal and state entities rely on the criteria for independent contractor status identified by the _____.
a.
National Labor Relations Board
b.
Internal Revenue Service
c.
Department of Labor
d.
U.S. Treasury Department
ANSWER:
b
7. A court order that directs an employer to set aside a portion of an employee’s wages to pay a debt owed to a creditor is
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known as _____.
a.
liquidation
b.
sequestration
c.
garnishment
d.
distraint
ANSWER:
c
8. The right of employers to terminate employees whose pay is subject to a single garnishment order is restricted by the
_____.
a.
Davis-Bacon Act
b.
Walsh-Healy Public Contracts Act
c.
McNamara-O’Hara Service Contract Act
d.
Consumer Credit Protection Act
ANSWER:
d
9. Which of the following is typical of the entitlement philosophy of compensation?
a.
Pay and raises based on length of service
b.
No raises for poor-performing employees
c.
Market-adjusted pay scales
d.
Industry comparisons of total rewards
ANSWER:
a
10. Which of the following is typical of the performance philosophy of compensation?
a.
Pay and raises based on length of service
b.
No raises for poorly performing employees
c.
Across-the-board raises
d.
Pay scales increased annually
ANSWER:
b
11. In the context of worker motivation, which of the following is classified as an input in equity theory?
a.
Job security
b.
Praise
c.
Loyalty
d.
Vacation
ANSWER:
c
12. In the context of worker motivation, which of the following is classified as an outcome in equity theory?
a.
Loyalty
b.
Time
c.
Effort
d.
Praise
ANSWER:
d
13. Which of the following is true of an employer who uses the first-quartile strategy of compensation?
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a.
The employer pays the employees above market levels.
b.
The employer determines the pay independent of the market scenario.
c.
The employer pays the employees below market levels.
d.
The employer pays the employees on par with the market levels.
ANSWER:
c
14. Which of the following is true of an employer who uses the second-quartile strategy of compensation?
a.
The employer pays the employees above market levels.
b.
The employer determines the pay independent of the market scenario.
c.
The employer pays the employees below market levels.
d.
The employer pays the employees on par with the market levels.
ANSWER:
d
15. Which of the following is true of an employer who uses the third-quartile strategy of compensation?
a.
The employer pays the employees above market levels.
b.
The employer determines the pay irrespective of the market scenario.
c.
The employer pays the employees below market levels.
d.
The employer pays the employees on par with the market levels.
ANSWER:
a
16. Which of the following is true of the point factor method of job evaluation?
a.
In this method, descriptions of job classes are written and then each job is put into a grade according to the
class it best matches.
b.
It is a complex quantitative method that combines the ranking and classification methods.
c.
It looks at compensable factors in a group of similar jobs and assigns weights to them.
d.
It is a simple system that places jobs in order, from highest to lowest, by their value to the organization.
ANSWER:
c
17. In the context of job evaluation, external pay data are used to identify the relative value of jobs based on what other
employers pay for similar jobs in the _____.
a.
factor-comparison method
b.
ranking method
c.
point factor method
d.
market pricing method
ANSWER:
d
18. A collection of data on compensation rates for workers performing similar jobs in other organizations is known as a
_____.
a.
pay survey
b.
pay analysis
c.
pay scale
d.
pay grade
ANSWER:
a
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19. Groupings of individual jobs that have approximately the same value to the organization, used when establishing a pay
structure, are called _____.
a.
pay scales
b.
pay grades
c.
pay compressions
d.
pay expansions
ANSWER:
b
20. The relationship between job value as determined by job evaluation points and job value as determined by pay survey
rates is shown by a _____.
a.
market grade
b.
market band
c.
market line
d.
market scale
ANSWER:
c
21. Grouping jobs into pay grades based on similar market survey amounts is known as _____.
a.
market scaling
b.
market pegging
c.
market lining
d.
market banding
ANSWER:
d
22. Which of the following is true of red-circled employees?
a.
They are paid above the range set for a job.
b.
They are paid below the range set for a job.
c.
They are paid on par with the range set for a job.
d.
Their pay is not determined by the ranges set for a job.
ANSWER:
a
23. Which of the following is true of green-circled employees?
a.
They are paid above the range set for a job.
b.
They are paid below the range set for a job.
c.
They are paid on par with the range set for a job.
d.
