Chapter 18
10. (p. 625) _____ is the budgetary approach that begins with an estimate from top management of the pay increase budget for the entire organization. A. Bottom-up budgeting B. Top-down budgeting C. Managerial plan D. Executive estimate budgeting
B
42. Under the contract pay system, each worker was paid according to a uniform contract for each company. True False
FALSE
43. In calculating labor costs, employment level includes only core employees not contingent workers. True False
FALSE
46. Rather than define employment as hours of work, number of employees is often used. True False
FALSE
47. Executive estimation is the budgetary approach that begins with an estimate from top management of the pay increase budget for the entire organization. True False
FALSE
48. The phenomenon of turnover effect means that organizations must budget additional money for next year's budget to cover effects of turnover. True False
FALSE
50. The CPI measures the cost of living. True False
FALSE
52. A CPI of 180 in Boston and 220 in Chicago means that it is more expensive to live in Chicago than in Boston. True False
FALSE
54. Managing compensation ethically is comparatively easy since much of compensation is guided by many laws and regulations. True False
FALSE
57. Job analysis and gain-sharing are not examples of inherent controls on managers' compensation decisions. True False
FALSE
65. Manager self-service answers questions, explains compensation policy, and explains how systems affect their pay. True False
FALSE
What are red circle rates?
If employees are paid above the range maximum, these rates are called red circle rates. Most employers "freeze" red circle rates until the ranges are shifted upward by market update adjustments so that the rate is back within the range again. If red circle rates become common throughout an organization, then the design of the ranges and the evaluation of the jobs should be reexamined.
1. (p. 618) Which of the following is not a likely consequence of a highly decentralized pay system? A. Total labor costs would be reduced B. Pay rates would be very unsystematic C. Managers would use pay to motivate their own objectives D. Employees are likely to be treated unfairly
A
31. (p. 636) _____, designed for employees or managers, explain compensation policies and practices, answer frequently asked questions, and explain how these systems affect their pay. A. Communication portals B. Manager self-services C. Cafeteria plans D. Content delivery networks
A
74. (p. 627-628) Distinguish the concepts of the cost of living, changes in prices in the product and service markets, and changes in wages in labor markets.
Although there is little research to support cost of living increases, employees undoubtedly compare their pay increases to changes in their living costs. Unions consistently argue that increasing living costs justify increasing pay. It is important to distinguish among three related concepts: the cost of living, changes in prices in the product and service markets, and changes in wages in labor markets. Changes in wages in labor markets are measured through pay surveys. These changes are incorporated into the system through market adjustments in the budget and updates of the policy line and range structure. Price changes for goods and services in the product and service markets are measured by several government indexes, one of which is the consumer price index. The third concept, the cost of living, refers to the expenditure patterns of individuals for goods and services. The cost of living is more difficult to measure because employees' expenditures depend on many things: marital status, number of dependents and ages, personal preferences, location, and so on. Different employees experience different costs of living, and the only accurate way to measure them is to examine the personal expenditures of each employee. The three concepts are interrelated. Wages in the labor market are part of the cost of producing goods and services, and changes in wages create pressures on prices. Similarly, changes in the prices of goods and services create the need for increased wages in order to maintain the same lifestyle.
17. (p. 629) Which method of budgeting relies heavily on employee pay histories? A. Unit-level budgeting B. Bottom-up C. Control to planned level rise D. Top-down
B
2. (p. 619) Which of the following is not a tradeoff that would be considered in setting a compensation budget? A. Seniority versus performance contingent pay B. To pay overtime for exempt versus nonexempt C. Short-term versus long-term incentives D. Cash compensation versus benefits
B
8. (p. 623) Contingent workers include all of the following except _____. A. part-time regular workers B. workers on rotating shifts C. overtime workers D. small independent vendors
B
76. (p. 629-630) What are the steps involved in the bottom-up budgeting process?
Bottom-up budgeting begins with managers' pay increase recommendations for the upcoming plan year. 1. Instruct managers in compensation policies and techniques. 2. Distribute forecasting instructions and worksheets. 3. Provide consultation to managers. 4. Check data and compile reports. 5. Analyze forecasts. 6. Review and revise forecasts and budgets with management. 7. Conduct feedback with management. 8. Monitor budgeted versus actual increases.
25. (p. 632-633) _____ are to broad bands as minimums, midpoints, and maximums are to pay ranges. A. Gray fields B. Band-guides C. Reference rates D. Gray ranges
C
3. (p. 619) All of the following are major factors used to manage total labor costs except _____. A. average employment level B. average cash compensation C. number of overtime hours D. average benefits costs
C
33. (p. 637) Research shows that employees tend to _____ the actual pay of those in jobs above them and _____ the pay of those below them. A. underestimate; underestimate B. overestimate; overestimate C. access; overestimate D. overestimate; underestimate
C
34. (p. 637) All of the following are recommended steps in the compensation communication cycle by WorldatWork except _____. A. defining the objectives of the communication program B. a communication program that will convey the information needed to accomplish the original objectives C. collecting information from executives, managers, and employees D. operate an informal communication network
C
38. (p. 643) For the compensation system, the basic question to ask is _____ A. "Who should do the activity?" B. "How should the technique be redesigned?" C. "Does each specific activity directly contribute to our objectives?" D. "Should the activity be done in-house, or can others do it more effectively?"
C
9. (p. 625) The percentage increase that is planned for an organizational unit or company is called _____. A. a top-down budget B. a bottoms-up budget C. a planned pay-level rise D. the current year's rise
C
30. (p. 634) Approximately _____ of 600 surveyed companies calculate the cost and value added of their pay programs. A. three-fourths B. one-fourth C. one-half D. one-third
D
73. (p. 626) What is the turnover effect? Explain how it is calculated with an example.
Sometimes referred to as "churn" or "slippage," the turnover effect recognizes the fact that when people leave (through layoffs, quitting, retiring), they typically are replaced by employees who earn a lower wage. Turnover effect can be calculated as annual turnover multiplied by the planned average increase. For example, assume that an organization whose labor costs equal $1 million a year has a turnover rate of 15 percent and a planned average increase of 6 percent. The turnover effect is .15 x .06 = 0.9%, or $9,000 (.009 x $1,000,000). So instead of budgeting an additional $60,000 to fund a 6 percent increase, only $51,000 is needed. The turnover effect will also reduce benefit costs linked to base pay, such as pensions.
41. In a total decentralized pay system, employees are likely to be treated unequally and unfairly. True False
TRUE
44. If a company pays above the market for only one of five jobs, total compensation for these jobs may be above competitors. True False
TRUE
45. Many employers achieve flexibility and control employment costs by utilizing contingent workers rather than expanding and contracting the core workforce. True False
TRUE
49. The "churn", "slippage" or turnover effects assume that employees who leave earn, on average, less than employees likely to replace them. True False
TRUE
51. Changes in the CPI only indicate whether prices have increased more or less rapidly in an area since the base period. True False
TRUE
55. An area that presents an ethical dilemma for compensation managers is the manipulation of measures on which variable pay is based. True False
TRUE
56. The component of compensation most likely subject to unethical practices are employee profit-sharing payouts and executive stock valuations. True False
TRUE
58. Policy lines and skill-based pay plans are examples of inherent controls on managers' compensation decisions. True False
TRUE
60. If an organization has a number of red circle pay rates, this suggests problems with pay ranges and/or job evaluations. True False
TRUE
63. The compa-ratio is the average actual pay divided by the midpoint of the pay grade. True False
TRUE
64. Generally, management prefers a higher proportion of variable pay versus base wages and salary. True False
TRUE
67. A key reason to communicate pay information is that the goodwill engendered by the act of being open about pay may also affect perceptions of pay equity. True False
TRUE
69. If a pay system is not based upon work-related or business-related logic, it is best to not conduct a formal compensation communication program. True False
TRUE
70. The most important components of a pay communication program are the business- and work-related rationales on which the system is based. True False
TRUE
11. (p. 626) If financially troubled employers have not been able to maintain competitive market positions, the conventional response has been to _____. A. increase the rate of reduction in average pay by controlling adjustments in base pay B. decrease employees' copays and deductibles for benefits C. increase base wages but not variable pay D. reduce employment
D
53. Tying changes in pensions, social security payments, and labor agreements to changes in the CPI is called indexing. True False
TRUE
62. Broad bands provide managers greater discretion in pay for their subordinates than in grades and ranges. True False
TRUE
12. (p. 626) The denominator for calculating the current year's rise is _____. A. average pay at beginning of year B. average pay at end of year C. average number of employees during the year D. average employment level
A
13. (p. 626) Sometimes referred to as "churn" or "slippage," the _____ recognizes the fact that when people leave an organization, they typically are replaced by employees who earn a lower wage. A. productivity effect B. conflict effect C. turnover effect D. morale effect
C
59. An individual employee cannot earn more pay than the maximum of the pay grade of their current job. True False
FALSE
61. Employees should never be paid below the minimum of their pay range. True False
FALSE
72. (p. 625) What is the top-down method of budgeting?
Top-down budgeting begins with an estimate from top management of the pay increase budget for the entire organization. Once the total budget is determined, it is then allocated to each manager, who plans how to distribute it among subordinates. There are many approaches to top-down budgeting. A typical one, planned pay-level rise, is simply the percentage increase in average pay for the unit that is planned to occur. Several factors influence the decision on how much to increase the average pay level for the next period: how much the average level was increased this period, ability to pay, competitive market pressures, turnover effects, and cost of living.
