Strategic Compensation, 7e (Martocchio)

Chapter 4 Incentive Pay

1) Which of the following is true concerning incentive pay?

A) The award is earned only when the predetermined work objective is totally completed.
B) Motivates employees to be more productive, but does little to control payroll costs.
C) Awards are granted in one-time payouts.
D) Incentive levels are generally subjective in nature.
Answer: C
Difficulty: Difficult
Type: Concept
Learning Obj: 1

2) Which of the following is true of incentive pay?

A) Incentive pay is considered part of an employee's fringe compensation.
B) The criteria for judging an award tends to be objective, such as quantity produced.
C) Award levels are subjective.
D) The amount of the award paid for attainment of goals is not communicated in advance.
Answer: B
Difficulty: Moderate
Type: Concept
Learning Obj: 2

3) Customer satisfaction, labor cost savings, materials cost savings, and reduction in accidents
were listed as typical performance measures for which type of incentive plan?
A) individual
B) group
C) company-wide
D) executive
Answer: B
Difficulty: Moderate
Type: Concept
Learning Obj: 2

4) In addition to the guaranteed hourly pay rate, John receives incentives for every item produced
over the designated production standard. What kind of incentive plan is used in this situation?
A) management incentive plans
B) referral plans
C) piecework plans
D) behavioral encouragement plans
Answer: C
Difficulty: Easy
Type: Application
Learning Obj: 2

1
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
5) The concept that a hard working employee is likely to stay at an incentive pay position is
better known as this.
A) representative effect
B) structural effect
C) sorting effect
D) output effect
Answer: C
Difficulty: Moderate
Type: Concept
Learning Obj: 2

6) Which type of individual incentive plan requires the achievement of multiple, complex
objectives without compromising the quality and quantity of output that is generated by
employees?
A) piecework plans
B) referral plans
C) management incentive plans
D) behavior encouragement plans
Answer: C
Difficulty: Difficult
Type: Concept
Learning Obj: 2

7) To have better safety records, XYZ Company gives monetary incentive awards to its workers
for lower accident rates due to improper use of heavy equipment.
A) management incentive plans
B) referral plans
C) piecework plans
D) behavioral encouragement plans
Answer: D
Difficulty: Difficult
Type: Application
Learning Obj: 2

8) This type of individual incentive plan rewards employees who recruit new customers or new
employees.
A) behavior encouragement
B) referral
C) management incentive
D) piecework
Answer: B
Difficulty: Easy
Type: Concept
Learning Obj: 2

2
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
9) On which teams is membership relatively permanent, with the members working full-time on
the team?
A) work (process)
B) project
C) parallel
D) innovative
Answer: A
Difficulty: Moderate
Type: Concept
Learning Obj: 3

10) This is another name for parallel teams.

A) task forces
B) innovation teams
C) process teams
D) work teams
Answer: A
Difficulty: Easy
Type: Concept
Learning Obj: 3

11) John is a design engineer working at an auto manufacturer research and development
department. In addition to his normal duties, he is assigned to a team of other engineers
developing a highly automated assembly line for the new model of a passenger car. What type of
team is John assigned to?
A) incentive teams
B) project teams
C) work (process) teams
D) parallel teams
Answer: D
Difficulty: Moderate
Type: Application
Learning Obj: 3

12) This method reinforces cooperation among team members except when team members
perceive differences in other members' performances.
A) differential incentive payments approach
B) differential payments by ratio of base pay
C) equal incentives payment approach
D) small group incentive plans
Answer: C
Difficulty: Moderate
Type: Concept
Learning Obj: 3

3
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
13) This group incentive system was designed to provide employees with financial incentives for
increasing customer satisfaction, increasing productivity, lowering costs, or improving safety.
A) gain sharing
B) team based
C) small group
D) profit sharing
Answer: A
Difficulty: Easy
Type: Concept
Learning Obj: 3

14) Gunther Rohn was rewarded for making a suggestion that saved Ewe and Eye Electronics
thousands of dollars. Which type of incentive compensation approach might have worked best?
A) group incentive programs
B) gain sharing plan
C) management incentive plans
D) employee stock ownership plan
Answer: B
Difficulty: Difficult
Type: Application
Learning Obj: 3

15) What is the main objective of Scanlon plans?

