HRM701 Chapter 10 Practice Test
Given that the CEO is the chief executive and decides on most, if not all, major decisions of the firm, who usually sets his or her pay?
a compensation committee
The incentive payout under the Scanlon Plan is based upon increases in the sales volume of the organization's products. :T/F
F
The level of incentives given to executives may depend on their level in the firm. :T/F
T
The operation of a merit pay plan depends on the effectiveness of the performance appraisal system. :T/F
T
ESOPs have been criticized because of potential inabilities to pay back the stock of employees when they retire. :T/F
T
Why are some compensation plans referred to as variable pay?
because employee pay is linked to performance
A new start-up firm wants to encourage team behaviours and a "culture of ownership" among all employees in the organization. Which of the following pay plans would you advise against?
differential piece rates
Jim Jones received a $500 pay bonus as a result of his job performance last year; however, this extra money was not added to his base pay. This is an example of which of the following?
lump sum merit pay
Which of the following would NOT be a problem with merit raises?
if they are based upon objective, measurable criteria
Which of the following is NOT a reason that team incentive plans have grown more popular?
Unions have demanded team incentive plans
If the standard time for producing one unit of work in a job paying $5.00 per hour were set at 6 minutes, what would the piece rate be?
$1.50 per unit
A merit raise is a form of bonus that is given to an employee beyond their base wage. :T/F
F
A straight salary plan is the most frequently used type of sales incentive plan. :T/F
F
Management must be careful to ensure that incentive payments are viewed as both a reward and an entitlement. :T/F
F
Performance measures are rather simple to develop and standardize, as sales volume is an objective measure of performance that is not dependent upon external factors. :T/F
F
Professional employees are difficult to develop incentive plans for only because their outputs are difficult to measure. :T/F
F
Stock options are rights attached to the achievement of specific organizational objectives. :T/F
F
How does the bonus given to employees under Improshare differ from that given under the Scanlon Plan?
It is based on productivity gains resulting from a reduction in production time.
Which of the following is a problem with creating team incentive plans?
Not all teams are alike
A bonus is supplemental to base wages. :T/F
T
Financial incentives for salespeople are widely used. :T/F
T
A weakness of profit-sharing plans is that employees do not have total control over the profitability of the organization. :T/F
T
Sales incentives can be affected by external factors beyond the salesperson's control. :T/F
T
Employers use stock ownership incentive plans to increase employee "ownership" in the company. :T/F
T
Which of the following is NOT a reason that merit raises may fail to achieve their intended purpose?
Incentive rewards are linked to organizational goals.
A key advantage of incentive plans is that they represent variable costs that are linked to the realization of goals as opposed to a fixed cost such as salary that may be largely unrelated to true performance (i.e., output). :T/F
T
A salesperson with a sales volume of $275,000 earning a straight commission of 3 percent would receive $8,250. :T/F
T
Which of the following often applies to professional employees?
They cannot advance in salary beyond a point without taking on administrative duties
Which of the following is NOT a weakness of profit-sharing plans?
They cause intense competition at the individual employee level.
What is the purpose of a profit-sharing plan?
to motivate a total commitment to the organization as a whole
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. :T/F
F
Because profit-sharing plans often fail to pay off for several years in a row, they can have limited motivational value. :T/F
T
ESOPs can increase employees' pride of ownership in the organization, providing an incentive for them to increase productivity and help the organization prosper and grow. :T/F
T
Where does the emphasis on stock options and executive stock ownership come from?
the desire of the company and investors for senior managers to have a stake in the success of the business
In stock option plans, what does the difference in the grant price and the exercised price represent?
the gains by the stock option
Which of the following is a major concern about executive compensation?
the growing gap between leaders and the company's lowest-paid employees
Merit raises may be perpetuated year after year even if performance declines. :T/F
T
Meshing compensation and organizational objectives helps employees assume ownership of their jobs, improve effort, and improve performance. :T/F
T
One clear trend in strategic compensation management is the growth of incentive programs for employees throughout the organization.:T/F
T
Identify and briefly describe one gainsharing plan that encourages maximum effort and cooperation but is not tied to profit fluctuations, as are profit-sharing plans.
