Chapter 13Variable Pay and Executive Compensation

MULT PLE C!" CE 1. Susan, the president of the school board for a rural school district, is interested in implementing a payfor-performance compensation system in the school. The school board has called you in as an expert in incentive compensation to explore this option. You tell Susan that a pay-for-performance is not appropriate for public sector employees. . b a teacher pay-for-performance system rarely works unless the teachers are involved in . the design of the system. c teachers unions usually support the idea of pay-for-performance because it increases . teacher pay which is usually low. d improvements in student test scores are a non-controversial measure of teacher . performance.

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3. 4hat are variable pay plans5 a methods of tying compensation to the 0onsumer %rice 'ndex 60%'7 in order to keep up . with inflation b additional tangible rewards given to employees for performance beyond normal . expectations c compensation that increases as employees gain new 8ob-related knowledge, skills, and . abilities d incentives to meet re9uired performance standards .

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,. Traditional compensation systems pay employees differently based on their 8ob responsibilities and base employee increases mainly on a level of performance. . b growth in capabilities. . c increasing length of service. . d changes in the labor market pay rates. .

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:. 4hich of the following is an assumption of variable-pay systems5 a Some 8obs contribute more to organi;ational success than others. . b +mployee performance is more a function of the design of the 8ob and organi;ational . support than of individual differences in effort or abilities. c +9uality in pay is a strong motivator of exceptional employee performance. . d $oth good and poor performing employees will perceive a pay system that rewards high . performance as satisfying.

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<. !s director of compensation for $lue$ottle +nterprises, you have implemented a highly successful pay-for-performance system. This system has worked successfully for three years as measured by a number of financial and non-financial measures. $ecause of this success you are considering 9uitting $lue$ottle and setting up your own consulting firm to promote this system. 4hich of the following statements is T*=+5 a This will be a successful undertaking because effective pay-for-performance systems are . translatable across industries. b You should target poor-performing firms as potential clients because most firms . performance will be enhanced by a pay-for-performance system. c !s long as most employees will experience an increase in pay with this system, they will . be satisfied with it. d You need to have a way to evaluate organi;ational cultures in order to select the . organi;ations in which your pay-for-performance system will be effective.

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>. %erformance incentives include all the following +?0+%T a team bonuses. . b piece-rate systems. . c annual increases. . d profit-sharing. .

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A. 'n a TB interview, the 0+. of Trevelyan, 'nc., commented that the pay-for-performance system was working well at her company because, C"ow everyone is pulling in the same direction.D 4hat does the 0+. mean by this observation5 a The pay-for-performance system is linking employee performance and the organi;ation s

. b . c . d .

strategic goals. +mployees have high levels of satisfaction with pay. +mployees are receiving higher total compensation. 'mportant 2* ob8ectives have been achieved, such as reduction in turnover and better attendance.

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E. The 0+. of )aster(iber Textiles attended a conference where he spoke with the 0+. of Folden (leece )anufacturing. Folden (leece has had great success in implementing an individual pay-forperformance system. The 0+. of )aster(iber has directed the vice president of 2* to implement the Folden (leece method at )aster(iber. The ('*ST concern of the B% of 2* should be a &oes the plan reward the appropriate employee actions5 . b 0an the plan be administered properly5 . c &oes the plan fit with the business strategies and culture at )aster(iber5 . d 0an )aster(iber afford the plan5 .

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-. 0aroline works on a design team that develops costumes for historically-based and fantasy movies. The team s designs are executed by professional seamstresses and tailors. 0aroline s a 8ob would be suited for individual pay for performance because one can ob8ectively . 8udge the artistic merits of the costumes. b individual performance can be isolated and measured separately from her team members . contributions. c 8ob would not be suited for pay for performance because the 9uality of the work product . of the team is mostly based on sub8ective 8udgment. d individual performance can be measured by the number of design drawings she . produces, and her pay could effectively be tied to this number.

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1G. 't is important to make sure that what is being rewarded by the compensation system is strongly tied to organi;ational ob8ectives, because people tend to a guess what they think management wants done. . b produce what is convenient. .

c produce what is measured and rewarded. . d avoid doing unpleasant tasks. .