A) to standardize the workforce
B) to encourage unionization
C) to increase workforce competitiveness
D) to increase employee involvement
Answer: D
Difficulty: Moderate
Type: Concept
Learning Obj: 3

16) Which gain sharing plan bases incentives on the ratio between labor costs and sales value of
production (SVOP)?
A) Rucker Plan
B) referral plan
C) Scanlon Plan
D) Improshare
Answer: C
Difficulty: Difficult
Type: Concept
Learning Obj: 3

4
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
17) Which gain sharing plan focuses on lowering the percentage of labor costs using a value-
added formula?
A) Rucker Plan
B) Scanlon Plan
C) behavior encouragement plan
D) Improshare
Answer: A
Difficulty: Moderate
Type: Concept
Learning Obj: 3

18) XYZ Manufacturing Co. uses a gain sharing plan that gives incentives to employees to finish
products rather than to incentivize dollar savings. Therefore, this company measures productivity
as the ratio of standard labor hours and actual labor hours. What kind of gain sharing program
does XYZ Manufacturing Co. use?
A) Improshare
B) Rucher
C) Scanlon
D) SVOP
Answer: A
Difficulty: Difficult
Type: Application
Learning Obj: 3

19) This incentive plan has a buy-back provision.

A) ESOPs
B) Rucker
C) Improshare
D) Scanlon
Answer: C
Difficulty: Moderate
Type: Concept
Learning Obj: 3

20) Which of the following is true regarding group incentive plans as opposed to individual
incentive plans?
A) there are more groups in a company than individuals to measure
B) individual group members usually work more efficiently alone than in cohesive groups
C) it is easier to develop performance measures for individual incentive plans than group
incentive plans
D) it is easier to develop performance measures for group incentive plans than individual
incentive plans
Answer: D
Difficulty: Moderate
Type: Concept
Learning Obj: 3

5
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
21) Profit sharing plans and employee stock option plans are incentives on what level?
A) individual
B) group
C) companywide
D) executive
Answer: C
Difficulty: Moderate
Type: Concept
Learning Obj: 4

22) These profit sharing plans award cash to employees on a quarterly or annual basis as part of
their regular compensation.
A) recent profit sharing plans
B) current profit sharing plans
C) deferred profit sharing plans
D) anticipated profit sharing plans
Answer: B
Difficulty: Easy
Type: Concept
Learning Obj: 4

23) XYZ Company pays a portion of company profits to its employees. The management offers
this incentive plan as one kind of retirement program. What kind of companywide incentive plan
does XYZ Co. offer?
A) employee stock ownership plan
B) deferred profit sharing plan
C) current profit sharing plan
D) employee stock option plan
Answer: B
Difficulty: Moderate
Type: Application
Learning Obj: 4

24) This formula for determining the amount available for profit sharing uses a specific
percentage of annual profits contingent upon the successful attainment of a specified profit goal.
A) fluctuating first-dollar-of-profits
B) differed first-dollar-of-profits
C) graduated first-dollar-of-profits
D) fixed first-dollar-of-profits
Answer: D
Difficulty: Moderate
Type: Concept
Learning Obj: 4

6
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
25) This formula for calculating profit sharing awards gives the employees a higher percentage
of the profits as the profits increase.
A) fluctuating first-dollar-of-profits
B) differed first-dollar-of-profits
C) graduated first-dollar-of-profits
D) fixed first-dollar-of-profits
Answer: C
Difficulty: Moderate
Type: Concept
Learning Obj: 4

26) With which profit sharing formula does the profit sharing pool become funded only after
profits exceed a predetermined level but fall below some established maximum level?
A) fixed first-dollar-of-profits
B) profitability threshold
C) graduated first-dollar-of-profit
D) equal payments
Answer: B
Difficulty: Difficult
Type: Concept
Learning Obj: 4

27) Which of the following is true of most general stock compensation plans?
A) The company stock shares represent equity segments of equal value.
B) Employees own the stock upon purchase.
C) Company stock represents partial equity in the company.
D) Stock options refer to what an employee can do with the stock once they purchase it.
Answer: A
Difficulty: Difficult
Type: Concept
Learning Obj: 4

28) Which of the following performance measures corresponds to individual/ group/

companywide incentive plans respectively?
A) customer satisfaction/quantity of work/market share
B) quantity of work/market share/customer satisfaction
C) quality of work output/customer satisfaction/market share
D) customer satisfaction/market share/quality of work
Answer: C
Difficulty: Moderate
Type: Synthesis
Learning Obj: 2, 3, 4

7
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
29) Which of the following is true about the level of risk involved with incentive pay?
A) The level of risk decreases as incentive pay represents a greater proportion of total core
compensation.
B) The level of risk is lower for higher-level employees than those who are lower in the job
structure.
C) The level of risk depends on the extent to which employees control the attainment of a desired
goal.
D) The level of risk is dependent on subjective performance appraisals.
Answer: C
Difficulty: Moderate
Type: Critical Thinking
Learning Obj: 5

30) The general rule of thumb is that short-term company goals last less than how long?
A) 1 month
B) 6 months
C) 1 year
D) 5 years
Answer: D
Difficulty: Easy
Type: Concept
Learning Obj: 5

31) Another name for incentive pay is ________ pay.