Scanlon Plan. The Scanlon Plan enables employees who offer ideas and suggestions that improve productivity to be rewarded for these suggestions. The plan allows for employee participation primarily through shop committees established in each department. These committees consider production problems and make suggestions for improvement within their respective departments to an organization-wide screening committee. Both of these committees are composed of employees and managers. The screening committee reviews the data that serve as the basis for monthly bonuses, in addition to acting on suggestions received from the shop committees and advising top management. An established formula, based on increases in employee productivity as determined by a norm that has been established for labour costs, serves as the basis for financial incentives.
One philosophy of incentive systems is that tying compensation to employee effort will improve employee performance. :T/F
T
Which of the following is NOT an advantage of ESOPs?
The employees' pensions are less vulnerable due to diversification
Recently, stock options have been strongly criticized in the press following controversies at several companies. What has this criticism focused on?
the amount of the options granted and exercised
Incentive plans based on productivity can reduce labour costs. :T/F
T
Why are performance measures vital in incentive plans
because they communicate the importance of the organizational goals
Which of the following is NOT likely to help an incentive plan succeed in an organization?
ensuring that employees believe that performance standards are unachievable
Which of the following would NOT be the basis for a merit raise?
gain sharing decisions
Identify the principal methods for compensating salespeople and the advantages of each method.
Compensation plans for sales personnel may consist of a straight salary plan, a straight commission plan, or a combination salary and commission plan. The straight salary plan allows salespeople to be paid for performing duties not reflected immediately in their sales volume. It enables them to devote time to providing services and building customer goodwill without jeopardizing their income. A limitation of this plan is that employees may not be motivated to maximize their sales volume. The straight commission plan bases compensation on a percentage of sales. This plan provides maximum incentive and is relatively easy to compute and understand. However, disadvantages of this type of plan include an emphasis on sales volume instead of profits. In addition, customer service after the sale is likely to be a lower priority. When a combination salary and commission plan is used, the percentage of cash compensation paid out in commissions is called leverage. Leverage is a ratio of base salary to commission. The amount of leverage is determined after considering the constraining factors affecting performance. The combination plan has the advantages of both the straight salary and the straight commission plans, with few disadvantages.
Differential piece rate plans guarantee employees at least a base pay. :T/F
F
Gainsharing plans are designed to improve productivity through more effective use of organizational resources. :T/F
F
Incentive plans are not effective in service and government organizations because of the difficulty in measuring productivity. :T/F
F
Team incentive plans reward team members when performance standards are met or exceeded; however, they tend to foster a psychological climate that negatively impacts team cooperation. :T/F
F
Piecework is inappropriate where technology changes are frequent. :T/F
T
The most important lesson learned from Scanlon and Improshare plans is that if management wants to gain the cooperation of its employees in improving efficiency, they must permit the employees to become involved psychologically as well as financially in the organization. :T/F
T
At Steelcase, an office furniture maker, employees can earn more than their base pay if they produce more units, such as upholster more chairs. This part of their pay is determined on units produced. Which of the following plans is being used here?
piece rate plan
Elizabeth received a stellar performance appraisal in 2008, which translated to a 10 percent pay raise for the next year. Her 2008 base pay was $50,000. Which of the following applies to 2009?
$5,000 would be added to her 2008 base pay
Which of the following is a major problem of ESOPs?
Employees may become demotivated and frustrated if the share price falls, even though they have worked productively
What is the philosophy behind the Scanlon Plan?