16. (p. 628) If San Diego has a CPI of 165 and Los Angeles has a CPI of 145, this means _____. A. prices have risen faster in San Diego since the base year than they have in LA B. it essentially costs more to live in San Diego than in LA C. it costs less to live in LA than in San Diego D. pay in San Diego is, on average, 20 percent higher than in LA
A
21. (p. 632) Which of the following objectives of the pay model is most appropriate for judging ethical behavior of compensation specialists? A. Ensure legal compliance B. Strive to achieve efficiency and fairness C. Seek fairness for all stakeholders D. Strive to achieve efficiency and legal compliance
B
28. (p. 633) Which of following is a legitimate reason why a compa-ratio may be less than 1? A. A majority of workers with high performance B. The majority of employees may be new or recent hires C. Low promotion rates D. Turnover is low
B
68. The final step in the compensation communication cycle is conducting the communication sessions. True False
FALSE
66. Employees in companies with open pay systems express higher satisfaction with their pay system but not their pay than employees in more secret pay systems. True False
FALSE
75. (p. 627-628) What is the consumer price index (CPI)? Explain with an example.
Many people refer to the CPI as a "cost-of-living" index, and many employers choose, as a matter of pay policy or in response to union pressures, to tie wages to it. However, the CPI does not necessarily reflect an individual employee's cost of living. Instead, it measures changes in prices over time. Changes in the CPI indicate only whether prices have increased more or less rapidly in an area since the base period. For example, a CPI of 110 in Chicago and 140 in Atlanta does not necessarily mean that it costs more to live in Atlanta. It does mean that prices have risen faster in Atlanta since the base year than they have in Chicago, since both cities started with bases of 100.
20. (p. 631) Which form(s) of compensation is/are most likely to be involved in unethical practices? A. Executive stock options B. Employee medical benefits C. Employee base pay D. Worker pensions and retirement income
A
36. (p. 640) Which of the following statements about anchoring/framing is true? A. Initial data strongly affect decisions/beliefs. B. Reluctance to accept evidence that contradicts existing beliefs. C. Following fashions in programs/techniques. D. People "discover" patterns in random events.
A
7. (p. 622) _____ is a common effect of layoffs. A. Lower financial gains than expected B. Unfavorable short-term stock prices C. Higher morale among remaining employees D. Productivity gains
A
14. (p. 627) Changes in wages in labor markets are measured _____. A. by the producer price index B. by the consumer price index C. through pay surveys D. by examining the personal expenditures of each employee
C
18. (p. 629) Which of the following approaches to pay budgeting requires the most training of managers? A. Top-down B. Forward cycle budgeting C. Bottom-up approach D. Unit-level budgeting
C
26. (p. 633) The compa-ratio reflects the _____. A. rate paid for satisfactory performance B. relationship of actual salaries to the midpoint of the going rates in the market C. relationship of the midpoint of each range to actual salaries D. relationship of actual salaries in each range to the midpoint of the range
D
39. (p. 643) A major potential advantage of outsourcing is _____. A. stockholder returns B. improved employee satisfaction C. fewer problems with legislative compliance D. cost savings
D
24. (p. 632) A _____ rate is when an employee is paid more than the maximum of their pay grade. A. red circle B. yellow circle C. blue circle D. green triangle
A
27. (p. 633) A compa-ratio greater than 1 typically means that _____ A. the intended policy line has been violated B. employees are overpaid C. most employees are new entrants D. turnover is high
A
35. (p. 638) In a _____ approach in a compensation communication program, the focus is on explaining practices and how pay is determined. A. communication B. marketing C. management D. mixed
A
22. (p. 632) All of the following are examples of inherent controls except _____. A. range minimums and maximums B. broad bands C. budgets D. performance evaluation
C
29. (p. 634) All of the following statements about commercial compensation software are true except _____. A. can analyze almost every aspect of compensation information B. can simulate alternate wage proposals and compare their potential effects C. can easily compare past estimates to future estimates D. can help evaluate salary survey data and simulate the cost impact of gain-sharing options
C
79. (p. 636) What are some of the software packages that help in making information useful?
Compensation software transforms data into useful information and guides decision making. Many software packages that serve a variety of purposes are available. Some of them support employee self-service, by which employees can access their personal information, make choices about which health care coverage they prefer, allocate savings between growth or value investment funds, access vacation schedules, or check out a list of child or elder care service providers. Manager self-service helps managers pay their employees appropriately. Communication portals, designed for employees or managers, explain compensation policies and practices, answer frequently asked questions, and explain how these systems affect their pay. Other software processes transactions. It standardizes forms, performs some analysis, and creates reports at the click of the mouse. The advantage is that all employees at all locations are on the same system.