Their pay is not determined by the ranges set for a job.
ANSWER:
b
24. Which of the following is true of pay compression?
a.
It is the phenomenon by which all employees’ pay decreases significantly in an economic downturn.
b.
It occurs when the employer groups employees with different pay grades together.
c.
It is frequently a result of labor market pay levels increasing faster than current employees’ pay adjustments.
d.
It occurs when pay differences among individuals with different levels of experience and performance become
large.
ANSWER:
c
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25. Which of the following is true of a pay adjustment matrix?
a.
It reflects an employee’s horizontal movement in an organization.
b.
It is used to determine the compensation benchmark in a specific industry.
c.
It is used to determine the compensation benchmark in a specific organization.
d.
It reflects an employee’s eligibility for pay increase based on merit.
ANSWER:
d
26. Compa-ratio = _____.
a.
total pay divided by the total number of employees
b.
pay level divided by the midpoint of the pay range
c.
total pay divided by the midpoint of the pay range
d.
pay level divided by the total number of employees
ANSWER:
b
27. Compliance with FLSA provisions on employee compensation is enforced by the National Labor Relations Board.
a.
True
b.
False
ANSWER:
False
28. The Equal Pay Act of 1963 prohibits companies from using different wage scales for men and women performing
substantially the same jobs.
a.
True
b.
False
ANSWER:
True
29. Not having to pay Social Security, unemployment, or workers’ compensation costs to independent contractors offers
major advantages to the employer.
a.
True
b.
False
ANSWER:
True
30. The entitlement philosophy assumes that compensation decisions reflect performance differences.
a.
True
b.
False
ANSWER:
False
31. Equity theory states that individuals judge fairness in compensation by comparing their inputs and outcomes against
the inputs and outcomes of referent others.
a.
True
b.
False
ANSWER:
True
32. If an organization has implemented competitive pay practices and has a fair and reasonable pay structure, employee
concerns about inequity can be reduced by sharing this information.
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a.
True
b.
False
ANSWER:
True
33. In the context of compensation quartile strategies, the match-the-market strategy is also called the third-quartile
strategy.
a.
True
b.
False
ANSWER:
False
34. Pay compression occurs when the pay differences among individuals with different experience and performance levels
become small.
a.
True
b.
False
ANSWER:
True
35. Salary inversion occurs when the pay given to new hires is higher than the compensation provided to more senior
employees.
a.
True
b.
False
ANSWER:
True
36. The practice of using fewer pay grades with much broader ranges than in traditional compensation systems is called
broadbanding.
a.
True
b.
False
ANSWER:
True
37. Pay grades are groupings of individual jobs that have different values for the organization.
a.
True
b.
False
ANSWER:
False
38. An individual whose pay is above the range for a job is referred to as a green-circled employee.
a.
True
b.
False
ANSWER:
False
39. Integrating performance appraisal ratings with pay changes can be done through the development of a merit-based
performance matrix.
a.
True
b.
False
ANSWER:
True
40. A pay adjustment matrix considers two factors—the employee’s level of performance as rated in an appraisal and the
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compensation. The most common types of indirect compensation provided to employees are benefits.
employee’s position in the pay range, which is often related to experience and tenure.
a.
True
b.
False
ANSWER:
True
41. The compa-ratio is calculated by dividing the individual’s pay rate by the lowest point in the pay range.
a.
True
b.
False
ANSWER:
False
42. Define base pay.
ANSWER:
The basic compensation that an employee receives, usually as an hourly wage or a salary, is called base pay.
43. Differentiate between exempt employees and nonexempt employees.
ANSWER:
Under the Fair Labor Standards Act, employees are classified as exempt or nonexempt. Exempt employees
hold positions for which they are not paid overtime. Nonexempt employees must be paid overtime.
44. Describe the entitlement philosophy of employee compensation.
ANSWER:
The entitlement philosophy assumes that individuals who have worked another year with the company are
entitled to pay increases with little regard for performance differences. When organizations give automatic
increases to their employees every year, they are using the entitlement philosophy. Most employees receive
the same or nearly the same percentage increase.
