Chapter 12 - Final Exam - MIE 330

In the _____ dimension, employees base their fairness assessments on the processes that were used to decide the amount of compensation.

procedural In any situation where rewards are distributed, employees appear to assess fairness along two dimensions: distributive and procedural. Procedural fairness is based on the processes that were used to decide the amount of compensation.

Which of the following components is a perceived link between behavior and pay?

Instrumentality According to expectancy theory, motivation is hypothesized to be a function of expectancy, instrumentality, and valence perceptions. Generally speaking, the main influence of compensation is on instrumentality: the perceived link between behaviors and pay.

Which of the following is a compensation program that relates costs to the ability to pay?

Profit sharing Profit sharing and ownership relates costs to the employer's ability to pay. Payments are made in the form of bonuses in profit sharing.

As jobs become less programmable:

behavior-oriented contracts become less likely. As jobs become less programmable (less routine), outcome- oriented contracts become more likely because monitoring becomes more difficult.

In incentive pay, performance measures are primarily based on _____.

individual productivity In incentive pay, performance measures are primarily based on individual output, productivity, and sales. Payment is made in the form of bonuses.

Expectancy Theory

link between rewards and behaviors, it emphasizes expected (rather than experienced) rewards. In other words, it focuses on the effects of incentives. Behaviors (job performance) can be described as a function of ability and motivation. The theory that says motivation is a function of valence, instrumentality, and expectancy.

Programs for Recognizing Employee Contributions (Table 12.1)

merit pay incentive pay profit sharing ownership gain sharing skill-based

A(n) _____ is suitable for an organization with a culture that promotes individual competition.

merit pay plan Individual performance is the focus of merit and merit pay plans. It promotes a culture of individual competition. Refer To: Table 12.1

Agents prefer a behavior-based contract when _____.

outcome uncertainty is high Agents are less willing to have their pay linked to profits to the extent that there is a risk of low profits and the outcome is uncertain. They would therefore prefer a behavior-oriented contract.

Group incentives tend to measure performance in terms of _____.

physical output Group incentives (like individual incentives) tend to measure performance in terms of physical output, whereas team award plans may use a broader range of performance measures (like cost savings, successful completion of product design, or meeting deadlines).

In merit pay programs, an individual's compa-ratio represents his or her _____.

position in the pay range In merit pay programs, an individual's compa-ratio represents his or her position in the pay. It is one of the factors that determines the size and frequency of pay.

Which of the following is a compensation program that would best support an organizational culture of cooperation and problem solving?

Gainsharing The compensation program that would best reinforce the culture of cooperation and problem solving within an organization is gainsharing. The motivation is stronger in smaller units.

Which of the following compensation programs uses a management style that gives importance to control?

Incentive pay Under incentive pay programs, the management must exercise greater control over the employee. There is usually a clear performance-reward connection.

E. L. Thorndike's Law of Effect states that _____.

a response followed by a reward is more likely to recur in the future E. L. Thorndike's Law of Effect states that a response followed by a reward is more likely to recur in the future. The implication for compensation management is that high employee performance followed by a monetary reward will make future high performance more likely.

Merit Increase Grid

: A grid that combines an employee's performance rating with his or her position in a pay range to determine the size and frequency of his or her pay increases.

Which of the following must a principal do to reduce agency costs?

Align the agent's interests with the principal's interests. Agency theory says that the principal must choose a contracting scheme that helps align the interests of the agent with the principal's own interests (that is, it reduces agency costs). These contracts can be classified as either behavior-oriented (such as merit pay) or outcome-oriented (stock options, profit sharing, commissions, and so on).

Which of the following is a tool that allows companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth?

Balanced scorecard Some companies find it useful to design a mix of pay programs. It is possible to balance multiple objectives by using the balanced scorecard which allows companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth.

Reinforcement Theory

E. L. Thorndike's Law of Effect states that a response followed by a reward is more likely to recur in the future. The implication for compensation management is that high employee performance followed by a monetary reward will make future high performance more likely. By the same token, high performance not followed by a reward will make it less likely in the future. The theory emphasizes the importance of a person's actual experience of a reward.

Which of the following is a drawback of using profit sharing?

It runs the risk of contributing to employee dissatisfaction. Although profit sharing may be useful as one component of a compensation system, it runs the risk of contributing to employee dissatisfaction or higher labor costs, depending on how it is designed. Not only may profit sharing fail to increase performance motivation, but employees may also react very negatively when they learn that such plans do not pay out during business downturns.

Which of the following makes employee stock ownership plans (ESOPs) less attractive?

Less diversification of investment risk An ESOP must, by law, invest at least 51 percent of assets in its company's stock, resulting in less diversification of investment risk. Consequently, employees risk serious financial difficulties if the company does poorly.

Individual Incentives

Like merit pay, individual incentives reward individual performance, but with two important differences. First, payments are not rolled into base pay. They must be continuously earned and re-earned. Second, performance is usually measured as physical output (such as number of water faucets produced) rather than by subjective ratings. Individual incentives have the potential to significantly increase performance. Locke and his colleagues found that monetary incentives increased production output by a median of 30%—more than any other motivational device studied

Merit Bonus

Merit pay paid in the form of a bonus, instead of a salary increase

Which of the following is a difference between profit-sharing plans and employee ownership plans?

The link between pay and performance is less obvious under ownership than under profit sharing. Under ownership program, employees will not realize any financial gain until they actually sell their stock (typically upon leaving the organization). The link between pay and performance may be less obvious under ownership than under profit sharing. Thus, from a reinforcement theory standpoint (with its emphasis on actually experiencing rewards), the effect on performance motivation may be limited.`

Agency Theory

divergent interests and goals of the organization's stakeholders and the ways that employee compensation can be used to align these interests and goals

In skill-based pay systems, performance measures are primarily based on _____.

employees' competency acquisition In skill-based pay systems, performance measures are primarily based on skill or competency acquisition of individuals. The payment is made as a change in the base pay.

A(n) _____ program is based on group or plant performance that does not become part of the employee's base salary.

gainsharing Gainsharing is a form of compensation based on group or plant performance (rather than organization wide profits) that does not become part of the employee's base salary.

The Scanlon plan is an example of a(n) _____ plan.

gainsharing One type of gainsharing, the Scanlon plan provides a monetary bonus to employees (and the organization) if the ratio of labor costs to the sales value of production is kept below a certain standard. Gainsharing plans like the Scanlon plan and pay-for-performance plans in general often encompass more than just a monetary component.

Gainsharing plans differ from profit-sharing plans in that:

gainsharing plans distribute payouts more frequently. Gainsharing programs offer a means of sharing productivity gains with employees. Although sometimes confused with profit sharing plans, gainsharing differs in two key respects. First, instead of using an organization-level performance measure (profits), the programs measure group or plant performance, which is likely to be seen as more controllable by employees. Second, payouts are distributed more frequently and not deferred. References

According to a merit increase grid, one of the factors that determines the size and frequency of pay increases is the _____.

individual's performance rating In merit pay programs, the size and frequency of pay increases are determined by two factors. The first factor is the individual's performance rating (better performers receive higher pay). The second factor is position in range (that is, an individual's compa-ratio).

According to the expectancy theory, compensation systems differ according to their impact on the components of motivation; the main influence of compensation is on _____.

instrumentality According to expectancy theory, motivation is hypothesized to be a function of expectancy, instrumentality, and valence perceptions. Compensation systems differ according to their impact on these motivational components. Generally speaking, the main influence of compensation is on instrumentality: the perceived link between behaviors and pay.

A(n) _____ plan gives employees the opportunity to buy the company's shares at a previously fixed price.

stock option One way of achieving employee ownership is through stock options, which give employees the opportunity to buy stock at a fixed price. For many years, stock options had typically been reserved for executives in larger, established companies; more recently, there was a trend toward pushing eligibility farther down in the organization.