TBChap013 Recognizing Employee Contributions With Pay

Chapter 13 Recognizing Employee Contributions with Pay Answer Key
True / False Questions
1. Incentive pay is specifically designed to energize, direct, or control employees' behavior and is influential because
the amount paid is linked to certain predefined behaviors or outcomes.
TRUE
Along with wages and salaries, many organizations offer incentive pay—that is, pay specifically designed to
energize, direct, or control employees' behavior. Incentive pay is influential because the amount paid is linked to
certain predefined behaviors or outcomes.
AACSB: Analytical Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 13-01 Discuss the connection between incentive pay and employee performance.
Level of Difficulty: 1 Easy
Topic: Incentive Pay
2. Under incentive pay, piecework rates are most suited for routine, standardized jobs with output that is easy to
measure.
TRUE
Most jobs, including those of managers, have no physical output, so it is hard to develop an appropriate
performance measure. So piecework rates are most suited for very routine, standardized jobs with output that is
easy to measure.

Blooms: Remember
Learning Objective: 13-02 Describe how organizations recognize individual performance.
Topic: Pay for Individual Performance
13-1
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3. A merit pay incentive system is used to attract employees who are more team-oriented.
FALSE
Organizations with team-based rewards will tend to attract employees who are more team-oriented, while rewards
tied to individual performance make an organization more attractive to those who think and act independently, as
individuals. Merit pay incentive system is used to reward individual performance.

Blooms: Remember
Level of Difficulty: 2 Medium
4. Standard hour plans are quality-oriented incentives for professional employees.
FALSE
Standard hour plans are quantity-oriented incentives for production workers.

Blooms: Remember
5. Merit pay is a system of linking pay increases to ratings on performance appraisals.
TRUE
Almost all organizations have established a program of merit pay; linking pay increases to ratings on performance
appraisals. To make the merit increases consistent, so they will be seen as fair, many merit pay programs use a
merit increase grid.

Blooms: Remember
13-2
6. From employers' perspective, an advantage of merit pay is that it is cheap.
FALSE
A drawback of merit pay, from the employer's standpoint, is that it can quickly become expensive.

Blooms: Remember
7. As in the case of merit pay, performance bonuses for rewarding individual performance are rolled into an
employee's base pay.
FALSE
Like merit pay, performance bonuses reward individual performance, but bonuses are not rolled into base pay. The
employee must re-earn them during each performance period.

Blooms: Remember
8. Retention bonuses are one-time incentives paid to top managers, engineers, top-performing salespeople, and
information technology specialists in exchange for remaining with the company.
TRUE
Retention bonuses are one-time incentives paid in exchange for remaining with the company to top managers,
engineers, top-performing salespeople, and information technology specialists.

Blooms: Remember
13-3
9. The Scanlon plan of gainsharing gives employees a bonus if the ratio of labor costs to the sales value of
production is below a set standard.
TRUE
The Scanlon plan of gainsharing gives employees a bonus if the ratio of labor costs to the sales value of
production is below a set standard. To keep this ratio low enough to earn the bonus, workers have to keep labor
costs to a minimum and produce as much as possible with that amount of labor.

Blooms: Remember
Learning Objective: 13-03 Identify ways to recognize group performance.
Topic: Pay for Group Performance
10. Successful gainsharing plans include employee stock ownership plans.
FALSE
Employee stock ownership plan (ESOP) is an example of an organizational performance incentive plan.

Blooms: Remember
Learning Objective: 13-04 Explain how organizations link pay to their overall performance.
Topic: Pay for Organizational Performance
11. Group bonuses typically reward the performance of all employees in an organization.
FALSE
Bonuses for group performance tend to be for smaller work groups. These bonuses reward the members of a
group for attaining a specific goal, usually measured in terms of physical output.

Blooms: Remember
13-4
12. Under the team awards type of group incentive, cost savings is excluded as a performance measure.
FALSE
Team awards are similar to group bonuses, but they are more likely to use a broad range of performance
measures, such as cost savings, successful completion of a project, or even meeting deadlines.

Blooms: Remember
13. Linking incentives to the organization's profits or stock price exposes employees to a high degree of risk.
TRUE
Linking incentives to the organization's profits or stock price exposes employees to a high degree of risk. Profits
and stock price can soar very high very fast, but they can also fall. The result is a great deal of uncertainty about
the amount of incentive pay each employee will receive in each period.

Blooms: Remember
14. The costs associated with profit sharing increase substantially when the organization experiences financial
difficulties.
FALSE
Profit sharing has the practical advantage of costing less when the organization is experiencing financial difficulties.

Blooms: Remember
13-5
15. Under profit sharing, payments are a percentage of the organization's profits and become part of the employees'
base salary.
FALSE
Under profit sharing, payments are a percentage of the organization's profits and do not become part of the
employees' base salary.

Blooms: Remember
16. In larger organizations that have stock ownership plans, the employees may not see a strong link between their
actions and the company's stock price.
TRUE
The drawback of stock ownership as a form of incentive pay is that employees may not see a strong link between
their actions and the company's stock price, especially in larger organizations.

Blooms: Remember
17. An employee stock ownership plan is an arrangement in which the organization distributes shares of stock to all its
employees by placing it in a trust.
TRUE
Employee stock ownership plan refers to an arrangement in which the organization distributes shares of stock to
all its employees by placing the stock into a trust managed on the employees' behalf.

Blooms: Remember
13-6
18. Employees should exercise the stock options even if the stock price has decreased.
FALSE
If the stock price falls, employees do not need to exercise the options.

Blooms: Remember
19. ESOP denies employees the right to participate in votes by shareholders even if the stock is registered on a
national exchange.
FALSE
Employees have a right to participate in votes by shareholders if the stock is registered on a national exchange,
such as the New York Stock Exchange.

Blooms: Understand
20. A balanced scorecard is a combination of performance measures directed toward the company's long- and short-
term goals.
TRUE
A balanced scorecard is a combination of performance measures directed toward the company's long- and short-
term goals and used as the basis for awarding incentive pay.

Blooms: Remember
Learning Objective: 13-05 Describe how organizations combine incentive plans in a "balanced scorecard."
Topic: Balanced scorecard
13-7
21. Stock options are best suited to motivate day-to-day effort or to attract and retain top individual performers.
FALSE
Relying heavily on profit sharing or stock ownership may increase cooperation but do little to motivate day-to-day
effort or to attract and retain top individual performers.

Blooms: Remember
22. The balanced scorecard helps employees understand the organization's goals and how they can contribute to
these goals.
TRUE
Not only does the balanced scorecard combine the advantages of different incentive-pay plans, it helps employees
understand the organization's goals. By communicating the balanced scorecard to employees, the organization
shows employees information about what its goals are and what it expects employees to accomplish.

Blooms: Remember
23. An organization should keep information, such as changes made to its incentive plan, confidential from its
employees.
FALSE
Along with empowerment, communicating with employees is important. It demonstrates to employees that the
pay plan is fair. It is particularly important to communicate with employees when changing the plan. Employees
tend to feel concerned about changes.

Blooms: Remember
Learning Objective: 13-06 Summarize processes that can contribute to the success of incentive programs.
Topic: Processes that Make Incentives Work
13-8
24. The balanced-scorecard approach should be avoided while designing executive pay.
FALSE
The balanced-scorecard approach is useful in designing executive pay.

Blooms: Remember
Learning Objective: 13-07 Discuss issues related to performance-based pay for executives.
Topic: Incentive Pay for Executives
25. Incentive pay for executives lays the groundwork for significant ethical issues.
TRUE
Incentive pay for executives lays the groundwork for significant ethical issues. When an organization links pay to its
stock performance, executives need the ethical backbone to be honest about their company's performance even
when dishonesty or clever shading of the truth offers the tempting potential for large earnings.

Blooms: Remember
Multiple Choice Questions
26. A pay structure specifically designed to energize, direct, or control employees' behavior is known as:
A. monthly salary.
B. wage.
C. incentive pay.
D. annual salary.
E. fixed pay.
Along with wages and salaries, many organizations offer incentive pay—that is, pay specifically designed to
energize, direct, or control employees' behavior.

Blooms: Remember
13-9
27. Vactin Motors, an automobile company, ties individual performance, profits, and other measures of employees'
success to a particular form of pay. This form of pay is influential because the amount paid is linked to certain
predefined behaviors or outcomes. Which of the following is exemplified in this scenario?
A. Minimum wage
B. Overtime pay
C. Incentive pay
D. Piecework rates
E. Bonus payment
Incentive pay is the pay specifically designed to energize, direct, or control employees' behavior. Incentive pay is
influential because the amount paid is linked to certain predefined behaviors or outcomes. Incentive pay is
exemplified in this scenario.
AACSB: Knowledge Application

Blooms: Apply
Level of Difficulty: 3 Hard
28. A feature of an effective incentive pay plan is that it should:
A. have performance measures based on employees' requirements.

