This Study Resource Was: Chapter 5: Performance Pay Choices

Chapter 5: Performance Pay Choices
TRUE/FALSE
1. Merit bonuses represent a permanent increase to base pay.
ANS: F PTS: 1 REF: 163 OBJ: 2
2. If an organization has a “promote from within” policy, it doesn’t really need any
other rewards to motivate behaviour.
3. Attendance programs are less risky for organizations in which intrinsic

motivation is low in the first place.
ANS: T PTS: 1 REF: 172 OBJ: 1
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4. All things being equal, goal sharing programs are thought to be less motivational
than gain sharing programs.
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5.
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To qualify as having an employee profit sharing plan a firm must have a formal
program in which payments based on profits are made to a wide cross section of employees.
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6. The three types of profit sharing plans are the current distribution plan, the
deferred payout plan, and the amortization plan.
aC s
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7. The three main types of employee stock plans are: stock bonus plans, stock
purchase plans and stock option plans.
ed d
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8. Employee stock plans are simpler to implement in privately-held rather than

publicly-traded corporations.
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9. Profit sharing plans can reduce the need for employee supervision.

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10. The use of long-term incentive plans is of little value to most firms.
MULTIPLE CHOICE
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1. Which of the following pay plans is geared to individual performance?
a. Profit sharing
b. Competency-based
c. Gain-sharing
d. Piece rates
ANS: D PTS: 1 REF: 151 OBJ: 1
BLM: Remember
2. What is the most common form of performance pay used by medium to large
Canadian firms?
a. Merit raises
b. Profit sharing
c. Merit bonuses
d. Commissions
ANS: A PTS: 1 REF: 152 OBJ: 1
BLM: Understand
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3. A typical tree planter should be able to plant thirty trees in an hour. You have
determined the average amount of money a worker with the skills and abilities to plant trees
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should earn hourly is $18. What is the straight piece rate paid to your employees?
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a. $30
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b. $1.66
c.
rs e $0.60
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d. $18
ANS: C PTS: 1 REF: 153 OBJ: 1
BLM: Apply
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4. Individual performance pay plans generally focus on promoting which type of

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behaviour?
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a. Organizational citizenship
b. Membership
c. Task
d. Citizenship and membership
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KEY: Understand BLM: Understand
5. Which of the following best explains why, despite their motivational potential,
piece rate systems often do not motivate maximum effort?
is
a. Work group norms define acceptable rates of

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production.
b. Piece rates are used in conjunction with base
pay.
c. Workers may be tempted to cut corners on
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quality.
d. Workers are more concerned with production
than safety.
BLM: Understand
6. What can you offer your employees to balance out the self-centered perspective,
caused by your piece rate system, and encourage citizenship behaviour?
a. Perks
b. Employee stock ownership
c. Merit bonuses
d. Suggestion system
ANS: B PTS: 1 REF: 156 OBJ: 1
BLM: Understand
7. Which of the following terms is used to describe pay that is geared only to the
volume of sales or transactions, with no base pay component?
a. Sales commission
b. Leverage selling
c. New market selling
d. Straight commission
BLM: Remember
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8. In what way is piece rates and commissions similar to each other?
a. Employees don’t have to worry about
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working themselves out of a job.
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b. They reduce the need for external control of
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employees through supervision.
c.
rs e Both types are commonly used in conjunction
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with base pay.
d. Both are popular systems widely used in the
service sector.
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BLM: Analyze
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9. Which of the following terms is used to describe a pay system in which an

employee receives regular advances against future commissions to smooth out income
fluctuations?
a. Sale stipend system
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b. Draw system
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c. Pay advance system

d. Security income
BLM: Remember
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10. When should the proportion of base pay relative to commission be higher?
Th
a. The more that each salesperson works

independently of others.
b. The shorter the length of the sales cycle.
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c. The greater the concern for high turnover.

d. The higher the degree of persuasive skills
required.
BLM: Understand
11. What differentiates merit pay from other types of performance pay, such as piece
rates, sales commissions, and target incentives?
a. Merit pay can be used as a substitute for time-
based pay.
b. Merit pay is based on specific aspects of
performance.
c. Merit pay is rarely used in combination with
base pay.
d. Merit pay is generally based on appraised
performance.
BLM: Understand
12. Which of the following statements best describes a merit raise?

a. A promise of future payments
b. A permanent pay raise that recognizes past
performance
c. An increase that is tax exempt
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d. A lump sum reward for past performance that
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does not increase base pay
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BLM: Remember
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13.
rs e
From an employee’s perspective, why are merit bonuses seen as less valuable
than merit raises?
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a. Employees have little confidence in the
results of performance appraisal.
b. Bonuses can cause poor relations with
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supervisors and coworkers.