Answer: variable
Difficulty: Easy
Type: Concept
Learning Obj: 1

32) Individual incentive plans help to promote the relationship between pay and ________.
Answer: performance
Difficulty: Moderate
Type: Concept
Learning Obj: 1

33) The ________ effect refers to a worker's willingness to work diligently to produce more
quality output rather than simply attending work without putting in the effort.
Answer: incentive
Difficulty: Moderate
Type: Concept
Learning Obj: 2

8
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
34) ________ teams consist of a group of people assigned to complete a one-time project.
Answer: Project
Difficulty: Easy
Type: Concept
Learning Obj: 3

35) The sales value of production (SVOP) is the sum of sales ________ plus the value of goods
in inventory.
Answer: revenue
Difficulty: Difficult
Type: Concept
Learning Obj: 3

36) The Improshare bonus is based on a ________ ratio formula.

Answer: labor hour
Difficulty: Difficult
Type: Concept
Learning Obj: 3

37) The main disadvantage of group incentive compensation is employee ________.

Answer: turnover
Difficulty: Moderate
Type: Concept
Learning Obj: 3

38) ________ profit sharing plans place cash awards in trust accounts for employees, and are set
aside on employees' behalf as a source of retirement income.
Answer: Deferred
Difficulty: Easy
Type: Concept
Learning Obj: 4

39) In a "pay at ________" profit sharing compensation package, base bay is set below the
average for competing employers, and employees' pay can be very meager or very large
compared to a similar position elsewhere.
Answer: risk
Difficulty: Moderate
Type: Concept
Learning Obj: 4

40) Stock ________ describe an employee's right to purchase company stock.

Answer: options
Difficulty: Easy
Type: Concept
Learning Obj: 4

9
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
41) How can incentive pay systems, when properly applied, contribute to companies meeting the
goals of lowest cost and differentiation strategies?
Answer: Incentive pay systems can meet the goals of both strategies. For companies pursuing a
lowest cost strategy, a large concern is reducing output costs per employee. Piecework plans can
tie compensation with employee output. Behavioral encouragement plans can lead to decreases
in excessive absenteeism or improve safety. Group incentives also contribute to lower costs,
particularly through increased employee involvement. Profit-sharing plans are probably the least
likely form of incentive to support this plan.

For companies pursuing a differentiation strategy, creativity is stressed, and rewards are more
likely to be long-term in their delivery. Team-based incentives and gain-sharing programs can
meet this imperative. They promote interaction among coworkers and autonomy in order to find
a superior way to meet management objectives. But, one should use caution in making a blanket
statement in support of all incentive plans to meet this strategy. Piecework plans and profit-
sharing plans do little to support this approach.
Difficulty: Difficult
Type: Critical Thinking
Learning Obj: 2, 3

42) Compare and contrast individual and group incentive plans.

Answer: Individual incentive plans reward employees whose work is performed independently.
Employees are rewarded for meeting such work-related performance standards as quality,
productivity, customer satisfaction, safety, or attendance. When designed and implemented well,
employees are rewarded based on results for which they are directly responsible under this
incentive plan. Paying better performances more money help companies to retain best
performers. Group incentive plans reward employees for their collective performance and
reinforce teamwork, cultivate loyalty to the company, and increase productivity. Group incentive
programs may lead to turnover due to free-rider effect. It can be hard to keep the best performer
under this plan.
Difficulty: Moderate
Type: Synthesis
Learning Obj: 2, 3

10
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
43) In an effort to increase the productivity of its employees, a manufacturing company is
considering adopting an incentive pay program. List and discuss the five factors the HR
professionals should consider in the adoption of such a program.
Answer: The first factor to consider is whether the plan should be based on group or individual
employee performance. Clearly, this is dependent on the structure of the company. If the nature
of work performed is interdependent, for example, then group incentives would be appropriate.

A second factor is the level of risk employees would be willing to accept in their overall
compensation package. The level of risk increases as incentive pay becomes a greater part of
total core compensation. The level of risk is also dependent on the amount of control employees
may have toward the attainment of the desired performance goal.

A third factor is whether incentive pay should replace or complement traditional pay. Some
companies may choose to award incentive pay in addition to an employee's base pay and fringe
compensation. Other companies may opt to reduce base pay by placing the reduced portion at
risk in an incentive plan.

A fourth factor is the criteria by which performance should be judged. Criteria should be
quantifiable, be accessible, and reflect a company's competitive strategy. Further, the company
may want to consider using more than one performance measure, particularly if it is relevant. A
weighting scheme could be used to reflect the relative importance of each performance criterion.
As with the level of risk, the criteria chosen should be under the control of the employee.

A fifth factor is the time horizon of goals. Typically, incentives for lower-level employees tend to
be based on short-term goals that are within the control of such employees. Longer-term
incentives are used for professionals because of the length of time it takes for performance to be
adequately measured.
Difficulty: Moderate
Type: Concept
Learning Obj: 5

11
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall