TBChap012 Establishing A Pay Structure

Chapter 12 Establishing a Pay Structure Answer Key
True / False Questions
1. Pay level is the total amount an employee pays to the organization.
FALSE
Pay level is the average amount (including wages, salaries, and bonuses) the organization pays
for a particular job.
AACSB: Analytical Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Learning Objective: 12-01 Identify the kinds of decisions involved in establishing a pay structure.
Level of Difficulty: 1 Easy
Topic: Decisions about Pay
2. An organization's policies, rather than the wages, salaries, and bonuses that employees earn,
determine the job structure and pay levels within that organization.
TRUE
The organization's job structure and pay levels are policies of the organization rather than the
amount a particular employee earns.

Blooms: Remember
12-1
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3. The laws governing Equal Employment Opportunity guarantee equal pay for all employees of
an organization.
FALSE
The laws governing equal employment opportunity do not guarantee equal pay for men and
women, whites and minorities, or any other groups, because so many legitimate factors, from
education to choice of occupation, affect a person's earnings.

Blooms: Remember
Learning Objective: 12-02 Summarize legal requirements for pay policies.
Topic: Legal Requirements for Pay
4. If state laws specify minimum wages, in addition to the federal level, employees are entitled to
receive whichever rate is higher.
TRUE
Some states have laws specifying minimum wages; in these states, employers must pay
whichever rate is higher.

Blooms: Remember
12-2
5. Paying a salary does not necessarily mean that a job is exempt from overtime pay.
TRUE
Most workers paid on an hourly basis are nonexempt and therefore subject to the laws
governing overtime pay. However, paying a salary does not necessarily mean a job is exempt.

Blooms: Remember
6. Under the FLSA, children aged 14 and 15 may not be employed outside school hours.
FALSE
Under the FLSA, children aged 14 and 15 may work only outside school hours in jobs defined as
nonhazardous and for limited time periods. A child under age 14 may not be employed in any
work associated with interstate commerce, except work performed in a nonhazardous job for a
business entirely owned by the child's parent or guardian.

Blooms: Remember
12-3
7. Under the Davis-Bacon Act of 1931 and the Walsh-Healy Public Contracts Act of 1936,
employees of federal contractors must receive rates less than the prevailing wages in the area.
FALSE
Two additional federal laws, the Davis-Bacon Act of 1931 and the Walsh-Healy Public Contracts
Act of 1936, govern pay policies of federal contractors. Under these laws, federal contractors
must pay their employees at rates at least equal to the prevailing wages in the area.

Blooms: Remember
Topic: Prevailing Wages
8. In a product market, different organizations have exclusive customer bases.
FALSE
The organizations in a product market are competing to serve the same customers.

Blooms: Remember
Learning Objective: 12-03 Discuss how economic forces influence decisions about pay.
Topic: Product Markets
12-4
9. The pay offered by an organization is not limited by its presence in a product market.
FALSE
Product markets place an upper limit on the pay an organization will offer.

Blooms: Remember
10. The upper limit that product markets place on the pay offered by an organization is significant
when the organization's total costs are mainly comprised of labor costs and when price is a
significant factor for the organization's consumers.
TRUE
Product markets place an upper limit on the pay an organization will offer. This upper limit is
most important when labor costs are a large part of an organization's total costs and when the
organization's customers place great importance on price.

Blooms: Remember
12-5
11. Organizations use pay surveys to benchmark compensation.
TRUE
In terms of compensation, benchmarking involves the use of pay surveys.

Blooms: Remember
Topic: Gathering Information about Market Pay
12. According to equity theory, employees evaluate job outcomes such as compensation in terms
of outputs.
FALSE
According to equity theory, people measure outcomes such as pay in terms of their inputs.

Blooms: Remember
Learning Objective: 12-04 Describe how employees evaluate the fairness of a pay structure.
Topic: Judging Fairness
12-6
13. In a two-tier wage system, employees doing the same job are paid two different rates,
depending on their technical background and training.
FALSE
In a two-tier wage system, existing employees continue on at their current (upper-tier) pay rate
while new employees sign on for less pay (the lower tier).

Blooms: Remember
14. Research suggests that employees in the lower tier of the pay structure in a two-tier wage
system are less satisfied than the top-tier employees.
FALSE
One might expect reaction among employees in the lower tier that the pay structure is unfair.
But a study of these employees found that they were more satisfied than the top-tier
employees.

Blooms: Remember
12-7
15. The job characteristics that an organization deems valuable and decides to pay for are termed
as compensable factors.
TRUE
To conduct a job evaluation, a job evaluation committee identifies each job's compensable
factors, meaning the characteristics of a job that the organization values and chooses to pay
for.

Blooms: Remember
Learning Objective: 12-05 Explain how organizations design pay structures related to jobs.
Topic: Job Structure: Relative Value of Jobs
16. Key jobs are uncommon and have unstable content, making them very difficult to evaluate
using pay surveys.
FALSE
Key jobs are jobs that have relatively stable content and are common among many
organizations, so it is possible to obtain survey data about what people earn in these jobs.

Blooms: Remember
12-8
17. When job structure conflicts with market data, organizations should base their pay only on
market forces because this approach does not have any practical drawbacks.
FALSE
When job structure and market data conflict, organizations have to decide on a way to resolve
the two. One approach is to stick to the job evaluations and pay according to the employees'
worth to the organization. A way to moderate this approach is to consider the importance of
each position to the organization's goals. At the other extreme, the organization could base
pay entirely on market forces. However, this approach also has some practical drawbacks.

Blooms: Remember
Topic: Pay Rates
18. Pay grades allow precise matching of pay for individual jobs to market rates and an
organization's job structure.
FALSE
A drawback of pay grades is that grouping jobs will result in rates of pay for individual jobs that
do not precisely match the levels specified by the market and the organization's job structure.

Blooms: Remember
Topic: Pay Grades
12-9
19. The most common approach to pay differentials is to move an employee lower in the pay
structure to compensate for increasing costs.
FALSE
The most common approach to pay differentials is to move an employee higher in the pay
structure to compensate for higher living costs.

Blooms: Remember
Topic: Pay Differentials
20. Implementing broad bands increases the opportunities for promoting employees.
FALSE
Broad bands reduce the opportunities for promoting employees, so organizations that
eliminate layers in their job descriptions must find other ways to reward employees.

Blooms: Remember
Learning Objective: 12-06 Describe alternatives to job-based pay.
Topic: Alternatives to Job-Based Pay
12-10
21. Skill-based pay systems do not support empowerment of employees.
FALSE
Skill-based pay supports efforts to empower employees and enrich jobs because it encourages
employees to add to their knowledge so they can make decisions in many areas.

Blooms: Remember
22. A compa-ratio is 1 if actual pay is not consistent with the pay structure of an organization.
FALSE
Assuming that an organization has pay grades, the organization would find a compa-ratio for
each pay grade: the average paid to all employees in the pay grade divided by the midpoint for
the pay grade. If the average equals the midpoint, the compa-ratio is 1.

Blooms: Remember
Learning Objective: 12-07 Summarize how to ensure that pay is actually in line with the pay structure.
12-11
23. Issues affecting an organization's pay structure do not affect its reputation in general.
FALSE
An organization's policies regarding pay structure greatly influence employees' and even the
general public's opinions about the organization. Issues affecting pay structure therefore can
hurt or help the organization's reputation and ability to recruit, motivate, and keep employees.

Blooms: Remember
Learning Objective: 12-08 Discuss issues related to paying employees serving in the military and paying executives.
Topic: Current Issues Involving Pay Structure
24. Military pay often exceeds what service members would earn in their civilian jobs.
FALSE
The armed services pay service members during their time of duty, but military pay often falls
short of what they would earn in their civilian jobs.

Blooms: Remember
Topic: Pay during Military Duty
12-12
25. The equity of executive pay has a limited effect on other employees.
FALSE
Top executives help to set the tone or culture of the organization, and employees at all levels
are affected by behavior at the top. As a result, the equity of executive pay can affect more
employees than, say, equity among warehouse workers or salesclerks.

Blooms: Remember
Topic: Pay for Executives
Multiple Choice Questions
12-13
26. Which of the following will most likely be a result of using an unplanned approach, in which
each employee's pay is independently negotiated?
A. Dissatisfied employees
B. Equal pay distribution
C. Rates that are stable
D. Easy employment
E. Cost control
An unplanned approach, in which each employee's pay is independently negotiated, will likely
result in unfairness, dissatisfaction, and rates that are either overly expensive or so low that
positions are hard to fill.

Blooms: Remember
12-14
27. Caroline, a researcher, believes that an organization needs to plan what they will pay
employees in each job. Mark, her colleague, argues that an employee's pay should be
independently negotiated. Which of the following statements will weaken Mark's argument?
A. An unplanned approach will likely result in unfairness and dissatisfaction among the
employees.
B. Most of the employees prefer planned pay because negotiation with the management takes
time.
C. Independently negotiated pay will increase the workload and rivalry among the employees.
D. When the pay is planned by the organization, it creates more employment opportunities.
E. The pay structure is the same for both an entry-level and a manager-level employee if it has
been independently negotiated.
Because pay is important both in its effect on employees and on account of its cost,
organizations need to plan what they will pay employees in each job. An unplanned approach
in which each employee's pay is independently negotiated will likely result in unfairness,
dissatisfaction, and rates that are either overly expensive or so low that positions are hard to fill.
AACSB: Reflective Thinking

Blooms: Analyze
Level of Difficulty: 3 Hard
12-15
28. Which of the following best defines an organization's job structure?
A. It consists of the relative pay for different jobs within the organization.
B. It is the average amount an organization pays for a particular job.
C. It comprises the characteristics of jobs that the organization values and chooses to pay.
D. It comprises regular pay, overtime pay, and bonuses.
E. It refers to the standard amount that employers must pay under federal and state law.
Job structure consists of the relative pay for different jobs within the organization. It establishes
relative pay among different functions and different levels of responsibility.

Blooms: Remember
29. An organization's job structure and pay levels:
A. reflect the organization's knowledge about inflationary pressures.
B. reflect the decisions about how much to pay each employee.
C. provide the total amount an organization pays for a particular job.
D. are annual earnings of key employees in the organization.
E. are policies of the organization.
The organization's job structure and pay levels are policies of the organization rather than the
amount a particular employee earns.

12-16
Blooms: Remember
30. Hamish Life, an insurance company, defines the difference in pay between an entry-level
recruiter and an entry-level assembler, as well as the difference between an entry-level
recruiter, the HR manager, and the organization's Vice President. Which of the following is
being exemplified in this scenario?
A. Straight piecework plan
B. Job structure
C. Merit pay system
D. Pay differential
E. Balanced scorecard
Job structure consists of the relative pay for different jobs within the organization. It establishes
relative pay among different functions and different levels of responsibility. For example, job
structure defines the difference in pay between an entry-level accountant and an entry-level
assembler, as well as the difference between an entry-level accountant, the accounting

department manager, and the organization's comptroller.
AACSB: Knowledge Application

Blooms: Apply
12-17
31. Which of the following statements is true of equal employment opportunity laws?
A. These laws guarantee equal pay for whites and minorities.
B. The goal of these laws is for employers to provide equal pay for equal work.
C. Job descriptions and job structures cannot help organizations demonstrate that they are
upholding these laws.
D. These laws guarantee equal pay for men and women.
E. Under these laws, employers cannot tie differences in pay to business-related

considerations.
Under the laws governing equal employment opportunity, employers may not base differences
in pay on an employee's age, sex, race, or other protected status. Any differences in pay must
instead be tied to such business-related considerations as job responsibilities or performance.
The goal is for employers to provide equal pay for equal work.

Blooms: Understand
Level of Difficulty: 2 Medium
12-18
32. Cindy and Alex execute the same roles and responsibilities at their organization. However, Alex
earns more than Cindy. Under the laws governing equal employment opportunity, which of the
following will justify the organization's decision to pay Alex more than Cindy?
A. Alex belongs to a poor family.
B. Alex has more experience compared to Cindy.
C. Alex is younger than Cindy.
D. Alex can work for longer hours than Cindy because he is a male.
E. Cindy is an introvert.
The goal of equal employment opportunity laws is for employers to provide equal pay for equal
work. Job descriptions, job structures, and pay structures can help organizations demonstrate
that they are upholding these laws. These laws do not guarantee equal pay for men and
women, whites and minorities, or any other groups, because so many legitimate factors, from
education to choice of occupation, affect a person's earnings.

Blooms: Analyze
Topic: Equal Employment Opportunity
12-19
33. The comparable-worth policy:
A. advocates remedies for any undervaluation of jobs based on market-pay data.
B. is designed to reduce the wage gap between women and minority groups exclusively.
C. has been consistently upheld in court rulings.
D. uses job evaluation of an organization's jobs in terms of such criteria as their difficulty.
E. is the only non-controversial pay policy.
The comparable-worth policy uses job evaluation to establish the worth of an organization's
jobs in terms of such criteria as their difficulty and their importance to the organization.

Blooms: Remember
12-20
34. Which of the following is a drawback of a comparable-worth policy?
A. A free-market economy assumes people will not take differences in pay into account when
they choose a career.
B. Employees may conclude that pay rates are unfair.
C. The courts prohibit organizations from defending themselves against claims of

discrimination by showing that they pay the going market rate.
D. Grouping jobs will result in rates of pay for individual jobs that do not precisely match the
levels specified by the market and the organization's job structure.
E. Raising pay for some jobs places the employer at a disadvantage relative to employers that
pay the market rate.
Comparable-worth policies are controversial. From an economic standpoint, the obvious
drawback of such a policy is that raising pay for some jobs places the employer at an economic
disadvantage relative to employers that pay the market rate. A free-market economy assumes
people will take differences in pay into account when they choose a career.

Blooms: Understand
12-21
35. Which of the following is a federal law that establishes a minimum wage and requirements for
overtime pay and child labor?
A. FLSA
B. ADA
C. FMLA
D. ERISA
E. EAP
FLSA is a federal law that establishes a minimum wage and requirements for overtime pay and
child labor.

Blooms: Remember
36. Which of the following provisions is included in the Fair Labor Standards Act (FLSA)?
A. Personal finance
B. Minimum wage
C. Wage discrimination
D. Environmental hazards
E. Retirement plans
The Fair Labor Standards Act (FLSA) includes provisions for minimum wage, overtime pay, and
child labor.
12-22
Blooms: Remember
37. Which of the following is a drawback of a minimum wage in terms of social policy?
A. It assumes people will take differences in pay into account when they choose a career.
B. It is one and a half times the employee's usual hourly rate.
C. It applies only to the hours worked beyond 40 in one week.
D. It places the employer at an economic disadvantage relative to employers that pay the
living wage.
E. It tends to be lower than the earnings required for a full time worker to rise above the
poverty level.
From the standpoint of social policy, an issue related to the minimum wage is that it tends to be
lower than the earnings required for a full-time worker to rise above the poverty level.

Blooms: Understand
12-23
38. Mark and Chloe hold the same position at Rue & West Bros. However, Mark earns more than
Chloe. Which of the following will justify the organization's decision to pay Mark more than
Chloe?
A. Mark meets higher productivity targets than Chloe.
B. Mark comes from an economically weaker background.
C. Mark is more skilled than Chloe because he is male.
D. Chloe is younger than Mark.
E. Chloe is not a U.S. citizen.
Since Mark meets higher productivity targets than Chloe, the organization's decision to pay him
more than Chloe is justified. The laws governing equal employment opportunity do not
guarantee equal pay for men and women, whites and minorities, or any other groups, because
so many legitimate factors, from education to choice of occupation, affect a person's earnings.
Any differences in pay must instead be tied to such business-related considerations as job
responsibilities or performance.

Blooms: Analyze
12-24
39. David earns a base rate of $12 an hour and receives a weekly attendance award of $20. He
works 40 hours this week. What would be his total compensation for the week?
A. $480
B. $600
C. $500
D. $520
E. $250
Since David earns a base rate of $12 an hour for 40 hours, he earns $480. He also receives a
weekly award of $20. This increases his compensation to $500 for this week.

Blooms: Understand
12-25
40. Which of the following statements is true of the FLSA requirements for overtime pay?
A. The overtime rate is one and a half times the employee's hourly rate, excluding any bonuses
or piece-rate payments.
B. Time worked includes hours spent on production or sales, but not on activities such as
attending required classes, cleaning up the work site, and so on.
C. Overtime must be paid whether or not the employer specifically asked or expected the
employee to work the extra hours.
D. Everyone is eligible for overtime pay.
E. Most workers paid on an hourly basis are exempt and therefore not subject to the laws
governing overtime pay.
The FLSA requires that employers pay higher wages for overtime, defined as hours worked
beyond 40 hours per week. Overtime pay is required, whether or not the employer specifically
asked or expected the employee to work more than 40 hours.

Blooms: Understand
12-26
41. Perlis Inc. is a whole food distributor. The hourly pay of employees working at Perlis is lower
than the earnings required to rise above poverty level. In this scenario, which of the following
laws is violated by the company?
A. Laws governing equal employment opportunity
B. Fair Labor Standards Act (FLSA) of minimum wage
C. Fair Labor Standards Act (FLSA) of overtime
D. Laws governing prevailing wages
E. Product market laws
From the standpoint of social policy, an issue related to the minimum wage is that it tends to be
lower than the earnings required for a full-time worker to rise above the poverty level. A
number of cities have therefore passed laws requiring a so-called living wage, essentially a
minimum wage based on the cost of living in a particular region.

Blooms: Apply
12-27
42. Which of the following statements is true about the Fair Labor Standards Act (FLSA)?
A. The overtime rate under the FLSA is two and a half times the employee's hourly rate.
B. The FLSA permits federal contractors to pay less than the prevailing wage rate.
C. The FLSA permits a subminimum training wage equal to 95% of the minimum wage.
D. Nonexempt employees are covered by FLSA and include most hourly workers.
E. Under the FLSA, executive, professional, and administrative employees are considered
nonexempt employees.
Most workers paid on an hourly basis are nonexempt and therefore subject to the laws
governing overtime pay. Under the FLSA, executive, professional, administrative, and highly
compensated white-collar employees are considered exempt employees.

Blooms: Understand
43. Under the FLSA, exempt status of employees depends on their:
A. job responsibilities and salary.
B. organizational commitment.
C. job title.
D. work experience.
E. job qualifications.
Exempt status depends on the employee's job responsibilities, salary level, and "salary basis."
12-28
Blooms: Remember
44. _____ means that an employee is paid a given amount regardless of the number of hours
worked or quality of the work.
A. Pay level
B. Nonexemption
C. Pay policy line
D. Piecework rate
E. Salary basis
Salary basis means that an employee is paid a given amount regardless of the number of hours
worked or quality of work. Paying an employee on a salary basis means the organization
expects that this person can manage his or her own time to get the work done, so the
employer may deduct from the employee's pay only in certain limited circumstances, such as
disciplinary action or for unpaid leave for personal reasons.

Blooms: Remember
12-29
45. According to the FLSA, which of the following individuals is most likely a nonexempt
employee?
A. The CEO
B. A senior administrative employee
C. An hourly paid employee
D. An HR manager
E. The director of marketing
Under the FLSA, executive, professional, administrative, and highly compensated white-collar
employees are considered exempt employees. Any employee who is not in one of the exempt
categories is called a nonexempt employee. Most workers paid on an hourly basis are
nonexempt and therefore subject to the laws governing overtime pay.

Blooms: Remember
12-30
46. Under the FLSA, which of the following statements is true of child labor?
A. Children aged 18 and 19 may not be employed in hazardous occupations defined by the
Department of Labor.
B. Children aged 14 and 15 may not be employed in any work associated with interstate
commerce.
C. The FLSA's restrictions on the use of child labor apply to children younger than 18.
D. Children aged 18 and 19 may work only outside school hours, in jobs defined as
nonhazardous, and for limited time periods.
E. All the states have laws requiring working papers or work permits for minors.
The FLSA's restrictions on the use of child labor apply to children younger than 18. Under the
FLSA, children aged 16 and 17 may not be employed in hazardous occupations defined by the
Department of Labor.

Blooms: Understand
12-31
47. Carbon Fine Inc., a mining industry, hires employees belonging to the age group of 16 to 30.
The company provides overtime pay for its employees. The company is charged for violation of
law under the FLSA. Which of the following best explains the reason for the company being
sued?
A. Individuals aged 16 and 17 are being employed as mine workers.
B. Executive employees of the company are not being provided overtime pay.
C. Employees are being paid overtime only if they work beyond 40 hours in one week.
D. Mine workers are being paid only 25% above the minimum wage.
E. Individuals eligible for overtime are being paid at one and a half times the employee's
regular pay rate, including bonuses.
Under the FLSA, children aged 16 and 17 may not be employed in hazardous occupations
defined by the Department of Labor, such as mining, meatpacking, and certain kinds of
manufacturing using heavy machinery.

Blooms: Analyze
12-32
48. Which of the following statements is true according to the Davis-Bacon Act of 1931 and the
Walsh-Healy Public Contracts Act of 1936?
A. Under these laws, individuals aged 18 and 19 may not be employed in hazardous
occupations defined by the Department of Labor.
B. Federal contractors must pay their employees at rates at least equal to the prevailing wages
in the area.
C. The overtime rate applies to the hours worked beyond 45 in one week.
D. Employers must pay a training wage to workers under the age of 15 for a period of up to 60
days.
E. Organizations can defend themselves against claims of discrimination by showing that they
pay the going market rate.
Two federal laws, the Davis-Bacon Act of 1931 and the Walsh-Healy Public Contracts Act of
1936, govern pay policies of federal contractors. Under these laws, federal contractors must pay
their employees at rates at least equal to the prevailing wages in the area.

Blooms: Understand
12-33
49. The Davis-Bacon Act of 1931:
A. requires that a lower "training wage" be paid to workers under the age of 20 for a period of
up to 90 days.
B. mandates that employers pay higher wages for overtime, defined as hours worked beyond
40 hours per week.
C. requires general contractors performing services on prime contracts in excess of $2,500 to

pay service employees in various classes no less than the wage rates found prevailing in the
locality.
D. covers all government contractors receiving $10,000 or more in federal funds.
E. covers construction contractors that receive more than $2,000 in federal money.
Davis-Bacon covers construction contractors that receive more than $2,000 in federal money.
Walsh-Healy covers all government contractors receiving $10,000 or more in federal funds.

Blooms: Understand
12-34
50. The Walsh-Healy Public Contracts Act of 1936:
A. requires that a lower "training wage" be paid to workers under the age of 20 for a period of
up to 90 days.
B. mandates that employers pay higher wages for overtime, defined as hours worked beyond
40 hours per week.
C. covers construction contractors that receive more than $2,000 in federal money.
D. requires general contractors performing services on prime contracts in excess of $2,500 to

pay service employees in various classes no less than the wage rates found prevailing in the
locality.
E. covers all government contractors receiving $10,000 or more in federal funds.
Walsh-Healy covers all government contractors receiving $10,000 or more in federal funds.
Davis-Bacon covers construction contractors that receive more than $2,000 in federal money.

Blooms: Remember
12-35
51. Ramon Inc., a software company, uses job evaluations to establish the value of its jobs in terms
of criteria such as their difficulty and their importance to the organization. The company then
compares the evaluation points awarded to each job with the pay for each job. If jobs have the
same number of evaluation points, but are not paid equally, the pay of the lower-paid job is
raised. Based on the scenario, identify the policy adopted by the company.
A. Comparable-worth policy
B. Minimum wage policy
C. Average pay policy
D. Merit pay policy
E. Piecework rate policy
There are several instance where employers have undervalued work performed by women.
Some policy makers have proposed a remedy for this called equal pay for comparable worth.
This policy uses job evaluation to establish the worth of an organization's jobs in terms of such
criteria as their difficulty and their importance to the organization. The employer then compares
the evaluation points awarded to each job with the pay for each job. If jobs have the same
number of evaluation points, they should be paid equally. If they are not, pay of the lower-paid
job is raised to meet the goal of comparable worth.

Blooms: Apply
12-36
52. Teno Industries Inc. is a manufacturing company based in Texas. Teno Industries implemented
the comparable-worth policy to establish equal pay for all employees. However, the
organization incurred losses of about $20 million. In this scenario, which of the following is
most likely the reason for the failure of the comparable-worth policy?
A. The employer is at an economic disadvantage because of increased pay for some jobs.
B. The policy overlooks the undervalued work performed by women.
C. The policy uses job enrichment to establish pay structure based on market rate.
D. The employer ignores consider the evaluation points for each job.
E. The lower-paid jobs are encouraged to meet the goal of comparable worth.
There are several instance where employers have undervalued work performed by women.
Some policy makers have proposed a remedy for this called equal pay for comparable worth.
Comparable-worth policies are controversial. From an economic standpoint, the obvious
drawback of such a policy is that raising pay for some jobs places the employer at an economic
disadvantage relative to employers that pay the market rate.

Blooms: Analyze
12-37
53. Pentrall, a healthcare company, provides a lower training rate to its employees belonging to the
age group of 18 to 20 years. The rate is applicable for a period of 90 days. In this case, which of
the following laws will justify the organization's decision to pay the lower pay?
E. Fair Labor Standards Act (FLSA) of child labor
At the federal level, the 1938 Fair Labor Standards Act (FLSA) establishes a minimum wage that
is now $7.25 per hour. The FLSA also permits a lower "training wage," which employers may pay
to workers under the age of 20 for a period of up to 90 days.

Blooms: Apply
12-38
54. Scorla Automobiles is a manufacturing company based in Nevada. The employees of Scorla are
paid the lowest amount under federal or state law, which is stated as an amount of pay per
hour. Which of the following laws is the organization abiding by in this scenario?
In the United States, employers must pay at least the minimum wage established by law. At the
federal level, the 1938 Fair Labor Standards Act (FLSA) establishes a minimum wage that is now
$7.25 per hour.

Blooms: Apply
12-39
55. John is the head of the insurance claims department. John works for longer hours than his
subordinates. However, John is not paid overtime for working more than 40 hours per week.
Under the FLSA, which of the following will justify the organization's decision not to give John
overtime pay?
A. John is not a U.S. citizen.
B. John comes from an economically strong background.
C. John is unmarried.
D. John is considered as an exempt employee.
E. John has lower educational qualifications than his subordinates.
Under the FLSA, executive, professional, administrative, and highly compensated white-collar
employees are considered exempt employees, meaning employers need not pay them one and
a half times their regular pay for working more than 40 hours per week.

Blooms: Analyze
12-40
56. Blyrie Pharma is a pharmaceutical company based in Alabama. Blyrie Pharma expects its
employees to work long hours and achieve increased production rates. Employees earn one
and a half times the usual hourly rate for working more than 40 hours in one week. Which of
the following laws is Blyrie Pharma abiding by in this scenario?
The overtime rate under the FLSA is one and a half times the employee's usual hourly rate,
including any bonuses and piece-rate payments (amounts paid per item produced). The
overtime rate applies to the hours worked beyond 40 in one week.

Blooms: Apply
12-41
57. Spark Inc., a manufacturing company, hires employees belonging to the age group of 14 to 25.
However, the company ensures that employees belonging to the age group of 14 to 18 are
employed in nonhazardous environment and for limited time periods. In this scenario, which of
the following laws is complied by the company?
E. Fair Labor Standards Act (FLSA) of child labor
manufacturing using heavy machinery. Children aged 14 and 15 may work only outside school
hours in jobs defined as nonhazardous and for limited time periods.

Blooms: Apply
12-42
58. Sapheda Inc., a heavy machinery company, has employees belonging to the age group of 17 to
30. Noah, a 17-year-old, is prohibited from working with heavy machinery tools. His work
involves working in the mail room. Under the laws governing Fair Labor Standards Act (FLSA),
which of the following will justify the organization's decision to forbid Noah from doing heavy
machinery work?
A. Noah cannot be employed in hazardous occupations because he is 17 years old.
B. Noah is expected to work in a safe environment because he is male.
C. Noah is not a U.S. citizen, therefore he is prohibited from working in a hazardous

environment.
D. Noah has not yet completed college, therefore he should only be given administrative
duties.
E. Noah comes from an economically weaker background, therefore he is expected to perform

clerical duties.
manufacturing using heavy machinery. Children aged 14 and 15 may work only outside school
hours in jobs defined as nonhazardous and for limited time periods.

Blooms: Analyze
12-43
59. SalientVision Inc., a construction company, receives more than $2,000 in federal money. The
company pays its employees at rates at least equal to the prevailing wages in the area. The
calculation of prevailing rates by the company is based on 30% of the local labor force. In this
case, which of the following laws does the company comply with?
A. The Lloyd-La Follette Act of 1912
B. The Smith-Connally Act of 1943
C. The Julie Jargon Act of 1940 and the Eric Morath Act of 1945
D. The Davis-Bacon Act of 1931 and the Walsh-Healy Public Contracts Act of 1936
E. The Humphrey-Hawkins Full Employment Act

Blooms: Apply
12-44
60. Cliff Stiff Inc., a cement company, receives more than $2,000 in federal money. The company
hires employees belonging to the age group of 25 to 40. The company is charged for violation
of law under the Davis-Bacon Act of 1931 and the Walsh-Healy Public Contracts Act of 1936.
Which of the following best explains the reason for the company being sued?
A. The employees of the company are not being paid at rates at least equal to the prevailing
wages in the area.
B. Cement industry employees are being paid only 15% above the minimum wage.
C. The company hires employees belonging to the age group of 25 to 30, and they are being
employed in hazardous environments.
D. Individuals eligible for overtime are being paid at one and a half times the employee's
regular pay rate.
E. Employees below the age of 25 are not being hired by the company.

Blooms: Analyze
12-45
61. An organization's choices about _____ are limited by its response to the economic forces of
product markets and labor markets.
A. pay rates
B. pay structure
C. pay differentials
D. pay grades
E. pay ranges
Decisions about how to respond to the economic forces of product markets and labor markets
limit an organization's choices about pay structure.

Blooms: Remember
Topic: Economic Influences on Pay
12-46
62. Which of the following statements is true about a product market?
A. The cost of labor does not affect the product market because it is an insignificant part of an
organization's costs.
B. Product-market considerations are of particular concern to a company when its customers
place greater importance on product rather than price.
C. Organizations in a product market are competing to serve the same customers.
D. Product markets typically place a lower limit on the pay an organization will offer its
employees.
E. Organizations in a product market must increase the cost of labor every quarter.
The organization's product market includes organizations that offer competing goods and
services. In other words, the organizations in a product market are competing to serve the
same customers.

Blooms: Understand
12-47
63. Small Leaf Resort and Cresgrove Resort are established hotels in the hospitality industry.
However, Small Leaf Resort has a larger net profit than that of Cresgrove Resort. In order to
remain financially viable in the hospitality market, Cresgrove Resort decides to charge more for
their rooms and other services. In this scenario, which of the following best explains the reason
behind Cresgrove Resort incurring losses?
A. Cresgrove Resort has high labor-related expenses.
B. Cresgrove Resort hires employees belonging to the age group of 15 to 20.
C. Cresgrove Resort has better quality and customer service than Small Leaf Resort.
D. Cresgrove Resort considers its employees as resources.
E. Cresgrove Resort's compa-ratio is less than 1.
If an organization's labor costs are higher than those of its competitors, it will be under pressure
to charge more than competitors charge for similar products.

Blooms: Analyze
12-48
64. Das Work and Edge Tech are electronics manufacturing companies competing to serve the
same customers. The labor-related expenses per product for Das Work is $30 higher than that
for Edge Tech. However, Das Work makes more profits than Edge Tech. In this case, which of
the following actions has contributed to the profits made by Das Work?
A. It produces high quality goods and charges more for these products than competitors.
B. It does not provide overtime pay to employees who work more than 40 hours in one week.
C. It has recently introduced the comparable-worth policy for employees.
D. It provides free home delivery of purchased goods.
E. It has a company website where customers can purchase goods online.
If an organization's labor costs are higher than those of its competitors, it will be under pressure
to charge more than competitors charge for similar products.

Blooms: Analyze
12-49
65. Quasio Inc., a business consulting company, considers the cost of living of an employee while
deciding the average pay. In this case, which of the following measures helps the company
prepare for changes in the demands of the labor market?
A. Consumer Price Index
B. Wholesale Price Index
C. Producer Price Index
D. Retail Price Index
E. Customer Interest Index
The federal government tracks trends in the nation's cost of living with a measure called the
Consumer Price Index (CPI). Following and studying changes in the CPI can help employers
prepare for changes in the demands of the labor market.

Blooms: Apply
12-50
66. Trevor, a researcher, believes that having higher labor costs than competitors is not necessarily
bad. His colleague, Nick, supports Trevor's opinion by stating that employees must be paid
according to the market rate. Which of the following strengthens their statements?
A. An organization may gain an advantage by paying above the market rate if it uses this
method to attract top talent and uses employees' knowledge to be more innovative.
B. High pay will encourage an employee to work on holidays and produce higher quality
goods in order to balance the labor expense with high productivity.
C. Employees can be forced to work long hours because they are paid higher than the market
rate.
D. The work environment is friendly when employees are paid higher than the market rate.
E. Organizations can guarantee employee satisfaction if they increase employees' salaries
above the market rate.
An organization may gain an advantage by paying above the market rate if it uses the higher
pay as one means to attract top talent and then uses these employees' knowledge to be more
innovative, produce higher quality, or work more efficiently.

Blooms: Analyze
12-51
67. Inverness Inc., a manufacturing company, believes that pay is an investment that can generate
returns in attracting, retaining, and motivating a high-quality workforce. In this case, which of
the following statements is true about Inverness?
A. It considers its employees as resources.
B. It gives the least importance to profits.
C. It is a customer-friendly firm.
D. It tries to keep its labor costs minimal.
E. It helps employees find higher-paying jobs.
Higher pay may be an investment in superior human resources. Having higher labor costs than
your competitors is not necessarily bad if you also have the best and most effective workforce,
which produces more products of better quality. Pay policies are one of the most important
human resource tools for encouraging desired employee behaviors and discouraging undesired
behaviors. Therefore, organizations must evaluate pay as more than a cost—it is an investment
that can generate returns in attracting, retaining, and motivating a high-quality workforce.

Blooms: Apply
12-52
68. Organizations under pressure to cut labor costs may respond by:
A. retaining staff levels.
B. providing pay increases to prevent employee turnover.
C. postponing hiring decisions.
D. requiring employees to bear less of the cost of benefits such as insurance premiums.
E. avoiding automation of routine tasks.
Organizations under pressure to cut labor costs may respond by reducing staff levels, freezing
pay levels, postponing hiring decisions, or requiring employees to bear more of the cost of
benefits such as insurance premiums.

Blooms: Understand
12-53
69. Which of the following statements is true about labor markets?
A. Organizations compete to sell labor in the labor market.
B. Competition for labor establishes the minimum an organization must pay to hire an
employee for a particular job.
C. Changes in the CPI do not affect the labor market.
D. Cost-of-living considerations have little impact on labor-market rates.
E. An organization's competitors in labor markets only include companies with different

products.
Competition for labor establishes the minimum an organization must pay to hire an employee
for a particular job. If an organization pays less than the minimum, employees will look for jobs
with other organizations.

Blooms: Understand
12-54
70. Which of the following statements is true about the Consumer Price Index (CPI)?
A. The CPI helps organizations in the product markets decide an upper limit on the pay it will
offer.
B. Following and studying changes in the CPI helps employers prepare for changes in the
demands of the labor market.
C. The CPI helps organizations lure top-quality employees.
D. The CPI helps control labor market's demand for pay increases.
E. The CPI helps organizations to compete with companies in other industries that hire similar
employees.
The federal government tracks trends in the nation's cost of living with a measure called the
Consumer Price Index (CPI). Following and studying changes in the CPI can help employers
prepare for changes in the demands of the labor market.

Blooms: Understand
12-55
71. Although labor and product markets limit organizations' choices about pay levels, there is a
range within which organizations can make decisions. The size of this range depends on the:
A. minimum and maximum wages fixed by the government.
B. pay of federal contractors.
C. organization's competitive environment.
D. quality of employees.
E. organization's global reputation.
Although labor and product markets limit organizations' choices about pay levels, there is a
range within which organizations can make decisions. The size of this range depends on the
details of the organization's competitive environment.

Blooms: Remember
12-56
72. _____ holds that the most profitable pay level, all things being equal, would be at the market
rate.
A. Equity theory
B. Economic theory
C. Justice theory
D. Wage theory
E. Market theory
Economic theory holds that the most profitable level, all things being equal, would be at the
market rate.

Blooms: Remember
73. Pay policies are one of the most important human resource tools for:
A. reducing competition in the product market.
B. automating routine activities.
C. persuading customers that high quality is worth a premium price.
D. making decisions about product pricing.
E. encouraging desired employee behaviors.
Pay policies are one of the most important human resource tools for encouraging desired
employee behaviors and discouraging undesired behaviors.
12-57
Blooms: Understand
74. Capnos Inc., an insurance company incurred losses of about $100 million. To analyze its losses
and to overcome them, the company began comparing its own practices against those of its
successful competitors. In this scenario, which of the following procedures is adopted by
Capnos?
A. Benchmarking
B. Job evaluation
C. Regression analysis
D. Delayering
E. Pay structuring
To compete for talent, organizations use benchmarking, a procedure in which an organization
compares its own practices against those of successful competitors.

Blooms: Apply
12-58
75. Which of the following U.S. organizations conducts an ongoing National Compensation Survey
measuring wages, salaries, and benefits paid to the nation's employees?
A. Bureau of Labor Statistics
B. Society for Human Resource Management
C. American Management Association
D. AFL-CIO
E. Bureau of Economic Analysis
Pay surveys are available for many kinds of industries and jobs. The primary collector of this
kind of data in the United States is the Bureau of Labor Statistics, which conducts an ongoing
National Compensation Survey measuring wages, salaries, and benefits paid to the nation's
employees.

Blooms: Remember
12-59
76. According to _____, people measure outcomes such as pay in terms of their inputs.
A. expectancy theory
B. equity theory
C. retributive justice theory
D. progressive justice theory
E. economic theory
According to equity theory, people measure outcomes such as pay in terms of their inputs.

Blooms: Remember
Topic: Employee Judgments about Pay Fairness
77. Which of the following is an advantage of a two-tier wage system?
A. It helps move jobs out of the country.
B. It helps eliminate jobs without any legal hassles.
C. It helps reduce labor costs without cutting employees' existing salaries.
D. It helps provide more pay to new employees.
E. It provides better standards for benchmarking.
Some organizations have set up two-tier wage systems as a way to cut labor costs without
cutting employees' existing salaries.

Blooms: Understand
12-60
78. Research on the effects of two-tier wage plans found that:
A. lower-paid employees were less satisfied on average than higher-paid employees.
B. lower-paid employees were more satisfied on average than higher-paid employees because
they made comparisons with lower-paying alternatives for themselves.
C. lower-paid employees expected to be promoted into the second tier in a short time span.
D. equity theory did not come into play for either group and neither group experienced more
or less job satisfaction than the other.
E. both existing employees and new employees have a similar pay rate.
In a two-tier wage system, existing employees continue at their current (upper-tier) pay rate
while new employees sign on for less pay (the lower tier). One might expect reaction among
employees in the lower tier that the pay structure is unfair. But a study found that these
employees were more satisfied than the top-tier employees. They were not comparing their pay
with that of the upper-tier employees but with the other alternatives they saw for themselves:
lower-paying jobs or unemployment.

Blooms: Understand
12-61
79. Los Amigo Inc., a clothing manufacturer, believes that employees must be paid above the
average market rate. The company aims to provide good customer service and to increase its
sales. In this case, which of the following is most likely the reaction of employees working at Los
Amigo?
A. The employees will be motivated to work hard.
B. The employees will put less effort at work.
C. The employees will find their jobs less challenging.
D. The employees will find a way to increase their outcomes by stealing.
E. The employees will resign from their current jobs.
One of the purposes of pay is to motivate employees, and they will not be motivated by pay if
they think it is unfair. If employees conclude that they are underrewarded, they are likely to
make up the difference in one of three ways. They might put forth less effort (reducing their
inputs), find a way to increase their outcomes (for example, stealing), or withdraw by leaving the
organization or refusing to cooperate.