45. Describe the pay-for-performance philosophy of employee compensation.
ANSWER:
A pay-for-performance philosophy assumes that compensation decisions reflect performance differences. Pay
raises or incentives are structured to reward performance differences (quantity, quality, speed of work,
customer satisfaction, etc.) among employees. Outstanding performers are compensated with substantially
greater pay increases and higher variable rewards than employees who perform at only a satisfactory level.
Employees who perform below standards do not receive pay increases and are often placed on performance-
improvement plans.
46. Define competency-based pay.
ANSWER:
Competency-based pay rewards individuals for the capabilities they demonstrate and acquire. In knowledge-
based pay (KBP) or skill-based pay (SBP) systems, employees start at a base level of pay and receive
increases as they learn to do other jobs or gain additional skills and knowledge and thus become more valuable
to the employer.
47. Define job evaluation.
ANSWER:
Job evaluation is a formal, systematic process to determine the relative worth of jobs within an organization.
48. Describe the various components of compensation.
ANSWER:
Tangible rewards can be quantitatively measured, so it is possible to calculate the monetary value of each
reward. Consequently, employees can easily compare the tangible rewards offered by various organizations to
determine relative compensation levels. Intangible rewards, on the other hand, cannot be as easily measured or
quantified.
One tangible component of a compensation program is direct compensation, the monetary rewards for work
done and performance results achieved. Base pay and variable pay are the most common forms of direct
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promise and delivery of the reward will decrease motivation. Managers who understand the key linkages in
these expectations can better monitor employee motivation and adjust reward systems accordingly.
The equity theory of motivation was first introduced by John Stacey Adams in 1963. This theory states that
The basic compensation that an employee receives is called base pay. Organizations often provide basic
compensation as either an hourly wage and/or as a salary. These two base pay categories are identified
according to the way pay is determined and the nature of the jobs. Hourly pay is most common and is based on
the amount of time spent at work. Employees paid by the hour receive wages calculated on the basis of the
time worked. In contrast, employees paid a salary receive the same payments each period regardless of the
number of hours worked.
Another type of direct compensation is variable pay, which is compensation linked directly to individual,
team, or organizational performance. The most common types of variable pay are bonuses, incentive program
payments, equity awards, and commissions.
Many organizations provide indirect rewards in the form of employee benefits. With indirect compensation,
employees receive financial rewards without receiving actual cash or other direct monetary payments. A
benefit is an indirect reward given to an employee or group of employees for organizational membership,
regardless of performance.
49. Describe the Fair Labor Standards Act and the major areas on which it focuses.
ANSWER:
The primary federal law affecting compensation is the Fair Labor Standards Act (FLSA), which was passed in
1938. Compliance with FLSA provisions is enforced by the Wage and Hour Division of the U.S. Department
of Labor (DOL). Penalties for wage and hour violations often include awards of up to two years of back pay
for affected current and former employees, along with a monetary penalty. Willful violations may be penalized
by up to three years of back pay. For example, TGI Friday’s was assessed over $19 million in back wages and
penalties for violations resulting from failing to pay tipped hourly workers the proper minimum wage,
overtime pay, and allowing some workers to perform “off-the-clock” work for which they were never paid.
The provisions of both the original act and subsequent revisions focus on the following major areas:
• Minimum wage
• Limits on the use of child labor
• Exempt and nonexempt status (overtime provisions)
50. Describe the Lilly Ledbetter Fair Pay Act.
ANSWER:
The Fair Pay Act (2009) extended the statute of limitations for equal pay claims and essentially treats each
paycheck as a new act of discrimination. Pay discrimination need not be intentional to be unlawful. Pay
practices resulting in disparate impact are also actionable. Steps to reduce liability include conducting a
periodic disparate impact analysis of compensation plans, properly documenting all compensation decisions,
retaining complete pay records for an appropriate duration, and limiting discretion in pay decisions to higher
levels in the organization.
51. What is garnishment?
ANSWER:
Garnishment occurs when a creditor obtains a court order that directs an employer to set aside a portion of an
employee’s wages to pay a debt owed to the creditor.
52. Describe two motivation theories and their relationship with compensation.
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jobs. For example, the ranking method might be used at a small family-owned dry cleaning shop with only
The classification method is often used in public-sector organizations. Descriptions of job classes are written,
individuals judge fairness (equity) in compensation by comparing their inputs and outcomes against the inputs
and outcomes of referent others. These referent others are workers whom the individual uses as a reference
point to make these comparisons. Inputs include time, effort, loyalty, commitment, skill, knowledge, and
enthusiasm. Outcomes include pay, job security, benefits, praise, recognition, and thanks.