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11. )ax is studying the new pay-for-performance incentive plan. )ax reali;es that under the new standards if he continues his normal rate of production, which takes a steady effort over the work day with few CslackD times where he can rest, he can continue to earn what he earns now. $ut if he puts forward maximum effort all day long, which will leave him physically and mentally exhausted by the end of the day, he can earn an extra H1G before taxes. )ax s current pay is about H,G an hour. 4hich of the statements is most likely to be T*=+5 a )ax is likely to continue to exert his typical effort. . b "o incentive pay system is likely to motivate higher effort from )ax. . c 'f this incentive plan is not effective in motivating extra effort from )ax, he is a low. motivation employee whose turnover would be functional. d )ax is likely to exert maximum effort every day in order to earn this production . incentive.

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13. !s director of 2* you need to calculate the return on investment of a new differential piece-rate system. To do this you need to calculate a the ratio of the cost of the old incentive system to the cost of the new incentive system . multiplied by the dollar value of the increase in production. b the dollar value of the increase in production divided by the cost of the new incentive . system. c the ratio of the cost savings of the new incentive system compared with the return on . investment which the shareholders expect. d the dollar value of the additional production minus the cost of the new incentive system . divided by the cost of the new incentive system

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1,. 4hich of the following statements is T*=+5 a Flobal firms cannot use pay-for-performance systems because of variations in national . culture. b Flobal firms can use pay-for-performance systems if the organi;ation has the same . competitive strategy in each country in which it operates. c Flobal incentive programs tend to be too complex to be understood by employees which . undermines the programs effectiveness.

d Flobal firms can use incentive systems if they are adapted to appropriate goals in . different geographic regions.

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1:. %otential metrics for variable pay plans include all of the following +?0+%T a increase in market share. . b reduction of total compensation expense. . c increase in customer satisfaction levels. . d return on investment. .

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1<. 2*-related performance measures for a variable pay plan include all the following +?0+%T a absenteeism costs. . b turnover costs. . c customer satisfaction. . d accident rates. .

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1>. *esearch shows that individual pay-for-performance compensation systems work best when they are accompanied by a high levels of teamwork and cooperation among co-workers. . b directive supervision and strong central leadership. . c an entrepreneurial and individualistic organi;ational culture. . d employee distrust of top management motives. .

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1A. !n effect of variable pay plans is that IIII incentives increase the competition among individual employees. a divisional . b individual . c work team . d organi;ational .

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1E. $ernard is very upset when he learns that the company is changing to a pay-for-performance system where lump-sum bonuses instead of raises will be used. The system will record the performance of each work team and reward everyone on the team e9ually. !ll of the following are reasons for $ernard to be upset +?0+%T a $ernard s base pay will be essentially fro;en. . b $ernard is a low to average performer on his work team. . c $ernard is the highest individual performer on his team. . d The pay-for-performance plan is phrased in vague, technical terms. .

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1-. !n individual incentive system will be counterproductive when a the organi;ation emphasi;es teamwork and cooperation. . b there is a dynamic technological environment. . c it results in competition among the employees. . d the organi;ational culture stresses individualism. .

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3G. 4hich of the following statements is T*=+5 a The ma8ority of employees covered by incentive systems are unhappy with them. .

b . c . d .

! large ma8ority of employers have incentive systems that cover all their employees. =nions tend to support monetary performance incentive plans if employers do not abandon pay for seniority. !n assumption of variable pay systems is that some 8obs contribute more to organi;ational success than do other 8obs.

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31. 4hich of the following is classified as an individual variable pay plan5 a Scanlon plan . b profit-sharing . c piece-rate . d employee stock options .

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33. !fter working five years as a service coordinator at $lue$ottle +nterprises, )andy has developed some timesaving shortcuts that allow her to process a higher volume of work than the other service coordinators. 'f )andy would train her co-workers in her techni9ues, the entire department could be more efficient. The performance incentive system that would be 1+!ST likely to encourage )andy to share her expertise with her co-workers would be aJan a individual-level incentive system. . b team-based incentive system. . c organi;ation-level incentive system. . d Scanlon plan. .

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3,. !n individual-level pay-for-performance system would be 1+!ST effective for which of the following employees5 a an employee who guts chickens in a poultry processing plant. . b a sales clerk at a fashionable women s shoe store. . c the 0+. of a middle-si;ed builder of manufactured housing.

. d a marketing specialist on a cross-functional product development team. .

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3:. IIII is an example of a group or team variable pay system. a Sales compensation . b Fainsharing . c +mployee stock options. . d &eferred compensation .

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3<. *obert is paid by the number of bicycle tires he attaches to wheel rims. 'f he attaches more than his daily 9uota of tires, he receives 3< cents extra per extra tire. *obert is paid under a IIII system. a pro-rated bonus . b differential piece-rate . c straight piece-rate . d straight commission .

