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
4. All things being equal, goal sharing programs are thought to be less motivational than gain sharing
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programs.
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5. To qualify as having an employee profit sharing plan a firm must have a formal program in which
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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
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the amortization plan.

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7. The three main types of employee stock plans are: stock bonus plans, stock purchase plans and stock
option plans.
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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
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 should earn hourly is $18. What is
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the straight piece rate paid to your employees?
a. $30
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b. $1.66
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c. $0.60
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d. $18
ANS: C rs e PTS: 1 REF: 153 OBJ: 1
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BLM: Apply
4. Individual performance pay plans generally focus on promoting which type of behaviour?
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a. Organizational citizenship
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b. Membership
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c. Task
d. Citizenship and membership
ANS: C PTS: 1 REF: 153 OBJ: 1
KEY: Understand BLM: Understand
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5. Which of the following best explains why, despite their motivational potential, piece rate systems often
do not motivate maximum effort?
a. Work group norms define acceptable rates of production.
b. Piece rates are used in conjunction with base pay.
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c. Workers may be tempted to cut corners on quality.

d. Workers are more concerned with production than safety.
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BLM: Understand
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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
8. In what way is piece rates and commissions similar to each other?

a. Employees don’t have to worry about working themselves out of a job.
b. They reduce the need for external control of employees through supervision.
c. Both types are commonly used in conjunction with base pay.
d. Both are popular systems widely used in the service sector.
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
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advances against future commissions to smooth out income fluctuations?
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a. Sale stipend system
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b. Draw system
c. Pay advance system
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d. Security income
BLM: Remember
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10. When should the proportion of base pay relative to commission be higher?
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a. The more that each salesperson works independently of others.

b. The shorter the length of the sales cycle.
c. The greater the concern for high turnover.
d. The higher the degree of persuasive skills required.
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BLM: Understand
11. What differentiates merit pay from other types of performance pay, such as piece rates, sales
commissions, and target incentives?
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a. Merit pay can be used as a substitute for time-based pay.

b. Merit pay is based on specific aspects of performance.
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c. Merit pay is rarely used in combination with base pay.

d. Merit pay is generally based on appraised performance.
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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
d. A lump sum reward for past performance that does not increase base pay
BLM: Remember
13. From an employee’s perspective, why are merit bonuses seen as less valuable than merit raises?
a. Employees have little confidence in the results of performance appraisal.
b. Bonuses can cause poor relations with supervisors and coworkers.
c. Bonuses are given in lump sum payments and apply only for one year.
d. Bonuses are not suited for work that depends on collaboration and cooperation.
BLM: Understand
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?
a. Valence
b. Expectancy
c. Instrumentality
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d. Effort
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BLM: Analyze
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15. According to the Peter Principle when will employees stop being promoted?
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a. When they reach their level of incompetence.
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b. When promotions are limited to family members.
c. When technical tracks are not available.
d. When fewer upper-level vacancies exist.
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BLM: Remember
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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
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c. Individual performance can be separated out

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d. Undesirable side effects are readily manageable

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

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a. A payment to work teams if they achieve a certain goal

b. Aimed at a specific individual
c. Intended to reduce compensation costs
d. Focused on a specific behaviour
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BLM: Remember
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
b. Merit
c. Special-purpose incentive
d. Commission
BLM: Apply
19. In what circumstance are special-purpose incentives least appropriate?

a. Intrinsic motivation does not already exist.
b. Both intended and unintended behaviours are easy to observe.
c. No other alternatives for inducing desired behaviour are feasible.
d. The company is using a high-involvement managerial strategy.
BLM: Understand
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.
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BLM: Understand
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21. Which of the following is an advantage of goal-sharing plans?
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a. Each employee establishes his/her own goals.
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b. Cost savings are quantified and shared.
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c. Management establishes outcomes for each employee.
d. They are less complex to develop than gain sharing.
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BLM: Understand
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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
d. Group commissions
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BLM: Apply
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23. Which of the following are main types of profit sharing plans?
a. Current assessment plan, delayered plan, and blended plan
b. Deferred plan, cash plan, and group plan
c. Combination plan, deferred plan, and current distribution plan
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d. Current distribution plan, combination plan, and delayered plan

BLM: Remember
24. Which of the following plans allows you to defer a portion of your annual profit sharing bonus to help
build your retirement income?
a. Deferred profit sharing
b. Combination profit sharing
c. Current distribution
d. Cash plan
BLM: Understand
25. When is profit sharing most important to a company?

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
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d. Free financial advice on stocks
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BLM: Understand
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27. For employees, what is the main concern with a stock plan?
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a. Stock plans are difficult to understand.
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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?
a. Sharing financial information about the company
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b. The use of work teams

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c. Training and development

d. Employee participation in decision making
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BLM: Understand
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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
b. Long-term incentives
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c. Deferred profit-sharing plans

d. Goal-sharing plans
BLM: Remember
30. In general, individual performance pay fits best with which managerial strategy?
a. Classical
b. Human relations
c. High involvement
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,
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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
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behaviours that are of special importance to an organization, or to counteract behaviours that are
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causing problems. Such incentives are most appropriate in circumstances where intrinsic motivation
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does not already exist, where both intended and unintended behaviours are easy to observe, and where
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no other alternatives for inducing the desired behaviour are feasible.
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PTS: 1 REF: 152 OBJ: 1
2. Discuss the nature of suggestion systems and some of the problems you need to be aware of.
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ANS:
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Suggestion systems are intended to promote and reward innovative thinking by employees.
Employees are encouraged to submit suggestions that may improve organizational effectiveness 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
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usable ideas. Problematic issues include the following: non accepted ideas cause resentment and a
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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, supervisors resent employees who
make suggestions feeling this is a negative reflection of managers’ performance, co-workers resent
suggestions that disrupt existing work practices, and who receives credit for the idea if developed by
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several individuals.
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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
between the company and the group. Under goal sharing, goals on one or more performance 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.
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
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that combines the current distribution and deferred profit-sharing plans by paying some of the profit-
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sharing bonus on a current (cash) basis and deferring the remainder.
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5. Identify and briefly define each of the three types of employee stock plans.
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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
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their employer at no cost to the employee. An employee stock purchase plan is a plan through which
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employees may purchase shares in their employing firm. An employee stock option plan provides
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options to employees to purchase company shares at some point in the future 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

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

the amortization plan.

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

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

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

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

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

c. Workers may be tempted to cut corners on quality.

ANS: A PTS: 1 REF: 154 OBJ: 1

8. In what way is piece rates and commissions similar to each other?

a. The more that each salesperson works independently of others.

ANS: C PTS: 1 REF: 160 OBJ: 1

a. Merit pay can be used as a substitute for time-based pay.

c. Merit pay is rarely used in combination with base pay.

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

ANS: A PTS: 1 REF: 165 OBJ: 1

c. Individual performance can be separated out

d. Undesirable side effects are readily manageable

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

a. A payment to work teams if they achieve a certain goal

ANS: D PTS: 1 REF: 168 OBJ: 1

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

ANS: D PTS: 1 REF: 177 OBJ: 2

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

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

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

ANS: D PTS: 1 REF: 186 OBJ: 3

b. The use of work teams

c. Training and development

c. Deferred profit-sharing plans

PTS: 1 REF: 171 OBJ: 1

PTS: 1 REF: 173 OBJ: 2

PTS: 1 REF: 184 OBJ: 3

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