53. Describe market competitive compensation.
ANSWER:
Whether an organization’s total reward practices are competitive has a significant impact on employees’ views
of compensation fairness. Consequently, providing competitive compensation to employees is a concern for all
employers. Organizations face the challenge of whether to adopt practices common in an industry or to
differentiate the firm by using novel or distinct compensation practices. They also face the challenge of
keeping their compensation levels competitive given what other firms are paying their employees, an issue
that comes to the forefront when companies try to hire workers away from their current employers.
Lag-the-Market Strategy
An employer using a first-quartile strategy chooses to “lag the market” by paying below market levels for
several reasons. If the employer is experiencing financial difficulties, it may be unable to pay more. Also,
when an abundance of workers are available, particularly those with lower-level skills, a below-market
approach can be used to attract sufficient workers at a lower cost. The downside of this strategy is that it
increases the likelihood of higher worker turnover and lower employee morale. If the labor market supply
tightens, then attracting and retaining workers becomes more difficult. Companies may adopt this strategy
during recessionary times only to discover that when the economy gets better, turnover increases.
Lead-the-Market Strategy
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is that subjective judgments are used to develop the class descriptions and to place jobs accurately in them.
The most widely used job evaluation method, the point factor method, looks at compensable factors in a group
of similar jobs and assigns weights, or points, to them. A compensable factor is a job dimension commonly
present throughout a group of jobs within an organization that can be rated for each job. For example, all jobs
require some level of education and experience for successful performance.
The point factor method is the most popular job evaluation approach because it is relatively simple to use and
considers the components of a job rather than the total job. However, point factor systems have been criticized
for reinforcing traditional organizational structures and job rigidity. Although not perfect, the point factor
method is generally better than the ranking and classification methods because it quantifies job elements.
While the point factor method has served employers well for many years, the trend is moving to a more
externally focused approach. More companies are moving to market pricing, which uses market pay data to
identify the relative value of jobs based on what other employers pay for similar jobs. A recent survey showed
that 85 percent of companies use market pricing to figure out how to value different jobs, and 78 percent
focused specifically on the market median values associated with total cash, which is calculated by adding
together base pay and short-term variable compensation.
55. Discuss individual pay.
ANSWER:
Once pay grades and pay ranges have been established, pay can be set for each individual employee. Setting a
range for each pay grade gives flexibility by allowing individuals to progress within a grade instead of having
to move to a new grade each time they receive a raise. A pay range also allows managers to reward employees
based on performance while maintaining the integrity of the pay system. Regardless of how well a pay
structure is constructed, there can be occasions when an employee is paid outside of the range because of past
pay practices, different levels of experience, or performance. There are risks in allowing these situations to
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56. AirCar LLC, a producer of consumer electronics, used gainsharing to compensate its employees. However, after a
change in management, the company decides to replace gainsharing with a stock option plan. Which of the following
statements is true of AirCar LLC?
a.
It used to provide individual incentives, but now it provides organizational incentives.
b.
It used to provide individual incentives, but now it provides team incentives.
c.
It used to provide team incentives, but now it provides organizational incentives.
d.
It used to provide organizational incentives, but now it provides individual incentives.
ANSWER:
c
57. Group Viewer LLC, a software company, used to provide profit sharing plans for its employees. After organizational
restructuring, the management decides to replace the profit sharing plans with commissions for each employee. Which of
the following is true of Group Viewer LLC?
a.
It used to provide individual incentives, but now it provides team incentives.
b.
It used to provide individual incentives, but now it provides organizational incentives.
c.
It used to provide team incentives, but now it provides individual incentives.
d.
It used to provide organizational incentives, but now it provides individual incentives.
ANSWER:
d
58. Hikoma LLC, a toy manufacturer, provides employees with incentives depending on their individual performances.
This best exemplifies _____.
a.
an employee stock plan
b.
a commission
c.
gainsharing
d.
deferred compensation
ANSWER:
b
59. Leah LLC, a producer of sporting goods, used to provide its employees with a stock option plan. After organizational
restructuring, the management decides to replace the stock option plan with profit sharing. Which of the following is true
of Leah LLC?
a.