Employees should offer ideas and suggestions to improve productivity and, in turn, be rewarded for their constructive efforts
Approximately 50 percent of Canadian companies offer some form of variable pay. :T/F
F
Because of failing popularity and media scandals, the number of Canadian companies granting stock options to non-executive personnel has been decreasing in recent years. :T/F
F
Team bonuses tend to increase employee jealousies and complaints over individual standards. :T/F
F
Naveen works as a sales representative for Rogers Pet Foods. He is on a commission plan. His individual performance has been steady over the past few months but he has noticed a decline in his pay. Which of the following is NOT a likely cause for Naveen's pay decline?
His intrinsic motivation.
Under the merit pay system, employees who have better political connections within the company may bear a threat to their supervisor and therefore may end up with a larger share of the "merit pie" than their performance would warrant. :T/F
T
Briefly discuss three individual incentive plans. (Students should discuss three of the four following plans.)
Piecework is one of the oldest incentive plans. When piecework is used, employees receive a certain rate for each unit they produce. Their compensation is then determined by the total number of units they produce during a given pay period. The piecework system is easier to implement and is more likely to succeed when output can be easily measured, the quality of the product is less critical, the job is fairly standardized, and a constant flow of work can be maintained. Piecework has the advantage of motivating employees who want to increase their earnings. Although piecework has advantages, it is limited in that it cannot be used for certain types of jobs, such as where individual contributions are difficult to distinguish or where employees have little control over output as a result of mechanization. In addition to this limitation, piecework may not be an effective motivator at all times. For example, employees may not exert maximum effort if they feel it will lead to disapproval from co-workers. The standard hour plan is an incentive technique that sets incentive rates based on a predetermined "standard time" for completing a job. If employees finish the work in less time than expected, they are still paid based on the standard time for the job multiplied by their hourly rate. Standard hour plans are easily suited to operations with a long cycle or to jobs that are nonrepetitive and require a variety of skills. While standard hour plans motivate employees to produce more, quality may suffer if employees become careless and do their work too fast. A bonus is an incentive that is given to an employee beyond one's normal base wage. Bonuses do not become part of base pay. They can be paid out on the basis of cost reduction, quality improvements, or other performance criteria. Merit pay is normally given on the basis of an employee having achieved some objective performance standard. In order to provide motivational value, merit pay plans should distinguish between an increase in base pay and the merit increase. Merit increases are normally granted yearly in conjunction with an employee's annual performance review. They can, however, be given out at any desired time period. Organizations may award lump-sum merit bonuses when they do not wish to raise an employee's base pay.
Which of the following is suggested by research?
Some increases in CEO pay reflect improved performance levels of their firms.
Balanced scorecards refer to the use of operational yardsticks as well as traditional financial measures as a basis for computing executive pay. :T/F
T
Employees receive a specified payment for each unit produced under a straight piecework program. :T/F
T
Employees working under a standard hour plan are paid on the basis of a predetermined time allowed to finish the job. :T/F
T
Employers using a lump-sum merit program will need to periodically increase base salaries in order for employees to keep pace with the cost of living or general market wages. :T/F
T
Enterprise incentive plans allow all organizational members to participate in the plan's payout. :T/F
T
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. :T/F
T
Improshare plans promote interaction and support between management and employees. :T/F
T
In most profit-sharing plans, about 20 to 25 percent of net profits are shared with employees. :T/F
T
Incentive plans can create an organizational environment of "shared commitment," since individuals contribute to organizational success. :T/F
T
Lump-sum merit pay does not contribute to escalating base salary levels. :T/F
T
Merit pay plans have been criticized because the merit increase may not be sufficient to raise the employee's base pay. :T/F
T
Perquisites are special benefits given to executive employees. :T/F
T
Spot bonuses are usually provided for some employee effort that is not directly tied to an established performance standard. :T/F
T
Straight commission plans may induce salespeople to grant price concessions. :T/F
T
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. :T/F
T
Under a straight commission plan, compensation is based entirely on a percentage of sales. :T/F
T
Which of the following best describes profit sharing?
The employer pays employees a special current or deferred sum based on the profits of the enterprise.