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3>. ! differential piece-rate system pays employees a one piece-rate wage for standard production, but less if producing below 9uota. . b one piece-rate wage for units produced up to a standard output, and a higher piece-rate . wage for units produced over the standard. c a higher rate per piece for employees with more experience and seniority. . d differential wages depending on the differing responsibilities in the production of each . unit.

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T.%# &efinitional 3A. 4hen 0laudette found a flaw in a ma8or outgoing order and corrected it before it was shipped, her boss immediately gave her a voucher to the best day spa in town. This type of incentive is called an a immediate payout. . b spot bonus. . c golden handshake. . d spontaneous reward. .

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3E. The downside of bonuses is that a they may cause low performing employees to 9uit. . b employees who are passed over may become 8ealous of the bonus recipient. . c a well-implemented bonus system may be more expensive to the firm than base pay . raises for improved performance. d bonuses are too trivial in amount to actually motivate exceptional behavior. .

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3-. $onuses are less costly to the organi;ation than general wage increases, because a bonuses receive preferential tax treatment. . b the annual amount given as a bonus tends to be smaller than the annual amount given as . a raise. c bonuses are fre9uently given in the form of non-cash items. . d bonuses do not become part of employeesK base wages. .

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,G. 'f a company has an annual competition to reward the store manager with the highest dollar sales in each state with a paid vacation to a luxury resort it will probably a improve sales at the stores with the historically lowest dollar sales. . b help retain the store managers who feel they have a chance to win the award in the

. upcoming year. c encourage teamwork among the store managers. . d increase morale of most of the store managers. .

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,1. The disadvantage of Cemployee of the monthD type awards is that a they can be seen as favoritism. . b they are typically awarded on the basis of ob8ective criteria. . c it is difficult to link these awards with specific performance criteria. . d eventually all employees will have been employee of the month and the award will have . lost its distinctiveness.

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,3. !t the annual awards ban9uet, all employees who have been with the company ,G years or more received their choice of a cruise or a week at a resort. This type of special incentive program is called a IIII award. a recognition . b golden handshake . c service . d performance .

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,,. The most common type of groupJteam incentive plan used by organi;ations is paying a all team members the same base pay with e9ual bonuses based on team performance. . b team members different base pay, with e9ual bonuses based on team performance. . c all team members the same base pay with varying bonuses based on individual . contribution to the team s performance. d team members different base pay, with varying bonuses based on individual contribution . to the team s performance.

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,:. &istributing team incentives e9uitably means that a each team member gets the same amount of bonus. . b team members are paid incentives that vary according to individual performance. . c teams that are in competition with one another are paid incentives based on their relative . performance. d each team in the company receives the same amount of discretionary incentive dollars to . distribute.

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,<. .ne of the differences between individual incentives and group incentives is that a individual incentives are more likely to be monetary whereas group incentives are more . likely to be non-monetary. b group incentives carry high CtrophyD value for the members who receive them. . c incentives for group members tend to be allocated e9uitably whereas individual . incentives tend to be allocated e9ually among employees. d group incentives place social pressure on group members. .

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,>. 'n designing the company s new team incentive plan, the vice president of 2* wishes to strongly link the team s efforts with its effective performance. The timing of incentive payouts should be a monthly. . b 9uarterly. . c semiannually. . d annually. .

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,A. !ll of the following are conditions supporting successful use of groupJteam incentives +?0+%T a cooperation is necessary to do the 8ob.

. b individual performance cannot be identified. . c group members decide how to allocate bonuses. . d employees understand how bonuses are earned and calculated. .

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,E. 1ucretia Toys is investigating the use of team incentives in its production plant. +ach work group is composed of about 3< individuals. !s the manager of 2* you a recommend using e9ual payouts for each team member. . b express concern about the dilution of individual efforts on such large teams. . c urge management to go forward with the plan because every 8ob can benefit from . increased teamwork. d recommend that management wait to implement any team incentive plan because this . may trigger a union organi;ing attempt in a manufacturing environment.

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,-. ! consultant presenting a plan for a groupJteam incentive plan stresses that the money to be used as incentive rewards will be generated by improved organi;ational performance. This aspect of the plan is called the IIII principle a li9uidating . b ;ero-sum-game . c pay-as-you-go . d self-funding .