B. not be provided as a direct percentage of employees' performance.
C. encourage group performance and sideline individual achievements.
D. be the same for all employees in the organization.
E. have performance measures linked to the organization's goals.
An effective incentive pay plan should have performance measures that are linked to the organization's goals.

Blooms: Understand
13-10
29. The many kinds of incentive pay fall into three broad categories: _____
A. incentives linked to individual, group, or organizational performance.

B. incentives linked to output, productivity, or quality of a product.
C. pay linked to goals, focus, or achievements of an organization.
D. pay related to base salary, bonus, and travel allowance.
E. incentives obtained in the form of company shares, gift coupons, and trial products.
The many kinds of incentive pay fall into three broad categories: incentives linked to individual, group, or
organizational performance. Choices from these categories should consider not only their strengths and
weaknesses, but also their fit with the organization's goals.

Blooms: Remember
30. Which of the following is a disadvantage of using incentive plans?
A. The goals of an incentive plan may interfere with other management goals.
B. The goals of incentive plans can seldom be linked to particular outcomes or behaviors.
C. Incentive plans cannot be used to promote group and organizational performance.
D. Incentive plans cause dissatisfaction among the non-performing employees in the organization.
E. Incentive plans are not very effective for jobs other than sales and service.
An incentive pay designed to support a management goal may interfere with other management goals. If incentive
pay is extremely rewarding, employees may focus on only the performance measures rewarded under the plan
and ignore measures that are not rewarded.

Blooms: Understand
13-11
31. In the process of designing incentives, managers should make sure that:
A. all the employees are paid the same amount.

B. even the lowest performing employees are rewarded.
C. employees focus only on completing the task quickly.
D. employees believe that the pay plan is fair.
E. they hire employees who consider earning money as the sole reason to perform well.
Attitudes that influence the success of incentive pay include whether employees value the rewards and think the
pay plan is fair.

Blooms: Understand
32. For incentive pay to motivate employees to contribute to the organization's success, the pay plans must be well
designed. Which of the following statements would strengthen this argument?
A. Performance measures are to be linked to the individual's goals.

B. Employees are given unattainable performance standards.
C. Employees will value the rewards or incentives that are being offered.
D. Employees are given limited resources to meet their goals.
E. The pay plan takes into account that employees will accept all goals irrespective of their rewards.
For incentive pay to motivate employees to contribute to the organization's success, employees should value the
rewards or incentives that are being offered.
AACSB: Reflective Thinking

Blooms: Analyze
13-12
33. Which of the following types of incentive plans are used to reward individual performance?
A. Gainsharing
B. Merit pay
C. Scanlon plan
D. Profit sharing
E. Stock ownership
Organizations may reward individual performance with a variety of incentives such as merit pay, piecework rates,
sales commission, and so on.

Blooms: Remember
34. Token Inc. is an envelope manufacturer based in Dallas. The employees of the organization receive incentive pay
based on the amount of work produced. If the output of an employee is more than the average production
volume, then the organization pays an incentive in addition to wages and salaries. In this case, which of the
following incentives is offered by Token Inc.?
A. Piecework rate
B. Minimum wage
C. Employee labor
D. Training stipend
E. Group bonus
Piecework rate is the wage based on the amount of work produced. In this scenario, Token pays its employees a
piecework rate.

Blooms: Apply
13-13
35. Jules & Co., a smartphone manufacturing company, provides wages to its employees based on the number of
smartphones the workers assemble. The more the employees assemble, the more they earn. This type of plan is
called:
A. piecework rate plan.

B. merit pay plan.
C. Scanlon plan.
D. profit sharing plan.
E. standard hour plan.
As an incentive to work efficiently, some organizations pay production workers a piecework rate, a wage based on
the amount they produce.

Blooms: Apply
36. A piecework rate plan is best suited for:
A. HR professionals.
B. executives.
C. production workers.
D. managers.
E. knowledge workers.
The piecework rate plan is most suited for very routine, standardized jobs with output that is easy to measure. For
complex jobs or jobs with hard-to-measure outputs, piecework plans do not apply very well.

Blooms: Remember
13-14
37. As an incentive to work efficiently, some organizations pay production workers a _____, a wage based on the
amount they produce.
A. merit pay
B. sales commission
C. standard hour pay
D. piecework rate
E. special bonus
As an incentive to work efficiently, some organizations pay production workers a piecework rate, a wage based on
the amount they produce.

Blooms: Remember
38. Wayan Inc., a health care insurance company, pays an incentive based on the average work per hour. Wayan pays
$10 for billing 20 medical charts per hour. An employee who bills 30 charts would earn $15 per hour. Hence,
Wayan pays the same rate per chart no matter how many charts an employee produces per hour. Which of the
following is being exemplified in this scenario?
A. Straight piecework plan

B. Skill-based pay system
C. Merit pay system
D. Quality-based pay system
E. Straight commission plan
Straight piecework plan is an incentive pay in which an employer pays the same rate per piece, no matter how
much a worker produces. In this scenario, Wayan is employing a straight piecework plan.

Blooms: Apply
13-15
39. An employee at CellWorks who produces 10 components in an hour earns $9 ($.90 × 10) per hour, while another
employee who produces 15 components earns $13.50 ($.90 × 15). This is an example of a:
A. commission plan.
B. differential piece rate plan.
C. direct commission plan.
D. profit sharing plan.
E. straight piecework plan.
Incentive pay in which the employer pays the same rate per piece, no matter how much the worker produces is
referred to as straight piecework plan.

Blooms: Apply
40. _____ refers to an incentive pay in which the wage paid is higher when a greater amount is produced.
A. Profit sharing
B. Differential piece rate
C. Gain sharing
D. Scanlon pay
E. Merit pay
Differential piece rate refers to an incentive pay in which the piece rate is higher when a greater amount is
produced.

Blooms: Remember
13-16
41. Which of the following statements is true about a piecework rate plan?
A. It can be used for all types of jobs and in all types of industries.
B. It is best suited for complex jobs and tasks.
C. It can be used to encourage team work and collaboration.
D. It has a direct link between the work done by the employee and the amount earned.
E. It encourages the employee's peers to perform as well and reduces conflicts.
An obvious advantage of piece rates is the direct link between how much work the employee does and the
amount the employee earns.

Blooms: Understand
42. The differential piece rates system refers to:
A. an incentive pay plan in which the employer pays the rate per piece based on the difference in performance of
employees.
B. a system that gives employees a bonus if the ratio of labor costs to the sales value of production is below a set
standard.
C. an incentive pay in which the piece rate is higher when a greater amount is produced.
D. a system of linking pay increases to ratings on performance appraisals.
E. an incentive pay plan where every employee is paid different wages based on the skills they possess.
Differential piece rates refers to an incentive pay in which the piece rate is higher when a greater amount is
produced.

Blooms: Understand
13-17
43. Piecework rate plans are most suited for _____.
A. innovative tasks
B. non-standard jobs
C. managerial jobs
D. jobs with difficult-to-measure output
E. routine jobs
Most jobs, including those of managers, have no physical output, so it is hard to develop an appropriate
performance measure. So piecework rates are most suited for very routine, standardized jobs with output that is
easy to measure.

Blooms: Remember
44. Johan, a manager of a construction company, believes that a piecework plan benefits all types of work areas.
However, his colleague, George, argues that a piecework plan is not suitable for a few complex jobs and that it
might have a negative impact on the work production. Which of the following statements, if true, strengthens
George's argument?
A. It is easy to measure the output of managers using a piecework plan.

B. A piecework plan is not suitable for very routine, standardized jobs.
C. Complex jobs involve the coordination of many team members to complete tasks.
D. Using a piecework plan helps employee empowerment.
E. Incentive plans do not impact productivity when work involves complex jobs.
Piecework incentives may be a poor incentive in an organization that wants to encourage teamwork. They may not
be helpful in an organization with complex jobs, employee empowerment, and team-based problem solving. If
complex jobs involve the coordination of many team members, using a piecework plan will not motivate
employees to perform well.

Blooms: Analyze
13-18
45. A standard hour incentive plan is likely to be successful if:
A. most or all of a salesperson's compensation is in the form of commissions.