Which of the following is NOT a problem with merit raises?
The raise may be based on achieving an objective standard.
Discuss the problems identified with merit raises. As a manager, what would you do to ensure that merit raises fulfilled their intended value?
There are number of problems identified with merit raises. First, unlike a bonus, a merit raise may be perpetuated year after year even when performance declines. When this happens, employees come to expect the increase and see it as being unrelated to their performance. Second, employees in some organizations are opposed to merit raises because, among other reasons, they do not really trust management. What are referred to as merit raises often turn out to be increases based on seniority, organizational politics, favouritism, or raises to accommodate increases in cost of living or area wage rates. Third, money available for merit increases may be inadequate to satisfactorily raise employee' base pay. Fourth, managers may have no guidance in how to define and measure performance, resulting in vagueness regarding merit award criteria. Fifth, employees may be unable to differentiate between merit pay (i.e., compensation tied to effort and performance) and other types of pay increases. Sixth, there may be a lack of honesty and cooperation between management and employees. Finally, it has been shown that "overall" merit pay plans do not motivate higher levels of employee performance. There are no easy solutions to these problems. However, organizations may establish a merit pay guidelines chart that functions as a "look-up" table for awarding merit increases on the basis of (1) employee performance, (2) position in the pay range, and in a few cases, (3) time since the last pay increase. In addition, organizations should strive to ensure that their performance appraisal system is reliable and valid. Any deficiencies in the performance appraisal system (as discussed in Chapter 8) can impair the operation of a merit pay plan. A third tactic that organizations may use is to implement a lump-sum merit pay plan. Under this type of plan, employees receive a single lump-sum increase at the time of their review, an increase that is not added to their base salary. This innovative approach provides financial control by maintaining annual salary expenses and helps to provide a clear link between pay and performance.
It was revealed in the press that the former CEO of a Fortune 100 firm enjoyed special use of the company plane and a country club membership as a part of his reward package. Which of the following best describes these benefits?
They are known as perquisites
When setting performance measures for incentive systems, what can we say about the best measures?
They are quantitative, simple to understand, and show a clear relationship to improved performance.
According to research, which of the following best describes incentive plans?
They can contribute to organizational performance if certain conditions are met.
Which of the following is an advantage of merit increases on a lump-sum basis?
They do not contribute to escalating base salary levels.
Which of the following is an advantages of piece rate pay systems?
They have a direct link to performance.
Several organizations have an incentive that managers can give to their employees for outstanding singular effort not tied to any planned performance standard. What is such an incentive usually called?
a spot bonus
Saturn, the auto firm, has a sales incentive plan that permits salespeople to be paid for performing various duties not reflected immediately in their sales volume. What is this type of pay plan?
a straight salary plan
When employees receive a higher rate of pay for all of their work if production exceeds a standard level of output, which incentive plan are they are working?
differential piece rate
There are many potential errors, as well as discrimination, that can occur in the performance appraisal process. Which of the following can such errors lead to?
problematic merit pay
Which of the following is NOT an important component of a meaningful gainsharing plan?
registering the plan with appropriate federal authorities
Last year, many CEOs of Canada's largest companies earned less than $300,000 base pay, yet their overall compensation was on average more than $10 million. What was the major reason for the huge overall pay?
stock options
Which of the following is a pay plan that only compensates sales employees based on a percentage of sales?
straight commission plan
Which of the following pay plans can be plagued by the "free-rider" effect?
team incentives
Profit-sharing plans represent one way that wealth can be redistributed at which of the following levels?
the firm level
Peter Drucker, the management expert, has argued that CEO pay should not be more than 20 times that of the rank-and-file employee. What did his concern focus on?
the pay gap between CEOs and employees
In the Scanlon Plan, how is employee participation primarily achieved?
through screening and shop committees
How is the base pay for CEOs largely established?
through their education and experience
Which of the following is NOT a reason given by organizations for implementing incentive plans?
to increase employee benefits