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:G. !ll of the following are typical performance measures in gainsharing plans +?0+%T a overhead cost. . b labor costs. . c overtime hours. .

d 9uality levels. .

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:1. The purpose of organi;ational-level incentives is to a reward each employee for the performance of the entire company. . b aid in recruiting individualistic and entrepreneurial employees. . c motivate functional competition among employees to increase total performance. . d create an organi;ational culture of ethical behavior. .

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:3. Fainsharing plans are designed to elicit IIII effort from employees. a minimum acceptable . b sustainable . c satisfactory . d maximum possible .

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:,. To be effective, an organi;ational incentive program should a give higher rewards to employees whose individual efforts are outstanding. . b include everyone from non-exempt employees to managers and executives. . c pay out every year regardless of whether the organi;ation is profitable. . d reward the shareholders for investing in the business. .

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::. The primary ob8ectives of organi;ational incentive systems includes all of the following +?0+%T a to enhance employee innovation. . b to attract and retain employees. . c to increase productivity. . d to improve employee morale. .

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:<. ! medium-si;ed law firm every year distributes a bonus to its employees, from clerks to partners, based on the fees it has earned on the cases it has won. +ven though every employee has not worked on every case, the senior partners of the law firm feel that such a bonus motivates employees to cooperate with one another and assist each other in times of high work loads. This is a type of IIII incentive. a group . b team . c individual . d organi;ational .

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:>. (or a profit-sharing plan to be effective, management must a increase innovative solutions to technical problems. . b not have high expectations of performance impact in the first year of the program. . c be willing to disclose financial and profit information to employees. . d stabili;e profits so that the annual payoff is consistent. .

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:A. !ll of the following are drawbacks of profit-sharing plans +?0+%T a profits of the organi;ation are not entirely under employees control. .

b they are not self-funding. . c employees rewards come a long time after their improved performance. . d management may resist disclosing financial and profit information. .

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:E. )elanie has worked for 3G years for a manufacturer of speciali;ed paint for the auto industry. )elanie stayed with the company rather than taking other 8ob offers because of the generous +S.%. 4hich of the following statements is (!1S+5 a +S.%s are a low-risk way for employees like )elanie to be Ccapitalists.D . b The +S.% probably has made )elanie more focused on the company s performance than . she would have been otherwise. c 'f the company goes bankrupt, )elanie may lose some of her anticipated retirement. . d The +S.% was a successful retention tool in )elanie s situation. .

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:-. !ndrew is excited about the new program at work. 2e will be allowed to purchase 3G shares of stock at H:< per share for a limited period of time. !ndrew is planning to take advantage of this IIII plan because he expects that the market price of the stock will far exceed H:< in a couple years. a windfall incentive . b gainsharing . c stock option . d employee stock ownership 6+S.%7 .

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<G. The main advantage for an employer in setting up an employee stock ownership plan is a increased protection against union organi;ing attempts. . b reduction of financial risk for employees and conse9uent reduction in employee turnover . rate. c increased employee productivity. .

d favorable tax treatment on earnings earmarked for use in the +S.%. .

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<1. The IIII type of pay-for-performance system is most likely to induce employees to behave unethically. a commission . b +S.% . c performance awards . d gainsharing .

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<3. ! IIII approach for compensating sales staff is useful when serving and retaining existing client accounts is significantly more important than generating new sales and accounts. a straight commission . b salary-only . c salary plus commission . d salary draw .

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<,. !rnold sells oil field e9uipment. 2e is paid 1G percent of the dollar amount of the sales he has completed each 9uarter. This is !rnold s only compensation. 2e is on the IIII system. a retainer . b pay-as-you-go . c deferred compensation . d straight commission .

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<:. The most fre9uently used form of sales compensation is the a draw. . b straight commission. . c salary plus commission. . d differential commission. .

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<<. %oseidon .ceanic Supply has introduced a new sales compensation system that rewards sales staff based on a combination of individual goals and group sales goals. 'n implementing this program, the management of %oseidon hopes to a motivate sales staff on the basis of individual entrepreneurialism. . b increase the amount of service to existing %oseidon customers. . c reduce opportunities for unethical behavior by sales staff. . d encourage teamwork among the sales staff. .

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<>. ! ma8or factor in making global incentive systems workable is a the spread of =.S.-style individualism among workers in other countries. . b the development of 'nternet-based management software. . c the development of a large group of Cglobal workersD who hold management and sales . 8obs in numerous countries throughout their careers. d technology improvements that allow employees to telecommute worldwide. .

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<A. Fainsharing and goalsharing plans are IIII -level incentives a individual .

b group . c organi;ational . d industrial .

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<E. 4hat is a Ldraw5L a an amount advanced to a sales employee and repaid from future commissions . b a system by which sales employees Cdraw downD their sales 9uotas . c a type of income e9uali;ation for tax purposes in which sales representatives can draw . down their earnings from a high-income year and transfer them to a low-income year d a lump-sum payment or bonus at the end of the month .

!"S# ! .$/# , T.%# &efinitional

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<-. !t the heart of most executive compensation plans is the idea that a at the executive level, status and image are as important as actual compensation. . b executives should be rewarded if the organi;ation grows in profitability and value over a . period of years. c executive compensation should be based on the organi;ation s current performance in the . stock market. d executives are more focused on their base compensation than they are on the variable . pay.

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>G. 4hich of the following statements is T*=+ about sales incentive plans5 a )ost companies are satisfied with their sales incentive plans. . b Sales incentives are effective in generating sales productivity over targets in most cases. . c )ost firms fre9uently change sales incentive plans. . d Sales staff are most satisfied when they are paid on straight commission plans because . they are simple to calculate and result in high payouts.

!"S# 0 .$/# , T.%# 0onceptual

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>1. /ames is a sales representative for a large international importJexport firm. (or the past three years /ames has received an annual bonus, the maximum possible, between H,A,GGG and H:3,GGG because he met his sales targets. This year, /ames is planning on using his bonus to buy a new car, so he and his wife have been test driving cars. 4hich of the following statements is most likely to be T*=+5 a 4e can be fairly certain that /ames has exerted intense discretionary effort in the last four . years. b The actual dollar amount of the bonus is less important to /ames than its CprestigeD . effect. c The bonus system in this company does not pay out a sufficiently large bonus to motivate . maximum effort. d /ames probably feels entitled to his anticipated bonus. .

!"S# & .$/# , T.%# !pplication

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>3. !ll of the following are common measures of sales effectiveness +?0+%T a sales relative to 9uota. . b sales staff satisfaction. . c new product sales. . d account retention. .

!"S# $ .$/# , T.%# 0onceptual

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>,. /essica works for one of the largest corporations in the =.S.. She makes the average pay of workers in this organi;ation, H,G,GGG. 't would be a good guess that the 0+. of /essica s company makes a H,GG,GGG. . b H1,<GG,GGG . c H,,GGG,GGG. . d H11,GGG,GGG. .

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>:. 'n large for-profit organi;ations, the 0+. s base salary is a typically the largest part of hisJher total compensation. . b often deferred until after the 0+. retires. . c likely to be less than half of hisJher total compensation. . d typically 3G times larger than the salary of the average worker in the organi;ation. .

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><. The main reason for giving 0+.s large incentive payments is to a motivate high performance resulting in improved financial performance of the company. . b make it easier to attract and keep top executives. . c prevent top executives from taking unethical actions to increase their pay. . d satisfy the financial needs of top executives. .

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>>. *egarding benefits, executives a typically have the same health benefits plans that other employees have. . b typically pay higher deductibles on their health care plans than do other employees. . c usually Cself-insureD for their health care. . d often have health plans with no co-payments and no limitations on physician choice. .

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>A. .rgani;ations offer deferred compensation to executives in order to a emphasi;e long-term performance of the organi;ation. . b help executives with tax liabilities caused by incentive plans. . c place Lgolden handcuffsL on key executives to prevent their leaving prematurely. . d hide excessive one-time bonuses earned by executives.

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>E. 4hich of the following statements is (!1S+5 a *esearch has not shown a strong relationship between 0+. stock options and firm . performance. b The Sarbanes-.xley !ct was motivated by abuse of stock options by top executives. . c +ven at the level of 0+., it is necessary to have formal, measurable performance targets . in order for a discretionary bonus system to be effective. d %er9uisites are becoming less-widely used because most of them are now taxed as . income to the executive.

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>-. =se of the company helicopter, country club memberships, first class air travel, and a chauffeured limousine are examples of a executive mandates. . b per9uisites. . c golden handcuffs. . d performance incentives. .

!"S# $ .$/# > T.%# &efinitional

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AG. +xecutives value perks for all of the following reasons +?0+%T a perks are status symbols. . b perks are continued after the executive retires. . c perks are often not taxed as income. . d perks are generally low cost to the company. .

