Chapter 5 Performance Pay Choices

Chapter 5 - Performance Pay Choices True / False 1. The central issue associated with attendance incentives is the notion that these programs treat only the symptoms while ignoring the underlying issues that cause absenteeism in the first place.  a. True  b. False ANSWER: True 2. Piece rates have experienced high discontinuation rates.  a. True  b. False ANSWER: True 3. Sales commissions are usually appropriate in situations where individual sales people exercise significant independence.  a. True  b. False ANSWER: True 4. All things being equal, goal-sharing programs are thought to be less motivational than gain-sharing programs.  a. True  b. False ANSWER: False 5. One of the problems with gain-sharing plans is that they do not encourage employee participation.  a. True  b. False ANSWER: False 6. Unions generally oppose profit-sharing plans on the basis of potential manipulation of profits by management and the uncertainty associated with profit sharing when compared with base pay.  a. True  b. False ANSWER: True 7. The three main types of employee stock plans are: stock bonus plans, stock purchase plans, and stock option plans.  a. True  b. False ANSWER: True 8. Employee stock plans are often used by companies using a classical management strategy  a. True  b. False ANSWER: False  Chapter 5 - Performance Pay Choices 9. Profit-sharing plans can reduce the need for employee supervision.  a. True  b. False ANSWER: True 10. The current distribution profit-sharing plan is sometimes called a “cash plan.”  a. True  b. False ANSWER: True Multiple Choice 11. Which of the following is an organizational-level pay performance plan?  a. goal-sharing plans  b. merit-pay plans  c. special-purpose incentive pay plans  d. profit-sharing plans ANSWER: 12. What is the most common form of performance pay used by medium to large Canadian firms?  a. merit raises  b. profit sharing  c. merit bonuses  d. commissions ANSWER: d a 13. You work for a company that assembles plastic toys. Generally speaking, employees working at similar assembly plants receive $15.00 per hour. Internal corporate data indicate that the average worker should be able to assemble 20 toys per hour. Your organization has made a strategic decision to pay assembly line workers on the basis of their output. What is the piece rate you are contemplating paying your assembly line workers?  a. $300.00 per day  b. $1.33 per toy  c. $0.75 per toy  d. $150.00 per day ANSWER: c 14. What is a key advantage of piece rate pay systems?  a. They reduce the need for external control of employees through supervision.  b. They create team work.  c. They link pay to group effort.  d. They encourage “rate busters.” ANSWER: a 15. Which statement best explains why, despite their motivational potential, piece rate systems often do not motivate Chapter 5 - Performance Pay Choices maximum effort?  a. Work group norms define acceptable rates of production.  b. Piece rates are used in conjunction with base pay.  c. Workers may be tempted to cut corners on quality.  d. Workers are more concerned with production than safety. ANSWER: 16. Which of the following would NOT be an ideal scenario in which to consider using a piece rate plan?  a. Quality standards can be monitored effectively.  b. Significant teamwork is needed to complete a particular task.  c. Each unit of production can be easily measured.  d. Tasks tend to be fairly static over time. ANSWER: a b 17. John works for an aerospace company selling satellites to communication companies. He receives a set percentage of the overall sale price of the satellite in the form of compensation. He does not receive a fixed salary or benefits. Which term best describes John’s compensation plan?  a. hybrid commission plan  b. leverage commission plan  c. percentage commission plan  d. straight commission plan ANSWER: d 18. In what way are piece rates and commissions similar to each other?  a. Employees don’t have to worry about working themselves out of a job.  b. They reduce the need for external control of employees through supervision.  c. Both types are commonly used in conjunction with base pay.  d. Both are popular systems widely used in the service sector. ANSWER: b 19. John’s employer decides to provide him with regular advances against his future commissions as a way to smooth out John’s income. Which term best describes the pay plan used by John’s employer?  a. sales stipend system  b. draw system  c. pay advance system  d. security income ANSWER: b 20. Which type of selling requires the most initiative on the part of the sales representative?  a. maintenance  b. conversion  c. leverage  d. new market  Chapter 5 - Performance Pay Choices ANSWER: d 21. In the public sector, what is one factor that should be considered when designing merit pay?  a. role of consultants  b. role of unions  c. pay mix with profit sharing  d. pay mix with stock options ANSWER: b 22. Which statement best describes how North American employees view merit raises?  a. They are viewed as not promoting employee–employer relationships.  b. They are viewed with significant scepticism by employees.  c. They are not viewed in a positive light because of the objective nature of performance reviews.  d. They are viewed in a positive light by unionized employees. ANSWER: b 23. One of the problems with merit raises is the risk of providing a long-term future reward for a short-term past performance. What is one way to address this problem while maintaining the performance appraisal system?  a. Replace merit raises with merit bonuses.  