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c. Bonuses are given in lump sum payments and

apply only for one year.
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d. Bonuses are not suited for work that depends

on collaboration and cooperation.
ed d
BLM: Understand
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14. Your employer is considering tying the bonus pool to the firm’s profitability and
then allocating this amount to employees based on individual merit. With reference to expectancy
theory, which component of the merit system will be weakened and thus make it less motivational
for you as an employee?
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a. Valence
Th
b. Expectancy
c. Instrumentality
d. Effort
sh
BLM: Analyze
15. According to the Peter Principle when will employees stop being promoted?
a. When they reach their level of incompetence.
b. When promotions are limited to family
members.
c. When technical tracks are not available.
d. When fewer upper-level vacancies exist.
a. When they reach their level of incompetence.
b. When promotions are limited to family
members.
c. When technical tracks are not available.
d. When fewer upper-level vacancies exist.
BLM: Remember
16. Which of the following is not a suitable condition for merit pay?
a. Individual performance that varies
b. Performance that is not controllable by the
individual
c. Individual performance can be separated out
d. Undesirable side effects are readily
manageable
BLM: Understand
17. Which of the following statements refers to a targeted incentive?

a. A payment to work teams if they achieve a
certain goal
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b. Aimed at a specific individual
c. Intended to reduce compensation costs
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d. Focused on a specific behaviour
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BLM: Remember
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18. Your instructor has offered class members bonus marks for volunteering as
campus tour guides. This is referred to as which type of performance pay plan?
a. Goal sharing
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b. Merit
c. Special-purpose incentive
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d. Commission
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BLM: Apply
19. In what circumstance are special-purpose incentives least appropriate?

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a. Intrinsic motivation does not already exist.

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b. Both intended and unintended behaviours are

easy to observe.
c. No other alternatives for inducing desired
behaviour are feasible.
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d. The company is using a high-involvement

managerial strategy.
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BLM: Understand
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20. From an employer’s point of view, what is the most attractive feature of gain-
sharing plans?
a. The plans are self-funding.
b. Positive work group norms develop.
c. The need for supervisory control is reduced.
d. Employees monitor each other’s performance.
BLM: Understand
21. Which of the following is an advantage of goal-sharing plans?

a. Each employee establishes his/her own goals.
b. Cost savings are quantified and shared.
c. Management establishes outcomes for each
employee.
d. They are less complex to develop than gain
sharing.
BLM: Understand
22. As the owner of a real estate firm with multi-office operations, you provide a
bonus to all sales personnel in the highest-producing office each month. What type of
performance pay plan are you using?
a. Goal-sharing
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b. Competitive bonus
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c. Pooled performance
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d. Group commissions
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BLM: Apply
o.
23. rs e
Which of the following are main types of profit sharing plans?
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a. Current assessment plan, delayered plan, and
blended plan
b. Deferred plan, cash plan, and group plan
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c. Combination plan, deferred plan, and current

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distribution plan
d. Current distribution plan, combination plan,
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and delayered plan

BLM: Remember
ed d
24. Which of the following plans allows you to defer a portion of your annual profit
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sharing bonus to help build your retirement income?

a. Deferred profit sharing
b. Combination profit sharing
is
c. Current distribution
d. Cash plan
Th

BLM: Understand
25. When is profit sharing most important to a company?

sh
a. When the company’s share value is very high.

b. When the employees are unionized.
c. When the company is privately owned.
d. When the firm has a high need for
cooperation.
BLM: Understand
26. What do employees receive under an employee stock bonus plan?

a. Shares at no cost to themselves
b. The cash value of phantom shares
c. A bonus equivalent to the increase in their
share value
d. Free financial advice on stocks
BLM: Understand
27. For employees, what is the main concern with a stock plan?
a. Stock plans are difficult to understand.
b. There are too many variations on their
execution.
c. They pose too much of a tax burden.
d. Share value is unpredictable.
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BLM: Understand
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28. Which of the following managerial practices, combined with an employee stock
plan, will increase the performance effects of employee ownership?
o.
a.
rs e Sharing financial information about the
company
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b. The use of work teams
c. Training and development
d. Employee participation in decision making
o

aC s
BLM: Understand
vi y re
29. These plans are set up so that a payout is contingent on the achievement of three-
to five-year performance goals.
a. Pension plans
ed d
b. Long-term incentives
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c. Deferred profit-sharing plans

d. Goal-sharing plans
BLM: Remember
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30. In general, individual performance pay fits best with which managerial strategy?
Th
a. Classical
b. Human relations
c. High involvement
sh
d. Hybrid
BLM: Understand
SHORT ANSWER
1. Identify and briefly explain the nature of individual performance pay plans.
ANS:
Individual performance pay plans - piece rates, sales commissions, merit pay, and special-purpose
incentives - generally focus on promoting task behaviour. Under piece rates , an employee
receives a specified sum of money for each unit of output produced or processed. They are
commonly used in manufacturing and service sectors. Sales commissions are used to compensate
sales personnel in a variety of industries. Sales associates receive a certain percentage of their
gross sales. The commission rate often varies depending on the products or services sold. Merit
pay is used to recognize and encourage continuing good performance and, unlike the other types
of performance pay, is based on appraisals of overall employee performance. Special-purpose
incentive programs (sometimes referred to as “targeted incentive programs”) are intended to
promote and reward certain behaviours that are of special importance to an organization, or to
counteract behaviours that are causing problems. Such incentives are most appropriate in
circumstances where intrinsic motivation does not already exist, where both intended and
unintended behaviours are easy to observe, and where no other alternatives for inducing the
desired behaviour are feasible.
PTS: 1 REF: 152 OBJ: 1
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2. Discuss the nature of suggestion systems and some of the problems you need to
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be aware of.
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o.
ANS:
rs e
Suggestion systems are intended to promote and reward innovative thinking by employees.
Employees are encouraged to submit suggestions that may improve organizational effectiveness
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in exchange for cash bonuses. The components of such a system are as follows: a system through
which suggestions are channeled, a systematic process for evaluating them, and an incentive for
submitting usable ideas. Problematic issues include the following: non accepted ideas cause
o
resentment and a reluctance to contribute further suggestions, employees may feel that the
amount of the award is not equitable compared to the cost savings realized by the company,
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supervisors resent employees who make suggestions feeling this is a negative reflection of
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managers’ performance, co-workers resent suggestions that disrupt existing work practices, and
who receives credit for the idea if developed by several individuals.

ed d
3. Explain the difference between goal sharing and gain sharing plans.
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ANS:
The core of goal sharing is that work groups or teams receive a bonus when certain pre-specified
performance goals are met, while, under gain sharing, cost savings are quantified and then shared
is
between the company and the group. Under goal sharing, goals on one or more performance
Th
indicators are set for each group or team, are to be met within a specified timeframe, and a bonus
is paid to all team members if the goal is achieved. Under gain sharing, there are no set goals
other than to simply improve as much as possible relative to the historical baseline. Employee
involvement is considered to be a fundamental aspect of most gain sharing plans. Goal sharing
plans can be much more arbitrary with management making most of the decisions.
sh
4. There are three types of profit sharing plans discussed in the text. Identify and
briefly explain each of them.
ANS:
Profit sharing may take one of the following three forms: the current distribution plan, the
deferred profit-sharing plan, and the combination plan. The current distribution plan is a profit
sharing plan that distributes the profit-sharing bonus to employees in the form of cash or shares,
at least annually. The deferred profit-sharing plan is a plan in which bonuses are allocated to
employee accounts but not actually paid out until a later date, usually on termination or
retirement. A combination plan is a plan that combines the current distribution and deferred
profit-sharing plans by paying some of the profit-sharing bonus on a current (cash) basis and
deferring the remainder.
5. Identify and briefly define each of the three types of employee stock plans.
ANS:
An employee stock plan is any type of plan through which employees acquire shares in the firm
that employs them. An employee stock bonus plan is a plan through which employees receive
shares in their employer at no cost to the employee. An employee stock purchase plan is a plan
through which employees may purchase shares in their employing firm. An employee stock
option plan provides options to employees to purchase company shares at some point in the future
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at a fixed price.
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Chapter 5: Performance Pay Choices

1. Merit bonuses represent a permanent increase to base pay.

ANS: F PTS: 1 REF: 163 OBJ: 2

ANS: F PTS: 1 REF: 164 OBJ: 1

3. Attendance programs are less risky for organizations in which intrinsic

ANS: T PTS: 1 REF: 172 OBJ: 1

ANS: F PTS: 1 REF: 181 OBJ: 3

ANS: T PTS: 1 REF: 184 OBJ: 3

8. Employee stock plans are simpler to implement in privately-held rather than

ANS: F PTS: 1 REF: 187 OBJ: 3

ANS: T PTS: 1 REF: 189 OBJ: 3

ANS: T PTS: 1 REF: 189 OBJ: 3

4. Individual performance pay plans generally focus on promoting which type of

ANS: C PTS: 1 REF: 153 OBJ: 1

KEY: Understand BLM: Understand

a. Work group norms define acceptable rates of

ANS: B PTS: 1 REF: 157 OBJ: 1

9. Which of the following terms is used to describe a pay system in which an

c. Pay advance system

a. The more that each salesperson works

c. The greater the concern for high turnover.

12. Which of the following statements best describes a merit raise?

supervisors and coworkers.

c. Bonuses are given in lump sum payments and

d. Bonuses are not suited for work that depends

17. Which of the following statements refers to a targeted incentive?

ANS: C PTS: 1 REF: 168 OBJ: 1

19. In what circumstance are special-purpose incentives least appropriate?

a. Intrinsic motivation does not already exist.

b. Both intended and unintended behaviours are

d. The company is using a high-involvement

ANS: D PTS: 1 REF: 172 OBJ: 2

21. Which of the following is an advantage of goal-sharing plans?

c. Combination plan, deferred plan, and current

and delayered plan

sharing bonus to help build your retirement income?

ANS: B PTS: 1 REF: 181 OBJ: 3

25. When is profit sharing most important to a company?

a. When the company’s share value is very high.

26. What do employees receive under an employee stock bonus plan?

ANS: D PTS: 1 REF: 187 OBJ: 3

c. Deferred profit-sharing plans

PTS: 1 REF: 152 OBJ: 1

PTS: 1 REF: 171 OBJ: 1

PTS: 1 REF: 173 OBJ: 2

PTS: 1 REF: 180 OBJ: 3

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