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A1. The executive compensation scandals at +nron, 4orld0om, Tyco and others mainly involved abuse of a +S.%s. . b stock options. . c executive perks. . d deferred compensation. .

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A3. The most widely used long-term incentives for executives isJare a generous per9uisites. . b +S.%s. . c stock options. . d annual cash incentives. .

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A,. The $oard of &irectors of 0lementine )inerals and )ining has been challenged by shareholders about the total compensation of the 0+.. 'n order to examine whether the 0+. s pay is reasonable, the $oard of &irectors is addressing all of the following 9uestions +?0+%T a 4ould another company hire this 0+.5 . b 2ow does the 0+. s compensation compare with that of 0+.s in other companies in the . mining industry5 c 2as the 0+. s pay decreased in years when 0)) lost money5 . d 4hat would an investor pay for the 0+. s level of performance5 .

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A:. The 0+. of a ma8or corporation is being interviewed by a reporter from a TB news show. The 0+. makes over H<G million a year, and the reporter asks, C!re you really worth H<G million a year to your company, especially when most of your employees make minimum wage5D !ll of the following are plausible responses to the reporter s 9uestion +?0+%T a C' have to make ma8or decisions, and ' work endless hours under great pressure.D

. b . c . d .

C' am in charge of the company, and ' am responsible for the results.D C1ike a professional athlete, the top earning years of corporate executives are very limited.D C!ll Feorge 0looney and $rad %itt have to do is look handsome to make huge acting fees. ' have the responsibility for a ma8or corporation.D

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A<. (inancial measures that can be used to 8udge executive performance include all of the following +?0+%T a earnings per share. . b net income before taxes. . c market share. . d return on e9uity. .

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A>. 4hat is the usual composition of the compensation committee5 a a subgroup of the $oard of &irectors including officers of the firm . b a subgroup of the $oard of &irectors who are not officers of the firm . c executives from other companies who serve on a committee that is separate from the . $oard of &irectors, but which reports to it d compensation consultants without executive management involvement .

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AA. .nion&ome )anufacturing has suffered ma8or losses in the last few years. 1ast year the board of directors fired the 0+. and hired Simon Simple from one of its ma8or competitors. Simple has laid off 3G percent of the hourly employees and 1< percent of the managers and professional staff in the company. 2e has sold off two unprofitable subsidiaries, and for the first time in five years the company has posted a small profit. This year the board of directors has given Simple a multi-million dollar bonus. 4hich of the following statements is T*=+5 a 't is unusual for a company that has experienced mass layoffs to give executives large . bonuses. b Simple should not receive a performance bonus this year because the profits are due to

. c . d .

manipulation. The Sarbanes-.xley !ct prohibits this type of bonus. The employees at .nion&ome may feel that it is unethical for Simple to have received this bonus.

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AE. 4hat is the role of a compensation committee of the $oard of &irectors5 a To assist the 2* unit in developing overall pay and benefit programs for the . organi;ation. b To develop a compensation package that ties the organi;ation s overall compensation . system to the organi;ation s goals and ob8ectives.. c To make recommendations to the shareholders on the compensation formula for . members of the board of directors. d To make recommendations to the $oard of &irectors on overall pay policies, salaries for . top officers, stock options, and additional perks for executives.

!"S# & .$/# > T.%# 0onceptual T#UE$%&L'E

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1. =nless incentives are monetary, employees are not motivated to exert discretionary effort. !"S# ( .$/# 1 T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. ,-3 1.0# )otivation 0oncepts

3. Some form of pay for performance program is appropriate for every organi;ation. !"S# ( .$/# 1 T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. ,-, 1.0# Strategy

,. 'f a sewing machine operator is paid mainly for the number of 8eans he hems, he will sew as many hems as he can with little concern for the 9uality of the work. !"S# T .$/# 1 T.%# !pplication %TS# 1 &'(# +asy "!T# !!0S$ !nalytic *+(# p. ,-: 1.0# )otivation 0oncepts

:. 't is the dollar amount of incentives that motivates employee performance, not their CtrophyD value. !"S# ( .$/# 3 T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. ,-E 1.0# )otivation 0oncepts

<. Team harmony is enhanced when team members decide as a group how to distribute performance bonuses to each team member. !"S# ( .$/# : T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :GG 1.0# 2*)

>. ! manager at your firm has recruited an individual who is individualistic and has a strong will to Cwin.D !s the 2* director, you think this individual will be a good match with the company because you are about to roll out an organi;ational level pay-for-performance system. !"S# ( .$/# 1 T.%# !pplication %TS# 1 &'(# 0hallenging "!T# !!0S$ !nalytic *+(# p. :G1 1.0# )otivation 0oncepts

A. 'f a gainsharing plan is successful, it will generate financial gains for the company over and above the extra pay that it is providing employees. !"S# T .$/# < T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :G3 1.0# 2*)

E. Fainsharing is an example of an incentive system that is Cself-funding.D !"S# T .$/# : T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :G3 1.0# 2*)

-. Fainsharing encourages employees to increase their discretionary effort because the extra effort will produce financial gains. !"S# T .$/# : T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :G3 1.0# )otivation 0oncepts

1G. !n organi;ation should not attempt to implement a profit-sharing plan if employees are distrustful of management. !"S# T .$/# : T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :G,-:G: 1.0# 2*)

11. =nions sometimes oppose profit-sharing plans because the level of profits can be influenced by such things as accounting decisions made by management rather than employees efforts. !"S# T .$/# < T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :G, 1.0# 2*)

13. Stock option plans are restricted to employees who are managers or who are classified as exempt.

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1,. Technically, +S.%s are not employee incentive systems because the funds are not available to employees until they retire. !"S# ( .$/# < T.%# 0onceptual %TS# 1 &'(# 0hallenging "!T# !!0S$ *eflective Thinking *+(# p. :G: 1.0# 2*)

1:. +S.%s are very popular among employees because they reliably provide increased financial security in retirement. !"S# ( .$/# < T.%# 0onceptual %TS# 1 &'(# 0hallenging "!T# !!0S$ *eflective Thinking *+(# p. :G: 1.0# 2*)

1<. (or profit-sharing to work, management must be willing to disclose financial and profit information to the employees. !"S# T .$/# < T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :G: 1.0# 2*)

1>. Straight sales commission systems are not an appropriate compensation system when ethical concerns are paramount. !"S# T .$/# , T.%# 0onceptual %TS# 1 &'(# +asy "!T# !!0S$ *eflective Thinking *+(# p. :G< 1.0# +thical *esponsibilities

1A. The traditional sales performance measure is individual sales revenue against established 9uotas. !"S# T .$/# , T.%# 0onceptual %TS# 1 &'(# +asy "!T# !!0S$ *eflective Thinking *+(# p. :G> 1.0# 2*)

1E. ! straight-commission approach is best it is extremely important for the firm to retain existing clients as well as to lure new clients to the firm. !"S# ( .$/# : T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :GA 1.0# 2*)

1-. The ratio of executive pay to average employee pay in the =.S. is comparable to that of executives in other developed nations. !"S# ( .$/# > T.%# 0onceptual %TS# 1 &'(# +asy "!T# !!0S$ *eflective Thinking *+(# p. :GE 1.0# +nvironmental 'nfluence

3G. %er9uisites may offer substantial tax savings for executives because some perks are not taxed as income. !"S# T .$/# > T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :G1.0# 2*)

31. The most widely used long term executive performance incentive is the +S.%. !"S# ( .$/# > T.%# 0onceptual %TS# 1 &'(# +asy "!T# !!0S$ *eflective Thinking *+(# p. :1G 1.0# 2*)

33. The Sarbanes-.xley !ct of 3GG3 regulates certain aspects of executive compensation. !"S# T .$/# > T.%# 0onceptual %TS# 1 &'(# +asy "!T# !!0S$ *eflective Thinking *+(# p. :1G 1.0# 2*)

3,. 0+. performance is meaningfully measured only if financial ob8ectives such as return on investment are considered. "on-financial measures are too easily manipulated to accurately reflect 0+. performance. !"S# ( .$/# > T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :11-:13 1.0# 2*)

3:. )embers of the board of directors who are also officers of the firm are barring by some firms from serving on the compensation committee. !"S# T .$/# > T.%# 0onceptual %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :13 1.0# +thical *esponsibilities