B. employers keep labor costs to a minimum.
C. the pay increase is linked to ratings on performance appraisals.
D. employees want the extra money more than they want to work at a pace that feels comfortable.
E. the organization values employee satisfaction, product quality, and customer service more than profits.
A standard hour plan is an incentive plan that pays workers extra for work done in less than a preset "standard
time." This plan can only succeed if employees want the extra money more than they want to work at a pace that
feels comfortable.

Blooms: Understand
46. Jupiter Systems, an information technology company, determines a particular time to complete a particular task.
Even if an employee completes the allotted task before the time of completion, the employee receives an amount
of pay equal to the wage for the designated time. Which of the following payment methods is exemplified in this
scenario?
A. Piecework plan
B. Differential plan
C. Standard hour plan
D. Merit plan
E. Skill-based plan
In a standard hour plan, an organization determines a standard time to complete a task, such as tuning up a car
engine. If the mechanic completes the work in less than the standard time, the mechanic receives an amount of
pay equal to the wage for the full standard time. In this scenario, Jupiter Systems is using a standard hour plan.

Blooms: Apply
13-19
47. Jeff owns and manages a small electronics repair store. He determines the time required by his employees to
complete each task assigned by him. When employees complete the repairs in less time, they receive an amount
of pay equal to that time determined by him. In this scenario, Jeff is using the:
A. standard hour plan.

B. differential piecework plan.
C. merit pay plan.
D. straight piecework plan.
E. Scanlon plan.
An incentive plan that pays workers extra for work done in less than a preset "standard time" is referred to as a
standard hour plan.

Blooms: Apply
48. Which of the following statements is true about standard hour plans?
A. They encourage employees to focus exclusively on customer service.

B. They succeed only for employees who are not motivated by money.
C. They encourage employees to focus mainly on quality.
D. In terms of their pros and cons, they are very different from piecework plans.
E. They encourage employees to work as fast as they can.
Standard hour plans encourage employees to work as fast as they can, but not necessarily to care about quality or
customer service.

Blooms: Understand
13-20
49. Which of the following is a drawback of a standard hour plan?
A. It does not focus on quality or customer service.

B. It escalates costs for an employer in the long term.
C. It is applicable only in team-based work environments.
D. It helps employees work at a comfortable pace.
E. It does not pay workers extra for work done in less than the standard time.
Standard hour plans encourage employees to work as fast as they can, but not necessarily to care about quality or
customer service. Also, they only succeed if employees want the extra money more than they want to work at a
pace that feels comfortable.

Blooms: Understand
50. An incentive system in which an organization links pay increases to ratings on performance appraisals is referred to
as _____.
A. commission
B. the Scanlon plan
C. merit pay
D. gain sharing
E. profit sharing
Merit pay is a system of linking pay increases to ratings on performance appraisals.

Blooms: Remember
13-21
51. _____ gives the biggest pay increases to the best performers and to those whose pay is relatively low for their job.
A. Piecework pay system

B. Merit pay system
D. Differential plan
E. Skill-based plan
Merit pay system gives the biggest pay increases to the best performers and to those whose pay is relatively low
for their job.

Blooms: Remember
52. In a company's merit pay program, individuals' compa-ratio represents their:
A. pay relative to performance of other workers in the industry.

B. pay relative to average pay.
C. comparable worth versus others.
D. ratio of pay to benefits.
E. the average worth of the skills possessed by the individual.
Compa-ratio refers to the pay relative to average pay of the individual.

Blooms: Remember
13-22
53. Merit pay system decisions are based on two factors: an individual's performance rating and their:
A. compa-ratio.
B. seniority.
C. pay grade.
D. educational qualification.
E. experience.
The decisions about merit pay are based on two factors: the individual's performance rating and the individual's
compa-ratio.

Blooms: Remember
54. Michael, formerly a model employee at his organization, has recently begun losing interest in his work due to
personal and financial issues. He has spoken to his manager about leaving the company, complaining that he
hasn't been receiving enough recognition for his work of the last 12 years. In an effort to change Michael's mind,
his manager decides to give him a large amount of money as an incentive. In this scenario, Michael's manager is
giving him _____.
A. a commission
B. a retention bonus
C. stock options
D. merit pay
E. an attendance bonus
Retention bonuses are one-time incentives paid in exchange for remaining with the company.

Blooms: Apply
13-23
55. Songreen Inc., a firm that manufactures ready-to-eat soups, offers incentives based on an employee's performance
rating and the employee's compa-ratio. Which of the following payment plans is exemplified in this scenario?
A. Piecework plan
B. Merit pay
D. Differential plan
E. Skill-based plan
This scenario exemplifies a merit pay program. To make merit increases consistent, so they will be seen as fair,
many merit pay programs use a merit increase grid. The decisions about merit pay are based on two factors: an
individual's performance rating and the individual's compa-ratio. This system gives the biggest pay increases to the
best performers and to those whose pay is relatively low for their job.

Blooms: Apply
56. Julianna, the HR manager at Hudson Corp., is facing criticism from the company's high-performing employees for
the lack of an effective incentive scheme that rewards them with the necessary pay. The company has avoided
paying out incentives in addition to employees' monthly salary in an attempt to minimize costs. But, after the last
annual meeting, it has been decided to pay employees an incentive amount based on their performance ratings
and their compa-ratio. In this scenario, Julianna would be applying the system of:
A. merit pay.
B. piecework pay.
C. standard hour pay.
D. commission.
E. attendance bonus.
Merit pay is a system of linking pay increases to ratings on performance appraisals.

Blooms: Apply
13-24
57. The primary function of a merit increase grid is to:
A. make the increases consistent.

B. further increase the pay for those whose pay is relatively higher for their job.
C. increase the employees' compa-ratio.
D. stabilize economic conditions.
E. increase incentives on a year-by-year basis.
To make the merit increases consistent, so they will be seen as fair, many merit pay programs use a merit increase
grid.

Blooms: Remember
58. Alex, a researcher, claims that an exceptional employee with low pay will benefit more than his or her co-workers,
who receive significantly better pay but perform below expectations, in a merit pay system. Which of the following
statements strengthens Alex's claim?
A. An employee receiving high pay performs better than other employees.

B. The quality of the output produced by employees with high pay is better than that of other employees.
C. Employees with high pay complete their work before the standard time.
D. A higher pay range results in lower compa-ratios causing a bigger merit raise.
E. The average pay in a merit pay system can only rise by a maximum of 2% each year.
A higher pay range would result in lower compa-ratios, causing employees to become eligible for bigger merit
increases. Since the employee who is considered exceptional has a lower compa-ratio when compared to his co-
workers, he is likely to be benefited more by receiving a better pay raise.

Blooms: Analyze
13-25
59. To make the merit increases consistent, administrators of merit pay programs must closely monitor the compa-
ratio and the:
A. number of grades in the pay structure.

B. individual's performance ratings.
C. number of new hires in the company.
D. company's stock price in the current financial year.
E. average pay of the area where the organization is based.
The decisions about merit pay are based on two factors: the individual's performance rating and the individual's
compa-ratio.

Blooms: Remember
60. Which of the following is an advantage of the merit pay incentive system?
A. It makes the reward more valuable by relating it to economic conditions.

B. It promotes group performance instead of promoting individual behavior.
C. It provides merit increases to employees solely on the basis of performance.
D. It is the most economical incentive system for the employers.
E. It provides a direct link between the work done by the employee and the amount earned.
An advantage of merit pay is that it makes the reward more valuable by relating it to economic conditions.

Blooms: Understand
13-26
61. Which of the following is a disadvantage of a merit pay system?
A. It does not relate the rewards to economic conditions.

B. It cannot be used effectively with performance appraisals.
C. Comparative pay is not considered in its evaluation.
D. It does not provide rewards for performance in all the dimensions measured in the organization's performance
management system.
E. It can quickly become expensive for the company.
A drawback of merit pay, from the employer's standpoint, is that it can quickly become expensive. Managers at a
majority of organizations rate most employees' performance in the top two categories (out of four or five).
Therefore, the majority of employees are eligible for the biggest merit increases, and their pay rises rapidly.

Blooms: Understand
62. _____ provides a method for rewarding performance in all of the dimensions measured in the organization's
performance management system.
A. Differential piece rate

B. Standard hour plan
C. Merit pay
D. Piece rate
E. Commission
An advantage of merit pay is that it provides a method for rewarding performance in all of the dimensions
measured in the organization's performance management system. If that system is appropriately designed to
measure all the important job behaviors, then the merit pay is linked to the behaviors the organization desires.

Blooms: Remember
13-27
63. Which of the following statements is true of a performance bonus?
A. It is designed to reward group performance.

B. It should be re-earned by employees during each performance period.
C. It is rolled into base pay and provided yearly or monthly.
D. It lacks flexibility and hence it is less popular.
E. It is exclusively linked to subjective ratings, rather than objective performance measures.
Like merit pay, performance bonuses reward individual performance, but bonuses are not rolled into base pay. The
employee must re-earn them during each performance period.

Blooms: Understand
64. Retention bonuses refer to:
A. the special reward programs used to satisfy the lower and middle-level managers.
B. the bonuses provided to union members to withhold a strike.
C. the bonuses provided to employees who take long leaves without pay.
D. annual incentives paid to daily wage workers to remain in the organization.
E. one-time incentives paid in exchange for remaining with the company.
Retention bonuses refer to one-time incentives paid in exchange for remaining with the company—to top
managers, engineers, top-performing salespeople, and information technology specialists.

Blooms: Remember
13-28
65. Gerald, the CEO of Logiworks, decides to scrap the current individual incentive pay scheme for a group incentive
structure in an effort to increase the overall benefit to the organization. Which of the following statements, if true,
would weaken his decision?
A. Most of the employees had exercised their stock options before this change.
B. The employees were unaware of the impact of their actions on the company's finances.
C. The move was a response to problems that arose out of a poorly constructed bonus plan.
D. The organization was divided into departments whose managers were rewarded as one group.
E. The employees in the company are required to work in teams in order to accomplish their goals.
The employees who do not understand the bonus requirements may resent any occasion when their bonus is
smaller than it has been previously.

Blooms: Analyze
66. When an employee's pay is calculated as a percentage of sales, it is referred to as:
A. commission.
B. gain sharing.
C. merit plan.
D. variable wage plan.
E. profit sharing.
A variation on piece rates and bonuses is the payment of commissions, or pay calculated as a percentage of sales.

Blooms: Remember
13-29
67. Which of the following is most likely a consequence of paying most or all of a salesperson's compensation in the
form of commissions?
A. It encourages the salesperson to focus on closing the sale.

B. It frees the salesperson to focus on developing customer goodwill.
C. It encourages teamwork over individual performance.
D. It makes the employee appreciate the reward as the reward relates to economic conditions.
E. It will quickly become expensive for the employer.
Paying most or all of a salesperson's compensation in the form of commissions encourages the salesperson to
focus on closing sales.

Blooms: Understand
68. Straight commission plans are plans which:
A. provide a straight salary to employees.

B. are useful when the organization wants salespeople to concentrate on listening to customers.
C. help to attract risk-averse employees.
D. are common among insurance and real estate agents.
E. are uncommon among car salespeople.
Some salespeople earn a commission in addition to a base salary; others earn only commissions—a pay
arrangement called a straight commission plan. Straight commissions are common among insurance and real
estate agents and car salespeople.

Blooms: Remember
13-30
69. Which of the following incentive plans are specifically designed to promote group performance?
A. Performance bonuses
B. Gainsharing
C. Standard hour plans
D. Merit pay
E. Commissions
To win group incentives, employees must cooperate and share knowledge so that the entire group can meet its
performance targets. Common group incentives include gainsharing, bonuses, and team awards.

Blooms: Remember
70. _____ is a group incentive program that measures improvements in productivity and effectiveness and distributes a
portion of each gain to employees.
A. Profit rate
B. Gainsharing
C. Commission sharing
D. Merit rate
E. Group bonus
Gainsharing is a group incentive program that measures improvements in productivity and effectiveness and
distributes a portion of each gain to employees.

Blooms: Remember
13-31
71. Brendan, the HR manager at Baretta & Co., is trying to implement an effective group incentive plan which
measures increases in productivity and effectiveness and distributes a portion of its earnings to all employees. In
this case, Brendan should apply the incentive scheme of _____.
A. piecework rate
B. gainsharing
C. sales commission
D. merit pay
E. ESOPs
A gainsharing program measures increases in productivity and effectiveness and distributes a portion of each gain
to employees.

Blooms: Apply
72. Which of the following incentive programs measures improvements in productivity and effectiveness and
distributes a portion of the earnings to all employees?
A. Merit pay
B. Team award
C. Commission
D. Standard hour plans
E. Gainsharing
Gainsharing refers to a group incentive program that measures improvements in productivity and effectiveness
and distributes a portion of each gain to employees.

Blooms: Remember
13-32
73. The distribution of a portion of a company's earnings to its employees will motivate them to focus more on
efficiency and productivity. Which of the following would strengthen this argument?
A. It helps create job opportunities.

B. It helps avoid competition among employees.
C. Employees spend long hours working.
D. Employees avoid taking days off when they are given a share of profit.
E. Employees consider the organization's goals along with their personal interests.
Gainsharing frees employees to determine how to improve their own and their group's performance. It also
broadens employees' focus beyond their individual interests.

Blooms: Analyze
74. QVO Financial, an auditing firm, distributes a portion of the profits resulting from improvements in productivity
and efficiency among its employees. If the company enjoys an improvement of $45,000, 60% of the improvement
might be the company's share. The other 40% would be distributed among the employees in the company. Which
of the following is being exemplified in this scenario?
A. Profit rate
B. Gainsharing
C. Commission sharing
D. Merit gain
E. Group bonus
Organizations that want employees to focus on efficiency may adopt a gainsharing program, which measures
increases in productivity and effectiveness and distributes a portion of each gain to employees. This scenario
exemplifies gainsharing.

Blooms: Apply
13-33
75. Jennifer believes that the challenge of identifying appropriate performance measures for complex jobs can be
resolved by implementing a gainsharing plan. Natalie argues that it is a poor incentive program in an organization
that wants to encourage teamwork. Which of the following statements weakens Natalie's argument?
A. It oversimplifies the responsibilities involved in teamwork and motivates employees to work hard.
B. It creates a competitive environment among the employees working in a team.
C. It offers less incentives because the incentives are distributed equally among team members.
D. It encourages employees to learn new skills from other team members.
E. It encourages teams to take pay-related decisions.
Gainsharing addresses the challenge of identifying appropriate performance measures for complex jobs.
Gainsharing frees employees to determine how to improve their own and their group's performance. It also
broadens employees' focus beyond their individual interests.

Blooms: Analyze
76. Which of the following is a common condition for gainsharing to be a success in an organization?
A. Employees who value working in groups

B. Employers who do not set short-term goals for employees
C. Work environment with minimum management commitment
D. Employees who prefer minimum interaction and cooperation
E. Low levels of cooperation and interaction
Gainsharing is most likely to succeed when organizations provide the right conditions. One of the common
conditions is the presence of employees who value working in groups.

Blooms: Understand
13-34
77. Organizations that want employees to focus on efficiency and on group incentives are most likely to implement a
_____ program.
A. gainsharing
B. standard hour
C. bonus
D. commission
E. piece rate pay
Organizations that want employees to focus on efficiency and on group incentives may adopt a gainsharing
program, which measures increases in productivity and effectiveness and distributes a portion of each gain to
employees.

Blooms: Remember
78. A multi-national organization uses a gainsharing program in which employees receive a bonus if the ratio of labor
costs to the sales value of production is below a set standard. This incentive plan is referred to as the:
A. group bonus.
B. merit pay plan.
C. Scanlon plan.
D. piecework rate.
E. team award.
Scanlon plan is a gainsharing program where employees receive a bonus if the ratio of labor costs to the sales
value of production is below a set standard.

Blooms: Remember
13-35
79. Developed in the 1930s, the Scanlon plan is a variation of the:
A. profit sharing plans.

B. gainsharing plans.
C. merit pay plans.
D. individual bonus plans.
E. commission plans.
Scanlon plan is a gainsharing program where employees receive a bonus if the ratio of labor costs to the sales
value of production is below a set standard.

Blooms: Remember
80. What should employees typically do to earn bonuses under the Scanlon plan?
A. They should produce products at a rate that is much higher than the standard production time.
B. They should create goodwill with customers and close as many sales as possible.
C. They should follow a defined set of quality standard to produce the desired outcome.
D. They should keep labor costs to a minimum and produce as much as possible with that amount of labor.
E. They should improve their performance year after year so that they re-earn the bonus during each
performance period.
The Scanlon plan gives employees a bonus if the ratio of labor costs to the sales value of production is below a set
standard. To keep this ratio low enough to earn the bonus, workers have to keep labor costs to a minimum and
produce as much as possible with that amount of labor.

Blooms: Understand
13-36
81. The Rudd-Mitchell organization uses the Scanlon plan to provide incentives to its employees. The workers produce
electrical components worth $5 million. The target ratio set by the organization is 30%. The employees will be
given a bonus if the actual labor costs are less than:
A. $0.5 million.
B. $1 million.
C. $1.5 million.
D. $2 million.
E. $2.5 million.
The target ratio refers to the ratio of labor costs and sales value of production. In this example, the standard is a
ratio of 30/100, or 30 percent, and the workers produced parts worth $5 million. To meet the standard, the labor
costs should be less than 30 percent of $5 million, or $1.5 million.

Blooms: Apply
82. What is the difference between bonuses and team awards?
A. Bonuses are for bigger work groups whereas team awards are for small teams.
B. Unlike bonuses, team awards encourage cooperation.
C. Bonuses are usually given to employees who meet deadlines, whereas team awards are given only when the
team as a whole meets the targets.
D. Unlike team awards, bonuses encourage competition among individuals.
E. Bonuses reward attainment of goals measured in terms of physical output, whereas team awards reward
performance in terms of cost savings.
Bonuses reward the members of a group for attaining a specific goal, usually measured in terms of physical output.

Blooms: Understand
13-37
83. Team awards differ from group bonuses in that they:
A. are typically plant-wide group incentive programs.

B. make payments in company stock rather than in cash.
C. are more likely to use a broad range of performance measures.
D. encourage competition among individual employees to achieve higher bonuses.
E. give more importance to organizational performance than small groups' performances.

Blooms: Understand
84. Which of the following is an advantage of group incentives?
A. They always use a broad range of performance measures.

B. They result in groups trying to outdo one another in satisfying customers and thus create healthy competition.
C. They encourage employees to achieve their goals irrespective of the cooperation of team members.
D. They reward the performance of all the employees at a facility.
E. They always result in cooperation among team members without any competition.
In group bonuses, depending on the reward system, competition among individuals may be replaced by
competition among groups. Competition may be healthy in some situations, as when groups try to outdo one
another in satisfying customers.

Blooms: Understand
13-38
85. Which of the following is a disadvantage of using group bonuses?
A. Physical outputs are not rewarded.

B. It reduces the level of cooperation between the members of the group.
C. The performance measures used are narrow.
D. It could result in competition among groups.
E. It cannot be used to promote specific goals.
When using group bonuses, depending on the reward system, competition among individuals may be replaced by
competition among groups.

Blooms: Understand
86. _____ is a type of incentive pay in which payments are a percentage of an organization's profits and do not become
part of its employees' base salary.
A. Merit pay
B. Gainsharing
C. Group bonus
D. Profit sharing
E. Commission
Profit sharing is an incentive pay in which payments are a percentage of the organization's profits and do not
become part of the employees' base salary.

Blooms: Remember
13-39
87. Which of the following is an organization-level incentive plan that is intended to motivate employees to align their
activities with the organization's goals?
A. Profit sharing
B. Gainsharing
C. Merit pay
D. Group bonus
E. Scanlon plan
Organizations offer incentive pay tied to organizational performance measures. These organization-level incentives
can motivate employees to align their activities with the organization's goals. Profit sharing is an example of
organizational incentives.

Blooms: Remember
88. Which of the following best describes profit sharing?
A. A gainsharing program in which employees receive a bonus if the ratio of labor costs to the sales value of
production is below a set standard
B. An incentive pay in which payments are a percentage of the organization's profits and do not become part of
the employees' base salary
C. A group incentive program that measures improvements in productivity and effectiveness and distributes a
portion of profit to employees
D. A combination of performance measures directed toward the company's profit and used as the basis for
awarding incentive pay
E. An incentive plan where a percentage of the previous year's profits is provided to the employees as a part of
their salary
Incentive pay in which payments are a percentage of the organization's profits and do not become part of the
employees' base salary is termed profit sharing.

Blooms: Remember
13-40
89. Which of the following would be a reason for organizations to implement profit sharing?
A. It has been established that profit sharing helps organizations perform better.
B. It makes employees feel that they have control over the company's profits.
C. It costs less when the organization is experiencing financial difficulties.
D. It helps employees find a direct relation between their performance and gain.
E. It motivates employees more than individual incentives.
Profit sharing has the practical advantage of costing less when the organization is experiencing financial difficulties.
If the organization has little or no profit, this incentive pay is small or nonexistent, so employers may not need to
rely as much on layoffs to reduce costs.

Blooms: Understand
90. Which of the following incentive plans would enable its employees to think like owners, taking a broad view of
what they need to do in order to make the organization more effective?
A. Merit pay
B. Gain sharing
C. The Scanlon plan
D. Performance bonuses
E. Profit sharing
Profit sharing is an incentive-pay in which payments are a percentage of the organization's profits and do not
become part of the employees' base salary. Organizations use profit sharing may encourage employees to think
more like owners, taking a broad view of what they need to do in order to make the organization more effective.

Blooms: Remember
13-41
91. Mike, the CEO of an automobile company, believes that profit sharing has increased the productivity of his
organization. He feels that an incentive plan motivates employees to be more productive. Which of the following
statements strengthens Mike's argument?
A. In a profit-sharing plan, employees are the owners of the organization.

B. Profit sharing helps employees to cooperate and to focus on organizational interests.
C. Profit sharing makes employees workaholics.
D. In profit sharing, employees contribute their base salary for the development of the organization.
E. Profit sharing benefits employees even if the organization makes less profit or no profit.
Organizations use profit sharing for a number of reasons. It may encourage employees to think more like owners,
taking a broad view of what they need to do in order to make the organization more effective. They are more
likely to cooperate and less likely to focus on narrow self-interests.

Blooms: Analyze
92. Identify the disadvantage of using profit sharing plans.
A. They cannot be used to improve the organization's performance as a whole.

B. The employees may develop a narrow view of their roles in the organization.
C. They cost more when the organization experiences financial difficulties.
D. Sharing profit with the employees ultimately reduces the organization's profitability.
E. Profit sharing is not directly linked to individual behavior.
The profit sharing plans are not directly linked to individual behavior as they are designed to promote
organizational goals. They treat individuals in the same manner regardless of the performance. This could raise
concerns of fairness.

Blooms: Understand
13-42
93. Sheldon, the manager of a manufacturing firm, wants the organization to perform better. He expects his
employees to think more like owners, taking a broad view of what they need to do in order to make the
organization more effective. In this case, Sheldon should:
A. pay his employees per piece that is manufactured.

B. create a balanced scorecard.
C. reorganize the departments in the organization.
D. implement a profit-sharing incentive plan.
E. hire new employees and pay them above the market rate.
Organizations use profit sharing for a number of reasons. It may encourage employees to think more like owners,
taking a broad view of what they need to do in order to make the organization more effective. In this scenario,
Sheldon should implement a profit-sharing incentive plan.

Blooms: Apply
94. What is the drawback of stock ownership as a form of incentive pay?
A. Financial benefits mostly come when the employee leaves the organization.
B. Employees have the right to participate in votes by shareholders, hence reducing the negotiating power of the
employer.
C. It causes the employers to lose control over their employees.
D. The employees will not benefit even if the organization is performing well.
E. Stock options do not provide any ownership to employees, instead it offers an equivalent sum.
Employees may not see a strong link between their actions and the company's stock price, especially in larger
organizations. The link between pay and performance is even harder to appreciate because the financial benefits
mostly come when the stock is sold—typically when the employee leaves the organization.

Blooms: Understand
13-43
95. The link between employees' performance and pay is harder to establish in:
A. piece rate plans.

B. merit pay plans.
C. standard hour plans.
D. stock ownership plans.
E. Scanlon plans.
In stock ownership plans, employees may not see a strong link between their actions and the company's stock
price, especially in larger organizations. The link between pay and performance is even harder to appreciate
because the financial benefits mostly come when the stock is sold—typically when the employee leaves the
organization.

Blooms: Remember
96. In the context of stock options, _____ is called exercising the option.
A. purchasing stock
B. selling stock
C. retaining stock
D. distributing stock
E. liquidating stock
Purchasing the stock is called exercising the option.

Blooms: Remember
13-44
97. Which of the following statements is true of using stock options as incentive pay?
A. The use of stock options ensures that managers add value in terms of efficiency and customer satisfaction.
B. Stock options require an option holder to purchase the organization's stocks at its present market rate.
C. Stock options are rewarding for employees who exercise their option when the company's stock value has
risen.
D. Low-level employees with stock options are more likely to think like owners than executives who have stock
options.
E. A company's performance in the stock market tends to be significantly better if its low-level employees are
provided stock options.
Suppose that in 2012 a company's employees received options to purchase the company's stock at $10 per share.
If in 2017 the stock is worth $30, they can exercise their options and buy stock for $10 a share.

Blooms: Understand
98. Maria, an employee of a finance company, believes that purchasing the company's stock will always be profitable
regardless of the stock's market value. She feels that stock options are long-term incentive plans that make
employees part owners of the organization. Which of the following statements contradicts Maria's belief?
A. Stock options are not profitable to employees.

B. A large percentage of top and middle managers avoid stock options.
C. A company does not allow its employees to purchase its own stock.
D. Offering stock options discourages employees from thinking like owners.
E. Stock prices in the market may fall below their purchased value.
Just as stock prices can rise, stock prices can also fall. In this case, the fact that stock prices rise and fall contradicts
Maria's belief that a company's stock will always be profitable.

Blooms: Analyze
13-45
99. In 2014, a company employee received an option to purchase the company's stock at $45 per share. If the stock is
trading at $40 a share in 2016, the employee will most likely:
A. exercise the option, receiving a gain of $5.

B. exercise the option, receiving a gain of $40.
C. not bother to exercise the options.
D. buy the stock at $45 per share.
E. sell the shares to a third party slightly above the market price.
If the stock price falls below the options level, employees are not likely to exercise the options.

Blooms: Apply
100. Alan, a manager at Conephase, decides to sell his shares at the current market value. He had purchased the stock
at $20 per share a few years ago. However, the current market rate per share is $15. In this case, Alan should:
A. avoid selling the stock and wait for the market value to be higher than $20.
B. ask a lower-level employee to purchase the stocks at his price.
C. apply the Scanlon plan.
D. negotiate with stock market authorities to increase the market value.
E. sell his shares at the current rate or wait for the rate decrease.
In this scenario, Alan should wait for the share prices to increase before selling his stock in order to avoid a loss.

Blooms: Apply
13-46
101. Which of the following is an arrangement in which the organization distributes shares of stock to all its employees
by placing it in a trust?
A. Stock options
B. Employee stock ownership plan
C. Scanlon plan
D. Collective stock options
E. Profit sharing plan
Employee stock ownership plan refers to an arrangement in which the organization distributes shares of stock to
all its employees by placing it in a trust.

Blooms: Remember
102. Electrix Inc. is an electrical appliances manufacturing company. It distributes shares of stock to its employees by
placing the stock in a trust managed on the employees' behalf. Which of the following has been implemented by
Electrix in this scenario?
A. Scanlon plan
B. Balanced scorecard
C. Piecework stock plan
D. Employee stock ownership plan
E. Differential piece stock plan
Employee stock ownership plan is an arrangement in which the organization distributes shares of stock to all its
employees by placing it in a trust. In this scenario, Electrix Inc. has implemented an employee stock ownership
plan.

Blooms: Apply
13-47
103. In the context of stock ownership, what is meant by backdating a stock option?
A. Reaping windfall in the stock market by selling stock based on company's nonpublic information
B. Falsifying numbers in the company's annual report to hide losses and inflate the stock prices
C. Buying company's stock just before the date of key product launch
D. Changing the price in the original option agreement so that the option holder can buy stock at a bargain price
E. Re-evaluating a company's stocks to adjust it to a previous date so that the shareholders and employees
minimize the losses
Backdating involves changing the date and/or price in the original option agreement so that the option holder can
buy stock at a bargain price—making the backdated option profitable or more profitable.

Blooms: Remember
104. What is the difference between stock options and an employee stock ownership plan (ESOP)?
A. Stock options carry significant risk whereas ESOPs are risk-free.

B. Stock options are usually granted to company executives whereas ESOPs are provided to all employees.
C. In stock options, stocks are placed into a trust whereas ESOPs give employees the right to buy a certain
number of shares of stock.
D. Under stock options, employees can sell their stocks whereas ESOPs do not allow employees to sell their stocks.
E. Earnings from stock options are exempt from income taxes whereas earnings from ESOPs are taxable.
While stock options are most often used with top management, a broader arrangement is the employee stock
ownership plan (ESOP). In an ESOP, the organization distributes shares of stock to its employees by placing the
stock into a trust managed on the employees' behalf.

Blooms: Understand
13-48
105. Which of the following is a reason for ESOPs' popularity?
A. ESOPs provide tax advantages to employers.

B. ESOPs provide very high risk-free retirement income.
C. Employees can use ESOPs to buy their company during financial crises.
D. ESOPs must invest at least 51 percent of its assets in the company's own stocks.
E. The employees are provided with many more stocks than they actually own.
ESOPs can be attractive to employers. Along with tax and financing advantages, ESOPs give employers a way to
build pride in and commitment to the organization.

Blooms: Understand
106. By law, what is the minimum percentage of assets that an ESOP must invest in its company's stock?
A. 10
B. 26
C. 51
D. 60
E. 76
By law, an ESOP must invest at least 51 percent of its assets in the company's own stock.

Blooms: Remember
13-49
107. Employee stock ownership plans (ESOPs) are attractive to employers. Along with tax and financing advantages,
ESOPs give employers a way to build pride in and commitment to the organization. Which of the following
statements weakens this argument?
A. Employees are not allowed to participate in general body meetings as shareholders.

B. The stocks within the trust are too widely diversified to earn high returns.
C. The stock earnings are taxed at high rates.
D. Employees are forced to return the stock profits to the organization.
E. Risks involved will directly affect employees' retirement income.
A disadvantage of ESOPs is that they carry a significant risk for employees. By law, an ESOP must invest at least 51
percent of its assets in the company's own stock in contrast to other kinds of stock funds that hold a wide diversity
of companies. Problems with the company's performance therefore can take away significant value from the ESOP.
Many companies set up ESOPs to hold retirement funds, so these risks directly affect employees' retirement
income.

Blooms: Analyze
108. A major problem with ESOPs is that:
A. they carry a significant risk for employees.

B. employees are not allowed to participate in votes by shareholders.
C. the stocks within the trust are too widely diversified to earn high returns.
D. any earnings from the trust holdings are taxed at an extremely high rate.
E. they result in reduced profitability for the employees.
A disadvantage of ESOPs is that they carry a significant risk for employees. By law, an ESOP must invest at least 51
percent of its assets in the company's own stock in contrast to other kinds of stock funds that hold a wide diversity
of companies.

Blooms: Understand
13-50
109. Which of the following is a method where a combination of performance measures directed toward the company's
long- and short-term goals are used as the basis for awarding incentive pay?
A. Merit pay
B. Profit sharing
C. Gainsharing
D. Balanced scorecard
E. Scanlon plan
A balanced scorecard refers to a combination of performance measures directed toward the company's long and
short-term goals and used as the basis for awarding incentive pay.

Blooms: Remember
110. Which of the following best describes a balanced scorecard?
A. A combination of performance measures directed toward the company's long and short-term goals and used
as the basis for awarding incentive pay
B. A performance review process where the organization collects feedback from customers, managers, and
subordinates, assigns ratings, and lists them on the company's performance card
C. An arrangement in which the organization distributes shares of stock to all its employees by placing the stock
into a trust
D. An incentive pay in which payments are a percentage of the organization's profits and do not become part of
the employees' base salary
E. It is a system designed to measure the performance of HR personnel based on the quality of recruitment
A balanced scorecard refers to a combination of performance measures directed toward the company's long- and
short-term goals and used as the basis for awarding incentive pay.

Blooms: Remember
13-51
111. Which of the following is an advantage of using balanced scorecard?
A. It eliminates the need to communicate the details of the plan to the employees.
B. It eliminates managerial effort when providing incentives to employees.
C. It increases the pay for all employees in the organization regardless of their performances.
D. It reduces employee stress because it does not focus on financial targets.
E. It helps employees understand the organization's goals.
The balanced scorecard combines the advantages of different incentive-pay plans and it helps employees
understand the organization's goals.

Blooms: Understand
112. Kelltech Inc. is a sales and marketing company based in Baltimore. It wants to combine the advantages of different
incentive-pay plans and help employees understand the organization's goals. Which of the following will help the
company accomplish this goal?
A. A Scanlon plan
B. A balanced scorecard
C. A dashboard
D. An employee stock ownership plan
E. A differential piece rate system
A combination of performance measures directed toward a company's long- and short-term goals and used as the
basis for awarding incentive pay is called a balanced scorecard. In this scenario, using a balanced scorecard will
help Kelltech accomplish its goal.

Blooms: Apply
13-52
113. Which of the following statements is true about a balanced scorecard?
A. It encourages employees to compete at the expense of cooperating to achieve organizational goals.

B. It allows employees to buy their company when it is experiencing financial problems.
C. It combines the advantages of different incentive pay plans and helps employees understand the organization's
goals.
D. It increases cooperation but does little to motivate day-to-day effort or to attract and retain top individual
performers.
E. It is the only measure used by top management to measure the performance of HR professionals and
managers.
The balanced scorecard combines the advantages of different incentive-pay plans and it helps employees
understand the organization's goals.

Blooms: Understand
114. An organization wants to provide its employees information about what its goals are and what it expects
employees to accomplish. It is planning to implement an incentive plan that helps employees understand the
organization's goals. Which of the following should be used by this organization?
A. A retention bonus
B. A piecework rate system
C. A merit pay system
D. The Scanlon plan
E. A balanced scorecard
Not only does the balanced scorecard combine the advantages of different incentive-pay plans, it helps employees
understand the organization's goals. By communicating the balanced scorecard to employees, the organization
shows employees information about what its goals are and what it expects employees to accomplish.

Blooms: Apply
13-53
115. Employee participation in pay-related decisions can be part of a general move toward:
A. employee empowerment.
B. centralized decision making.
C. self ownership.
D. high power distance.
E. federalism.
Employee participation in pay-related decisions can be part of a general move toward employee empowerment.

Blooms: Remember
116. If employee participation in making pay-related decisions is encouraged in an organization, then:
A. administering the plans become simple.

B. the organization's interests can be best protected.
C. the cost borne by the organization decreases.
D. monitoring performance becomes difficult.
E. the incentive plan has more chances of being successful.
Employee participation can contribute to the success of an incentive plan.

Blooms: Remember
13-54
117. Keytechi and Sons, a marketing company, has implemented a few incentive plans to motivate its employees. The
organization encourages employees to learn new skills and cooperate with others. Which of the following will
contribute to employees' feeling that the organization's incentive pay plans are fair?
A. Employees must be able to understand the requirements of the incentive pay plan.
B. Equal incentives should be offered to all the employees of the organization.
C. Employees must be the key decision makers when creating incentive pay plans.
D. The company should not inform the employees about incentive plan changes.
E. Employees should make decisions that are only in favor of their interests.
Along with empowerment, communicating with employees is important. It demonstrates to employees that the
pay plan is fair. Also, when employees understand the requirements of the incentive pay plan, the plan is more
likely to influence their behavior as desired.

Blooms: Apply
118. Employees should participate in pay-related decisions. This will most likely help in the success of incentive plans,
and the plans are more likely to influence employee behavior as desired. Which of the following statements
weakens this argument?
A. Employees will make decisions that are in their best interests at the expense of the organization's interests.
B. It is difficult to monitor an employee's work output when decisions are made by the employee.
C. When employees become more involved in pay decisions, they neglect the work assigned to them.
D. Employees should be a part of the human resource department to be involved in pay-related decisions.
E. It will have a negative impact on the top-level management of the company.
If employees are involved in decisions about incentive pay plans and employees' eligibility for incentives, the
process of creating and administering these plans can be more complex. There is also a risk that employees will
make decisions that are in their interests at the expense of the organization's interests.

Blooms: Analyze
13-55
119. Harry, the HR manager at Kopi Co., has been asked to reward good performance. However, the budget allocated
for rewards is limited. He therefore decides to offer raises to a few employees and spot bonuses to the remaining
employees. Which of the following would further strengthen his decision?
A. The performance appraisals of each employee were performed by two supervisors to avoid bias.
B. The performance measures used to evaluate employees had been communicated to the employees before the
start of the review period.
C. The spot bonuses have been increased by ten percent from the previous financial year.
D. The organization had decided to reward teams that worked on new types of projects.
E. The organization believes that merit pay is for exceptional and not regular work.
Since the organization cannot afford to give raises to everyone, it should target pay increase to the best of the
best in order to make the best use of the available budget.

Blooms: Analyze
120. Ashance Inc., a manufacturing company, includes bonuses based on the year's profits or other measures related to
the organization's goals as an incentive method. Sometimes, to gain tax advantages, the actual payment of the
bonus is deferred. Which of the following is being exemplified in this scenario?
A. Long-term incentive
C. Piecework plan
D. Employee stock incentive plan
E. Short-term incentive
Short-term incentives include bonuses based on the year's profits, return on investment, or other measures related
to an organization's goals. Sometimes, to gain tax advantages, the actual payment of the bonus is deferred (for
example, by making it part of a retirement plan). This scenario exemplifies short-term incentives at Ashance Inc.

Blooms: Apply
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121. Which of the following is a short-term incentive?
A. Return on investment
B. Straight salary
C. Stock options
D. Stock purchase plans
E. Company shares
Short-term incentives include bonuses based on the year's profits, return on investment, or other measures related
to the organization's goals.

Blooms: Remember
122. Kolese Inc., a manufacturing company, includes stock options and stock purchase plans. Executives at the company
will want to do what is best for Kolese because that will cause the value of the stock to grow. Which of the
following is being exemplified in this scenario?
A. Scanlon plan
C. Long-term incentive
D. Merit plan
E. Short-term incentive
Long-term incentives include stock options and stock purchase plans. The rationale for these long-term incentives
is that executives will want to do what is best for an organization because that will cause the value of their stock to
grow. This scenario exemplifies long-term incentives.

Blooms: Apply
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123. Which of the following is a long-term incentive?
A. Sales commission
B. Group bonus
C. Merit pay
D. Stock option
E. Piece rate
Long-term incentives include stock options and stock purchase plans.

Blooms: Remember
124. How does the balanced scorecard help organizations deal with unethical behaviors of executives?
A. It allows companies to deduct executive pay that exceeds $1 million.

B. It ensures that by rewarding the achievement of a variety of goals, temptation on the executive's part to gain
bonuses by manipulating data are reduced.
C. It encourages executives to hold on to their stock options when the company is undergoing financial problems.
D. It forces executives to focus on the company's long-term success because ESOP funds are guaranteed by the
Pension Benefit Guarantee Corporation.
E. It mandates that an ESOP invest at least 51% of its assets in the company's own stock.
Rewarding achievement of a variety of goals in a balanced scorecard reduces the temptation to win bonuses by
manipulating financial data.

Blooms: Understand
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125. The _____ has required companies to more clearly report executive compensation levels and the company's
performance relative to that of competitors.
A. National Credit Union Administration

B. Financial Industry Regulatory Authority
C. Commodity Futures Trading Commission
D. Securities and Exchange Commission
E. Omnibus Budget Reconciliation Act
The Securities and Exchange Commission (SEC) has required companies to more clearly report executive
compensation levels and the company's performance relative to that of competitors.

Blooms: Remember
126. How does linking executive pay to stock performance lead to unethical behavior?
A. Executives can use the advantage of knowing the company's inside information to buy or sell stock and create
huge personal gains.
B. Executives can roll in the stock price into their base pay to avoid paying a huge tax.
C. Executives will lower the stock prices in order to enjoy bonuses.
D. Executives can use the employee stock ownership plan to buy their company if it is experiencing financial
problems.
E. The executives can obtain as many shares as they need at a price that is much lower than the market rate.
When executives are stockholders, they have a dual role as owners and managers. This places them at an
advantage over others who want to invest in the company. An individual, a pension fund, or other investors have
less information about the company than its managers do. An executive who knows about these activities could
therefore reap a windfall in the stock market by buying or selling stock based on knowledge about the company's
future.

Blooms: Understand
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Essay Questions
127. What are the different types of incentive pay? How should organizations choose the right type of incentive pay?
The kinds of incentive pay fall into three broad categories: incentives linked to individual, group, or organizational
performance. The choice of incentive pay may affect not only the level of motivation but also the kinds of
employees who are attracted to and stay with the organization. For example, there is some evidence that
organizations with team-based rewards will tend to attract employees who are more team-oriented, while rewards
tied to individual performance make an organization more attractive to those who think and act independently as
individuals. Given the potential impact, organizations not only should weigh the strengths and weaknesses in
selecting types of incentive pay but also should measure the results of these programs.

Blooms: Remember
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128. What are the different types of pay for rewarding individual performance?
Organizations may reward individual performance with incentives such as piecework rates, standard hour plans,
merit pay, individual bonuses, and sales commissions.
Piecework rates: As an incentive to work efficiently, some organizations pay production workers a piecework rate,
a wage based on the amount they produce. The amount paid per unit is set at a level that rewards employees for
above-average production volume. Under the straight piecework plan, the employer pays the same rate per piece,
no matter how much the worker produces. Under differential piece rates, the piece rate depends on the amount
produced. If the worker produces more than the standard output, the piece rate is higher. If the worker produces
at or below the standard, the amount paid per piece is lower. This type of incentive is most suited for very routine,
standardized jobs with output that is easy to measure.
Standard hour plans: Another quantity-oriented incentive for production workers is the standard hour plan, an
incentive plan that pays workers extra for work done in less than a preset "standard time." They encourage
employees to work as fast as they can, but not necessarily to care about the quality or customer service.
Merit pay: Merit pay links pay increases to ratings on performance appraisals and the employee's compa-ratio,
his/her pay relative to average pay. Thus, the system gives the biggest pay increases to the best performers and to
those whose pay is relatively low for their job. Advantages include the fact that rewards are made more valuable
by relating them to economic conditions and that they provide a method for rewarding performance in all of the
dimensions measured in the organization's performance management system. Disadvantages include the fact that
they can, from the employer's standpoint, quickly become very expensive and they may be viewed by employees
as unfair if superior performance ratings are based on factors other than employee ability and motivation.
Performance bonuses: Like merit pay, performance bonuses reward individual performance, but bonuses are not
rolled into base pay. In some cases, the bonus is a one-time reward. Bonuses can be linked to objective
performance measures, rather than subjective ratings, and they allow organizations great flexibility in deciding
what kinds of behavior to reward and whether such rewards will be one-time or ongoing.
Sales commissions: Commissions are calculated as a percentage of sales. Some salespeople earn a commission in
addition to a base salary; others earn only a commission, a pay arrangement called a straight commission plan.
Paying most or all of a salesperson's compensation in the form of salary frees the salesperson to focus on
developing customer goodwill, while paying most or all of a salesperson's compensation in the form of
commissions encourages the salesperson to focus on closing sales.

Blooms: Understand
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129. What are the different types of piecework rates? Explain each of them.
The two types of piecework rates are the straight piecework plan and the differential piece rates plan. Straight
piece work pay is an incentive pay in where the employer pays the same rate per piece, no matter how much the
worker produces. Differential piece rates refers to the incentive pay in which the piece rate is higher when a greater
amount is produced.

Blooms: Remember
130. What are the advantages and disadvantages of a merit pay system?
Almost all organizations have established some program of merit pay—a system of linking pay increases to ratings
on performance appraisals. An advantage of merit pay is that it makes the reward more valuable by relating it to
economic conditions. Another advantage is that it provides a method for rewarding performance in all of the
dimensions measured in the organization's performance management system. If that system is appropriately
designed to measure all the important job behaviors, then the merit pay is linked to the behaviors the organization
desires. A drawback of merit pay is that conditions can shrink the available range of increases. It also has a long-
term focus. Over an entire career, the bigger increases for top performers can grow into a major change, but
viewed on a year-by-year basis, they are not much of an incentive to excel. A drawback of merit pay, from the
employer's standpoint, is that it can quickly become expensive.

Blooms: Understand
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131. Elaborate on how gainsharing can be successful as a form of group incentive.
Gainsharing is most likely to succeed when organizations provide the right conditions. Among the conditions
identified, the following are among the most common:
1) Management commitment.
2) Need for change or strong commitment to continuous improvement.
3) Management acceptance and encouragement of employee input.
4) High levels of cooperation and interaction.
5) Employment security.
6) Information sharing on productivity and costs.
7) Goal setting.
8) Commitment of all involved parties to the process of change and improvement.
9) Performance standard and calculation that employees understand and consider fair and that is closely related to
managerial objectives.
10) Employees who value working in groups.

Blooms: Understand
132. What are group bonuses and team awards? What are their advantages and disadvantages?
Bonuses for group performance tend to be for smaller work groups. These bonuses reward the members of a
group for attaining a specific goal, usually measured in terms of physical output. Team awards are similar to group
bonuses, but they are more likely to use a broad range of performance measures, such as cost savings, successful
completion of a project, or even meeting deadlines. Both types of incentives have the advantage that they
encourage group or team members to cooperate so that they can achieve their goal. However, depending on the
reward system, competition among individuals may be replaced by competition among groups. Competition may
be healthy in some situations, as when groups try to outdo one another in satisfying customers. On the downside,
competition may also prevent necessary cooperation among groups. To avoid this, the organization should
carefully set the performance goals for these incentives so that concern for costs or sales does not obscure other
objectives such as quality, customer service, and ethical behavior.

Blooms: Understand
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133. What are the implications of designing pay for organizational performance?
Many organizations offer incentive pay tied to organizational performance measures. The expectation is that
employees will focus on what is best for the organization. These organization-level incentives can motivate
employees to align their activities with the organization's goals. At the same time, linking incentives to the
organization's profits or stock price exposes employees to a high degree of risk. Profits and stock price can soar
very high very fast, but they can also fall. The result is a great deal of uncertainty about the amount of incentive
pay each employee will receive in each period. Therefore, these kinds of incentive pay are likely to be most
effective in organizations that emphasize growth and innovation, which tend to need employees who thrive in a
risk-taking environment.

Blooms: Understand
134. Explain how employee stock ownership plans differ from stock options?
Stock options give employees the right to buy a certain number of shares of stock at a specified price. In an
employee stock ownership plan, the organization distributes shares of stock to its employees by placing the stock
into a trust managed on the employees' behalf. Both encourage employees to focus on the success of the
organization as a whole. However, stock option plans give employees the opportunity to buy stock at a price that
has been previously fixed. The employee stands to obtain a financial gain only if the stock price has gone up since
the price was fixed. ESOPs are more common and usually have broader eligibility to a larger group of employees.
They carry more risk for employees since an ESOP must invest at least 51 percent of assets in the company's stock.
Problems with the company's performance therefore can take away significant value from the ESOP. Many
companies set up ESOPs to hold retirement funds, so these risks directly affect employees' retirement income.
Adding to the risk, funds in an ESOP are not guaranteed by the Pension Benefit Guarantee Corporation.

Blooms: Understand
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135. What is balanced scorecard? What is its purpose? What are the advantages of using a balanced scorecard?
The balanced scorecard is a combination of performance measures directed toward the company's long- and
short-term goals and used as the basis for awarding incentive pay. Its purpose is to allow the organization to have
a mix of measures that can be customized according to its markets, products, and objectives. The balanced
scorecard combines the advantages of different incentive-pay plans and it helps employees understand the
organization's goals. By communicating the balanced scorecard to employees, the organization shows employees
information about what its goals are and what it expects employees to accomplish.

Blooms: Understand
136. How does allowing employees to participate in pay-related decisions affect the incentive process?
Employee participation in pay-related decisions can be part of a general move toward employee empowerment. If
employees are involved in decisions about incentive pay plans and employees' eligibility for incentives, the process
of creating and administering these plans can be more complex. There is also a risk that employees will make
decisions that are in their interests at the expense of the organization's interests. However, employees have hands-
on knowledge about the kinds of behavior that can help the organization perform well, and they can see whether
individuals are displaying that behavior. Therefore, in spite of the potential risks, employee participation can
contribute to the success of an incentive plan. This is especially true when monetary incentives encourage the
monitoring of performance and when the organization fosters a spirit of trust and cooperation.

Blooms: Understand
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Chapter 13 Recognizing Employee Contributions with Pay Answer Key

True / False Questions

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

4. Standard hour plans are quality-oriented incentives for professional employees.

AACSB: Analytical Thinking

5. Merit pay is a system of linking pay increases to ratings on performance appraisals.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

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AACSB: Analytical Thinking

AACSB: Analytical Thinking

10. Successful gainsharing plans include employee stock ownership plans.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

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AACSB: Analytical Thinking

Multiple Choice Questions

AACSB: Analytical Thinking

AACSB: Knowledge Application

28. A feature of an effective incentive pay plan is that it should:

A. have performance measures based on employees' requirements.

AACSB: Analytical Thinking

A. incentives linked to individual, group, or organizational performance.

AACSB: Analytical Thinking

30. Which of the following is a disadvantage of using incentive plans?

AACSB: Analytical Thinking

A. all the employees are paid the same amount.

AACSB: Analytical Thinking

A. Performance measures are to be linked to the individual's goals.

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Knowledge Application

A. piecework rate plan.

AACSB: Knowledge Application

36. A piecework rate plan is best suited for:

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. Straight piecework plan

AACSB: Knowledge Application

AACSB: Knowledge Application

AACSB: Analytical Thinking

AACSB: Analytical Thinking

42. The differential piece rates system refers to:

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. It is easy to measure the output of managers using a piecework plan.

AACSB: Reflective Thinking

A. most or all of a salesperson's compensation is in the form of commissions.

AACSB: Analytical Thinking