It used to provide organizational incentives, but now it provides individual incentives.
b.
It used to provide organizational incentives, but now it provides team incentives.
c.
It used to provide organizational incentives, but now it provides the same.
d.
It used to provide individual incentives, but now it provides the same.
ANSWER:
c
60. Team Spark LLC, a producer of consumer goods, used to practice gainsharing. After organizational restructuring, the
management decides to replace its gainsharing plans with a piece-rate system. Which of the following is true of Team
Spark LLC?
a.
It used to provide team incentives, but now it provides individual incentives.
b.
It used to provide individual incentives, but now it provides team incentives.
c.
It used to provide team incentives, but now it provides organizational incentives.
d.
It used to provide individual incentives, but now it provides organizational incentives.
ANSWER:
a
61. RedCat LLC, a footwear manufacturing company, used to practice gainsharing. After organizational restructuring, the
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a.
Return on investment
management decides to replace gainsharing with profit sharing. Which of the following is true of RedCat LLC?
a.
It used to provide individual incentives, but now it provides team incentives.
b.
It used to provide organizational incentives, but now it provides individual incentives.
c.
It used to provide individual incentives, but now it provides organizational incentives.
d.
It used to provide team incentives, but now it provides organizational incentives.
ANSWER:
d
62. Describe employee stock ownership plans.
ANSWER:
Firms in many industries have an employee stock ownership plan (ESOP), which is a plan that gives
employees significant equity ownership in their organizations. ESOPs are not a passing fad as many
companies have continuously maintained these plans for over 25 years. They are an important ownership
structure in many, especially smaller, U.S. companies. Employees in an ESOP share in the growth and
profitability of their firm. Employee ownership may motivate employees to be more productive and focused
on organizational performance.
63. In the context of incentives, an example of gainsharing is _____.
a.
using employee committees to calculate and pass on savings to employees
b.
distributing surplus yields among employees when their performance improves above the baseline
c.
identifying favorable employee behavior and rewarding employees who adhere to the set standards
d.
using employee unions to encourage and promote a positive environment in organizations
ANSWER:
b
64. Which of the following is a disadvantage of profit sharing plans?
a.
Employees must trust that management will accurately disclose financial and profit information.
b.
Employees are taxed heavily on the income that they generate from profit sharing plans.
c.
Employees cannot access the funds that they receive from profit sharing plans for up to three years.
d.
Employers get little or no rebate on income tax for choosing profit sharing plans.
ANSWER:
a
65. Stock option plans give employees the right to purchase a(n) _____.
a.
unlimited number of shares of company stock at a specified exercise price for a limited period of time
b.
unlimited number of shares of company stock at a specified exercise price for an unlimited period of time
c.
fixed number of shares of company stock at a specified exercise price for a limited period of time
d.
fixed number of shares of company stock at a specified exercise price for an unlimited period of time
ANSWER:
c
66. Which of the following is the most accurate metric of organizational performance in variable pay plans?
a.
Customer satisfaction
b.
Accident rates
c.
Revenue growth
d.
Employee satisfaction
ANSWER:
c
67. Which of the following is a metric of sales programs in variable pay plans?
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b.
Turnover costs
c.
Accident rates
d.
Increase in market share
ANSWER:
d
68. Which of the following statements is true of the salary-only approach?
a.
The salary-only approach is useful when an organization emphasizes serving and retaining existing accounts.
b.
The salary-only approach is useful when an organization emphasizes generating new sales and accounts.
c.
The salary-only approach is useful only when an organization is compensating experienced sales executives.
d.
The salary-only approach is not useful in compensating sales representatives who are new to the job.
ANSWER:
a
69. A percentage of the revenue generated by sales that is given to an agent or salesperson is called _____.
a.
severance pay
b.
wage
c.
basic salary
d.
commission
ANSWER:
d
70. Executive compensation in public corporations is subject to shareholder approval via a “say-on-pay” provision in the
_____.
a.
Sarbanes-Oxley Act
b.
Dodd-Frank Act
c.
Lilly Ledbetter Fair Pay Act
d.
Walsh-Healy Public Contracts Act
ANSWER:
b
71. A provision that permits an organization to require an employee to return rewards obtained through unethical or
negligent actions is known as a(n) _____.
a.
say-on-pay provision
b.
clawback provision
c.
double jeopardy provision
d.
excessive fines provision
ANSWER:
b
72. Special benefits—usually noncash items—for executives are termed _____.
a.
executive salaries
b.
base salaries
c.
perquisites
d.
golden parachutes
ANSWER:
c
73. Which of the following statements is true of a discretionary system of determining bonuses?
a.
The federal and state governments decide the bonuses.
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b.
All the shareholders of the company decide the bonuses.
c.
The labor unions and employees decide the bonuses.
d.
The CEO and the board of directors decide the bonuses.
ANSWER:
d
74. Variable pay plans attempt to provide tangible rewards, or incentives, to employees for performance beyond normal
expectations.
a.
True
b.
False
ANSWER:
True
75. Nonfinancial rewards cannot be used as incentives in pay-for-performance plans.
a.
True
b.
False
ANSWER:
False
76. The most common means of providing individual variable pay are profit sharing plans and employee stock plans.
a.
True
b.
False
ANSWER:
False
77. The most prevalent forms of organization-wide incentives are piece-rate systems, sales commissions, and individual
bonuses.
a.
True
b.
False
ANSWER:
False
78. Cost reduction is classified as a work unit/team incentive.
a.
True
b.
False
ANSWER:
True
79. Under a straight piece-rate system, wages are determined by dividing the number of units produced by the piece rate
for one unit.
a.
True
b.
False
ANSWER:
False
80. The straight commission system is the most frequently used form of sales compensation.
a.
True
b.
False
ANSWER:
False
81. Intrinsic rewards include base pay, monetary incentives, bonuses, and other measurable rewards.
a.
True
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b.
False
ANSWER:
False
82. Merchandise, gift certificates, and travel are the most frequently used incentives for recognition awards.
a.
True
b.
False
ANSWER:
False
83. Recognition awards ensure that the award winners are determined objectively.
a.
True
b.
False
ANSWER:
False
84. A free rider is a member of the group who contributes the most in a group venture.
a.
True
b.
False
ANSWER:
False
85. The focus of gainsharing is to increase discretionary efforts.
a.
True
b.
False
ANSWER:
True
86. Profit sharing distributes some portion of organizational profits to employees.
a.
True
b.
False
ANSWER:
True
87. A stock option plan gives employees the right to purchase an unlimited number of shares of company stock at a
specified exercise price for a limited period of time.
a.
True
b.
False
ANSWER:
False
88. An employee stock ownership plan is a plan designed to give employees significant equity ownership in their
organizations.
a.
True
b.
False
ANSWER:
True
89. The straight commission system combines the stability of a salary with the performance aspect of a commission.
a.
True
b.
False
ANSWER:
False
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90. The advantage of a salary-plus-commission system is that it requires the sales representative to sell to receive any
form of payment.
a.
True
b.
False
ANSWER:
False
91. List the three basic assumptions on which the philosophical foundation of a variable pay plan rests.
ANSWER:
The philosophical foundation of variable pay rests on three basic assumptions:
1. Some people or groups contribute more to organizational success than do others.
2. Some people perform better and are more productive than are others.
3. Employees or groups who perform better or contribute more should receive greater compensation.
92. Explain the concept of line of sight in variable pay.
ANSWER:
A key concept for variable pay is line of sight—the idea that employees can clearly see how their actions and
decisions lead to desired outcomes. For example, front-line workers on the assembly line may have a clear line
of sight to production output and product quality but would have difficulty seeing how their daily performance
impacts corporate-wide profits. Top executives, on the other hand, have a clear line of sight to organization-
wide results. Determining rewards at the appropriate level for each segment of the workforce is necessary to
get maximum benefits from the pay plan.
93. Distinguish between extrinsic and intrinsic rewards.
ANSWER:
Many of the rewards given to employees by organizations are extrinsic rewards. These are rewards that are
external to the individual including base pay, monetary incentives, bonuses, and other measurable rewards.
Intrinsic rewards, on the other hand, are rewards that are internal to the individual, such as autonomy and
meaningful work. These rewards are powerful in motivating workers to exercise discretionary effort to achieve
their own and the organization’s goals.
94. Explain commissions in the context of variable pay.
ANSWER:
A commission is a percentage of the revenue generated by sales that is given to an agent or salesperson. In a
straight commission system, the total compensation for a sales representative is a percentage of the value of
the sales generated. Salary plus commission or bonuses is the most frequently used form of sales
compensation; it combines the stability of a salary with the performance aspect of a commission.
95. Explain the salary-only approach of sales compensation.
ANSWER:
The salary-only approach is a type of sales compensation. This type of compensation is useful when an
organization emphasizes serving and retaining existing accounts over generating new sales and accounts.
96. Explain bonuses in the context of variable pay.
ANSWER:
Individual employees may receive additional compensation in the form of a bonus, which is a one-time
payment that does not become part of the employee’s base pay. Individual bonuses are used at all levels in
firms and are a popular short-term incentive.
A bonus can recognize performance by an employee, a team, or the organization as a whole. When
performance results are good, bonuses go up. When performance results are not met, bonuses go down or
disappear. Many employers base part of an employee’s bonus on individual performance and part on company
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Sales compensation plans can be of three general types—salary only, straight commission, and salary plus
commission or bonuses.
The salary-only approach is useful when an organization emphasizes serving and retaining existing accounts
• Educating managers and employees about the incentive plan details.
Employees may receive bonuses for almost anything noteworthy, but some common examples are referral
bonuses (given for referring someone who is later hired), hiring or sign-on bonuses (given when someone
agrees to hire on with a firm), and innovation bonuses (given when an employee develops a creative solution
or idea). Spot bonuses are small, often cash awards to recognize an outstanding effort by an employee.
Retention bonuses are used to keep a valuable employee with the company, and project completion bonuses
are given upon completion of difficult projects.
97. Describe the challenges faced by work unit/team incentives.
ANSWER:
The difference between rewarding team members equally and rewarding them equitably triggers many of the
problems associated with work unit/team incentives. Rewards distributed in equal amounts to all members
may be perceived as unfair by employees who work harder, have more capabilities, or perform more difficult
jobs. This problem is compounded when an individual who is performing poorly prevents the work unit/team
from meeting the goals needed to trigger the incentive payment. Each organization should adopt a perspective
that is consistent with the organization’s core compensation philosophy.
A related challenge is that of “free riders” or “social loafers.” A free rider is a member of the group who
contributes little and rides on the efforts and success of the team.
98. Explain profit sharing.
ANSWER:
As the name implies, profit sharing is a system to distribute a portion of organizational profits to employees.
Giving employees a “piece of the action” can help enhance their commitment and increase job-related
performance. The primary objective of profit sharing plans is to improve organizational results by focusing
employees on organizational goals and objectives.
While profit sharing plans can ensure that all employees pay attention to the organization’s bottom line, profits
may vary a great deal from year to year, resulting in windfalls or losses beyond the employees’ control.
Payoffs are generally far removed in time from employees’ individual efforts; therefore, higher rewards may
not be obviously linked to better performance. Further, not all employees have sufficient line of sight to help
them see how their performance links to organizational profit or loss.
99. Explain employee stock plans.
ANSWER:
Organizational incentive plans can include stock ownership in the organization to reward employees. The goal
of these plans is to get employees to think and act like owners.
A stock option plan gives employees the right to purchase a fixed number of shares of company stock at a
specified exercise price for a limited period of time. Stock options can be difficult for employees to understand
and they often underestimate the real value of what they receive, which highlights the importance of providing
financial education to employees, especially those who are new to stock options. Stock options have become
less popular in the past decade, but companies in high-growth industries and start-up companies still use this
form of incentive to reward employees who contribute to the firm’s ultimate success.
Firms in many industries have an employee stock ownership plan (ESOP), which is a plan that gives
employees significant equity ownership in their organizations. ESOPs are not a passing fad as many
companies have continuously maintained these plans for over 25 years. They are an important ownership
structure in many, especially smaller, U.S. companies. Employees in an ESOP share in the growth and
profitability of their firm. Employee ownership may motivate employees to be more productive and focused
on organizational performance.
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over generating new sales and accounts. A commission is a percentage of the revenue that is generated by
sales that is given to an agent or salesperson.
In the straight commission system, a sales representative earns a percentage of the value of the sales generated.
Salary plus commission or bonuses is the most frequently used form of sales compensation; it combines the
stability of a salary with the performance aspect of a commission.