3<. !manda, a 0+. of a large marketing firm, has been asked to serve on the compensation committee of another large marketing firm. 'f !manda agrees to serve, she can except to be paid a large fee. !"S# T .$/# > T.%# !pplication E''&( 1. 4hat factors will contribute to a successful variable pay plan5 !"S# ! variable pay plan will be successful if it includes the following factors. 617 The variable pay plan is clear and understandable, and it is communicated to employees continually. 637 The employees see incentives as desirable. 6,7 The plan is appropriate for the organi;ation s culture. 6:7 't uses realistic performance measures. 6<7 The plan is kept current. 6>7 it is linked to organi;ational ob8ectives. 6A7 The performance results are clearly linked to payouts that truly recogni;e performance differences. (inally, 6E7 variable pay incentives are separate from employees base pay. %TS# 1 &'(# )oderate "!T# !!0S$ !nalytic *+(# p. :13 1.0# +thical *esponsibilities

%TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking

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.$/# 1 T.%# 0onceptual

3. Should performance incentives for teams be e9ual for all team members or based on individual performance5 !"S# 'f a team performs exceptionally well and is given an incentive, the incentive can either be awarded e9ually to all team members or it can be distributed in different amounts to different team members on some Ce9uitableD arrangement. 'f all team members get the same reward regardless of salary level, seniority, performance or other factor, there may be less overall conflict among team members, but the high-performing members may be resentful. *esearch shows that there is more overall satisfaction with rewards that are based on individual performance than those that are e9ual for all. 'f incentives for team performance are allocated differentially among team members, those who receive smaller awards may be resentful. 0onse9uently, there is no clear answer to this 9uestion, as the appropriateness of e9uality or e9uity depends on the individuals involved and the organi;ational circumstances. %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking T.%# 0onceptual *+(# p. :GG-:G1 .$/# : 1.0# )otivation 0oncepts

,. &escribe the various methods of compensating sales employees. !"S# 0ompensation paid to sales employees is typically partly or entirely tied to sales performance. %lans include salary-only, straight commission, draw system, salary-plus-commission or bonuses. !lthough all plans are supposed to encourage the employee to sell more products or services, the plans have different effects. Salary-only encourages the least selling effort and focuses effort on servicing existing clients. Straight commission forces the employee to sell in order to have any compensation. ! draw against straight commission still forces the employee to sell, but allows the employee to borrow against future 6potential7 sales and relieves himJher of some of the insecurity of working on commission. Salary-plus-commission or bonuses gives the stability of a salary with the sales motivation of a commission. %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :G<-:G> 1.0# 2*) .$/# , T.%# 0onceptual

:. Five two examples of organi;ational level incentives and explain how they link individual and firm performance. !"S# %rofit-sharing plans and +S.%s are two types of organi;ational level incentives. $oth reward the employee if the organi;ation as a whole performs well. +very employee in the program benefits if the organi;ation is profitable 6and, in the case of +S.%s, is successful in the long term7. The purpose is to encourage cooperation and a sense of ownership among the employees. %rofit-sharing distributes a percentage of profits to employees at the end of the year. +mployees have to trust that management is being truthful about the level of profits, especially in years when payouts are low. +S.%s transfer stock ownership to the employee. 'f the stock has grown in value when the employee retires, the employee will benefit financially. .f course, if the firm does not prosper, neither do the +S.%s or the employees who rely on them for retirement funds.

%TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking

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.$/# < T.%# 0onceptual

<. 2ow does executive compensation differ from the compensation packages provided for other employees in the organi;ation5 &escribe some of the incentives available for executives. !"S# !t the heart of most executive compensation plans is the idea that executives should be rewarded if the organi;ation grows in profitability and value over a period of years. Therefore, variable pay is a much larger proportion of executive pay than of pay for other employees. !lthough executive salaries can be high, they may be less than ,G percent of the executive s total compensation. +xecutives receive special benefits in addition to regular benefits available to non-executives, including more generous health insurance plans. Since executive pay is so high, tax conse9uences are significant. This has led to the use of deferred compensation plans as well as estate-planning and tax guidance services for executives. Stock options are the most common method of rewarding executives for long run performance of the firm, but past unscrupulous manipulation of stock options led to the passage of the Sarbanes-.xley !ct that places more restrictions on these plans. +xecutives also receive various perks, such as club memberships, first class plane travel, chauffeurs, and cars. (inally, executives receive financial incentives and bonuses that may 6or may not7 be tied to the financial or non-financial performance of the firm. 'deally, the executive would be rewarded for the firm s performance over a number of years, but in practice many incentives are based on shorter term ob8ectives and have sometimes been manipulated by unethical executives. The link between executive performance and firm performance is sometimes tenuous. %TS# 1 &'(# )oderate "!T# !!0S$ *eflective Thinking *+(# p. :1<-:3G 1.0# 2*) .$/# > T.%# 0onceptual