b. Use stock options instead of merit raises.  c. Use a team to assess performance.  d. Outsource merit systems. ANSWER: a 24. Your employer is considering tying the bonus pool to the firm’s profitability and then allocating this amount to employees based on individual merit. With reference to expectancy theory, which component of the merit system will be weakened and thus make it less motivational for you as an employee?  a. valence  b. expectancy  c. instrumentality  d. effort ANSWER: c 25. As a human resource specialist, you have been asked by your organization to lead a discussion on the merits of using internal promotions as a main reward mechanism. Which point would you most likely NOT raise?  a. They are an expensive process, as promotions are typically associated with pay increases.  b. They often carry both intrinsic and extrinsic rewards.  c. They recognize contributions made by strong performers.  d. They are often seen as a key motivation tool for employees. ANSWER: a 26. Which of the following is NOT a suitable condition for merit pay?  a. Individual performance varies.  b. Performance is not controllable by the individual.  Chapter 5 - Performance Pay Choices  c. Individual performance can be separated out. d. Undesirable side effects are readily manageable. ANSWER:  b 27. An automotive shop wants to reward employees for demonstrating creative customer service that leads to repeat business. A particular employee received a 10 percent bonus for suggesting that the company contact customers 24 hours after repairs to ensure customers are satisfied. What type of incentive would be the most appropriate in this scenario?  a. merit-raise plans  b. goal-sharing plans  c. gain-sharing plans  d. special-purpose plans ANSWER: d 28. Which of the following is a group level organizational pay performance system?  a. gain sharing  b. piece rates  c. merit raises  d. commissions ANSWER: 29. According to the textbook, what is the main drawback associated with attendance plans?  a. There are costs associated with administering the program.  b. Both intended and unintended behaviours are not easy to observe.  c. It is difficult to deal with the so-called “legitimate” absences.  d. They do not deal with the underlying cause of the issue. ANSWER: a d 30. From an employer’s point of view, what is the most attractive feature of properly designed gain-sharing plans?  a. The plans are self-funding.  b. Positive work group norms develop.  c. The need for supervisory control is reduced.  d. Employees monitor each other’s performance. ANSWER: a 31. What is a key difference between gain-sharing and organizational performance pay plans?  a. Unlike organizational level plans, gain sharing can be applied to not-for-profit and government organizations.  b. Gain sharing results in more pay for employees.  c. Unions support organizational level pay plans but not gain sharing.  d. There are more free riders in gain-sharing plans. ANSWER: a 32. As the owner of a real estate firm with multi-office operations, you provide a bonus to all sales personnel in the highest-producing office each month. What type of performance pay plan are you using?  Chapter 5 - Performance Pay Choices     a. b. c. d. goal-sharing competitive bonus pooled performance group commissions ANSWER: 33. Which are the main types of profit sharing plans?  a. current assessment plan, deferred plan, and blended plan  b. deferred plan, cash plan, and group plan  c. combination plan, deferred plan, and current distribution plan  d. current distribution plan, combination plan, and employee plan ANSWER: b c 34. Your CEO is concerned that employees are not saving enough for their retirement. At the same, the CEO wants to have some of the company’s profits shared with all employees. To address these issues, your CEO asks you, a human resource compensation specialist, to recommend the most appropriate profit-sharing plan to address this retirement issue. Which profit-sharing plan would you recommend?  a. deferred  b. combination  c. current distribution  d. cash plan ANSWER: a 35. Which characteristic of profit-sharing plans may be viewed as negative from the perspective of an employer?  a. They align employee and employer interests.  b. They eliminate the “free rider” principle by holding everyone accountable.  c. They are more complex than gain-sharing plans.  d. They require the sharing of potentially confidential information with employees. ANSWER: d 36. What do employees receive under an employee stock bonus plan?  a. shares at no cost to themselves  b. cash value of phantom shares  c. a bonus equivalent to the increase in their share value  d. free financial advice on stocks ANSWER: a 37. A publicly traded Canadian corporation provides employees with one year of continuous service and the opportunity to place 6% of their pre-tax income in a plan that may be invested in the company’s stock. Furthermore, the company matches the shares by 50% up to a limit of 4% of the employees’ pre-tax income. From the perspective of the employee, what are the potential drawbacks of participating in this program?  a. Administrative costs associated with these plans are normally very high.  b. It is extremely difficult for an employee to determine the performance of their stock.  c. They pose too much of a tax burden. Chapter 5 - Performance Pay Choices  d. If the company does poorly, your job and savings may be at risk. ANSWER: d 38. Martin, the HR Manager, bought 1000 shares in his company at a price that was a little less than market prices. What type of stock plan is this?  a. stock option  b. stock bonus  c. share purchase  d. market share ANSWER: c 39. Which plans are set up so that a payout is contingent on the achievement of three- to five-year performance goals?  a. pension plans  b. long-term incentives  c. deferred profit-sharing plans  d. goal-sharing plans ANSWER: b 40. Which of the following is normally seen as an advantage associated with long-term incentives plans?  a. They may encourage a better understanding of the business.  b. They tie rewards to the company’s ability to pay.  c. They usually dilute shareholder equity for existing shareholders.  d. Goals are easy to determine, particularly in dynamic industries. ANSWER: a Subjective Short Answer 41. Identify and briefly explain the nature of individual performance pay plans. ANSWER: Individual performance pay plans—piece rates, sales commissions, merit pay, and special-purpose incentives —generally focus on promoting task behaviour. Under piece rates, an employee receives a specified sum of money for each unit of output produced or processed. They are commonly used in manufacturing and service sectors. Sales commissions are used to compensate sales personnel in a variety of industries. Sales associates receive a certain percentage of their gross sales. The commission rate often varies, depending on the products or services sold. Merit pay is used to recognize and encourage continuing good performance, and unlike the other types of performance pay, is based on appraisals of overall employee performance. Special-purpose incentive programs (sometimes referred to as “targeted incentive programs”) are intended to promote and reward certain behaviours that are of special importance to an organization, or to counteract behaviours that are causing problems. Such incentives are most appropriate in circumstances where intrinsic motivation does not already exist, where both intended and unintended behaviours are easy to observe, and where no other alternatives for inducing the desired behaviour are feasible. 42. Discuss the nature of suggestion systems and some of the problems you need to be aware of. ANSWER: Suggestion systems are intended to promote and reward innovative thinking by employees. Employees are encouraged to submit suggestions that may improve organizational effectiveness in exchange for cash bonuses. The components of such a system are as follows: a system through which suggestions are  Chapter 5 - Performance Pay Choices Problematic issues include the following: non-accepted ideas cause resentment and a reluctance to contribute further suggestions; employees may feel that the amount of the award is not equitable compared to the cost savings realized by the company; supervisors resent employees who make suggestions, feeling this is a negative reflection of managers’ performance; co-workers resent suggestions that disrupt existing work practices; and who receives credit for the idea if developed by several individuals. 43. Explain the difference between goal-sharing and gain-sharing plans. ANSWER: The core of goal sharing is that work groups or teams receive a bonus when certain prespecified performance goals are met, while under gain sharing, cost savings are quantified and then shared between the company and the group. Under goal sharing, goals on one or more performance indicators are set for each group or team, goals are to be met within a specified timeframe, and a bonus is paid to all team members if the goal is achieved. Under gain sharing, there are no set goals other than to simply improve as much as possible relative to the historical baseline. Employee involvement is considered to be a fundamental aspect of most gain-sharing plans. Goal-sharing plans can be much more arbitrary, with management making most of the decisions. 44. There are three types of profit-sharing plans discussed in the textbook. Identify and briefly explain each of them. ANSWER: Profit sharing may take one of the following three forms: the current distribution plan, the deferred profitsharing plan, and the combination plan. The current distribution plan is a profit-sharing plan that distributes the profit-sharing bonus to employees at least annually in the form of cash or shares. The deferred profitsharing plan is a plan in which bonuses are allocated to employee accounts but not actually paid out until a later date, usually on termination or retirement. A combination plan is a plan that combines the current distribution and deferred profit-sharing plans by paying some of the profit-sharing bonus on a current (cash) basis and deferring the remainder. 45. Identify and briefly define each of the three types of employee stock plans. ANSWER: An employee stock plan is any type of plan through which employees acquire shares in the firm that employs them. An employee stock bonus plan is a plan through which employees receive shares in their employing firm at no cost to the employee. An employee stock purchase plan is a plan through which employees may purchase shares in their employing firm. An employee stock option plan provides options to employees to purchase company shares at some point in the future at a fixed price. 46. What is the rationale that makes employee stock plans such a “natural fit” with organizations using a highinvolvement management strategy? ANSWER: The notion of unity and common purpose (goals) fits well with providing employees with a so-called stake in the company via share ownership. This could be further expanded by including elements of power, transparency, and accountability. In a sense, employees become owners with “skin in the game,” so to speak.