32. (p. 636) _____ is a system that allows employees to make health care choices, allocate savings to 401Ks or other savings vehicles, access vacation schedules and other activities. A. Manager self-service B. Employee self-service C. Cafeteria plans D. A communication portal
B
23. (p. 632) Range minimums and maximums reflect the _____. A. market value of the output produced B. market value of the employee's skills and abilities C. market fluctuations in wage rates D. value to the organization of the output of a job
D
4. (p. 621) A major advantage of a _____ is that it reduces benefits costs, something that the other options ordinarily do not achieve. A. reduction in hours B. furlough C. pay cut D. reduction in force
D
37. (p. 641) A management strategy of giving separate organization units the responsibility to design and administer their own compensation systems is _____. A. centralized authority B. decentralized responsibility C. the best approach to design D. rarely done in today's organizations
B
15. (p. 627) Which of the following is a measure of prices of goods and services in the product and service markets? A. Producer price surveys B. Product market competitor wage surveys C. Labor market competitor wage surveys D. Consumer price index
D
19. (p. 631) The Web page for the compensation society is _____. A. Society for Human Resource Management B. American Compensation Association C. International Compensation and Benefits Society D. WorldatWork
D
40. (p. 643) Replacing merit grids with _____ eliminates the link between the pay increase and the employees' salary position in the range and performance rating. A. banding B. skill- or competency-based plans C. job evaluation D. bonuses
D
5. (p. 622) The _____ often comes into play if organizations target reductions among higher paid employees because higher paid employees also tend to be older employees. A. ADA B. FMLA C. FLSA D. ADEA
D
6. (p. 622) All of the following are potential problems with headcount reductions except _____. A. regulatory requirements make it difficult to make targeted cuts B. workforce reductions, especially if not handled well, can harm employee relations C. organizations that make greater involuntary workforce reductions also experience greater voluntary turnover D. RIFs are very costly in tangible terms up front due to increases in employment insurance tax rates
D
78. (p. 633) Briefly summarize compa-ratios.
Range midpoints reflect the pay policy line of the employer in relationship to external competition. To assess how managers actually pay employees in relation to the midpoint, an index called a compa-ratio is often calculated: Compa-ratio = average rate actual paid/range midpoint. A compa-ratio of less than 1 means that, on average, employees in a range are paid below the midpoint. That is, managers are paying less than the intended policy. There may be several valid reasons for such a situation. The majority of employees may be new or recent hires; they may be poor performers; or promotion may be so rapid that few employees stay in the job long enough to get into the high end of the range. A compa-ratio greater than 1 means that, on average, the rates exceed the intended policy. The reasons for this are the reverse of those mentioned above: a majority of workers with high seniority, high performance, low turnover, few new hires, or low promotion rates. Compa-ratios may be calculated for individual employees, for each range, for organization units, or for functions.
What are the potential problems associated with headcount reductions?
Several potential problems can occur with headcount reductions. First, regulatory requirements make it difficult to make targeted cuts. Second, workforce reductions, especially if not handled well, can harm employee relations. Third, organizations that make greater (involuntary) workforce reductions also experience greater voluntary turnover. Fourth, RIFs, while reducing costs over time, are very costly in tangible terms up front due to increases in unemployment insurance tax rates, disruption of work processes and serving customers, and administrative costs of handling exits. Fifth, some companies have learned to run so "lean", and have controlled hiring so successfully, that there may be little room to cut headcount. Finally, where cuts can be made, if the cuts are too deep, an organization will be poorly positioned to generate revenue if business picks up again.
80. (p. 643) Why is outsourcing a viable alternative for organizations?
What are the major potential advantages and disadvantages of outsourcing? Value chain analysis and Six Sigma are processes used to improve quality and ensure that value is added by each technique and at each stage in a process. For the compensation system, the basic question to ask is, "Does each specific activity directly contribute to our objectives?" If some added value is not apparent, then the question is, "How should it be redesigned? Or should it be dropped?" Of those activities that do add value, the next question is, "Who should do it?" "Should the activity be done in-house, or can others do it more effectively? That is, should it be outsourced?" Outsourcing is a viable alternative as organizations struggle with activities that do not directly contribute to objectives. These are often referred to as transactional activities, which are not unique to the organization and might be done cheaper (and perhaps also better) by an outside provider. Cost savings are the major potential advantage of outsourcing. All those compensation pros can be laid off and/or retrained and re-assigned to other work. Sometimes, the quality of the service provided may increase also. A firm that does nothing but administer retirement benefits may be able to do a better job than a firm whose primary business is something else. Major potential disadvantages include less responsiveness to unique employee-manager problems, less control over decisions that are often critical to all employees, and information leaks to rivals and competitors. In addition, as with any contract, while an agreement may be signed stating that an outsourcing firm will provide a certain set of services and at a certain level, either side may subsequently find that their vision of the agreement and their experience of what is actually delivered may end up being different.