Blooms: Analyze
12-62
80. Which of the following statements is true of compensable factors?
A. They are generally statistically derived.
B. They are the characteristics of a job that a firm values and chooses to pay for.
C. They refer to the factors that are important for setting the two-tier wage system.
D. They describe all aspects of the jobs being evaluated.
E. They are used to ensure equity among employees.
To conduct a job evaluation, the job evaluation committee identifies each job's compensable
factors, meaning the characteristics of a job that the organization values and chooses to pay
for.

Blooms: Understand
12-63
81. Triano Brothers, an insurance firm, follows an administrative procedure for measuring the
relative worth of its jobs. The organization does this by assembling and training a committee
consisting of people familiar with the jobs. The committee includes a human resource specialist
and, if the budget permits, an outside consultant is hired. Which of the following is exemplified
in this scenario?
A. Job rotation
B. Job evaluation
C. Merit pay system
D. Job enrichment
E. Work structure
Job evaluation is an administrative procedure for measuring the relative worth of the
organization's jobs. Usually, the organization does this by assembling and training a job
evaluation committee, consisting of people familiar with the jobs to be evaluated. The
committee often includes a human resource specialist and, if its budget permits, may hire an
outside consultant.

Blooms: Apply
12-64
82. Kazuri Inc., a manufacturing company, bases employees' pay entirely on market forces. In this
case, which of the following is a practical drawback faced by the company?
A. Employees might conclude that the pay rates are unfair.
B. Supervisors of the company will expect to receive lower pay because of less responsibility.
C. The highly paid employees will likely be dissatisfied because of more work.
D. The managers will participate in rotation of responsibilities because they receive lower pay.
E. All employees will be categorized as exempt employees.
The organization could base pay entirely on market forces. However, this approach also has
some practical drawbacks. One is that employees may conclude that pay rates are unfair.

Blooms: Apply
Topic: Pay Structure: Putting It All Together
12-65
83. John and Lisa hold the same position at Flyberry Electronics. However, John earns more than
Lisa. In the context of pay structure, which of the following justifies the organization's decision
to pay John more than Lisa?
A. John works the night shift, and night hours are less desirable for most workers.
B. John is a U.S. citizen; therefore his pay should be higher than non-Americans.
C. Lisa is pregnant; therefore her productivity is assumed to be lower.
D. John is physically disabled; therefore he should be paid more than Lisa.
E. Lisa lives in a location where living expenses are higher.
In some situations organizations adjust pay to reflect differences in working conditions or labor
markets. For example, an organization may pay extra to employees who work the night shift
because night hours are less desirable for most workers. Similarly, organizations may pay extra
to employees in locations where living expenses are higher.

Blooms: Analyze
12-66
84. Which of the following statements is true about key jobs?
A. Organizations usually have no survey data available for key jobs.
B. These are jobs that have highly unstable content.
C. These are jobs that are unique among organizations and are rare to obtain.
D. Organizations make the process of creating a pay structure more impractical by defining
key jobs.
E. A job with a higher evaluation score than a particular key job would receive higher pay than
that key job.
Pay for the key jobs can be based on survey data, and pay for the organization's other jobs can
be based on the organization's job structure. A job with a higher evaluation score than a
particular key job would receive higher pay than that key job.

Blooms: Understand
12-67
85. A pay policy line:
A. shows the mathematical relationship between the minimum pay and the maximum pay in
an organization.
B. can be generated using a statistical method called regression analysis.
C. requires market-pay-rate data on all jobs in the organization.
D. can seldom provide information on the market pay level for a given job evaluation.
E. reflects the pay structure in the market, which always matches rates in the organization.
A pay policy line is a graphed line showing the mathematical relationship between job
evaluation points and pay rate. This can be done statistically on a computer, using a procedure
called regression analysis.

Blooms: Remember
12-68
86. Which of the following is a drawback of pay rates?
A. It increases the administrative burden of managing the compensation system.
B. It results in decreased promotional opportunities for employees.
C. It results in some jobs being underpaid and others being overpaid.
D. It increases the costs of surveying the market.
E. It groups jobs, which will result in rates of pay for individual jobs that precisely match the
levels specified by the market.
Survey data may show that people in certain jobs are actually earning significantly more or less
than the amount shown on the pay policy line.

Blooms: Understand
12-69
87. Which of the following is a set of possible pay rates defined by a minimum, maximum, and
midpoint of pay for employees holding a particular job?
A. Pay grade
B. Pay range
C. Pay differential
D. Compa-ratio
E. Compensation differential
Pay range is a set of possible pay rates defined by a minimum, maximum, and midpoint of pay
for employees holding a particular job or a job within a particular pay grade.

Blooms: Remember
88. Pay ranges are most common for _____.
A. white-collar jobs
B. piece-rate jobs
C. jobs that are covered by union contracts
D. automotive workers
E. construction workers
Pay ranges are most common for white-collar jobs and for jobs that are not covered by union
contracts.
12-70
Blooms: Remember
89. Which of the following statements is true about pay ranges?
A. Pay ranges are most common for blue-collar jobs and those covered by union contracts.
B. Pay ranges are widest for employees who are at lower levels in terms of their job evaluation
points.
C. Pay ranges generally are designed so that they do not overlap.
D. The market rate or the pay policy line generally serves as the midpoint of a range for the
job.
E. The less overlap, the more flexibility in transferring employees among jobs.
Pay ranges are most common for white-collar jobs and for jobs that are not covered by union
contracts. The range is widest for employees who are at higher levels in terms of their job
evaluation points. That is because the performance of these higher-level employees will likely
have more effect on the organization's performance, so the organization needs more latitude
to reward them. A typical approach is to use the market rate or the pay policy line as the
midpoint of a range for the job or pay grade.

Blooms: Understand
12-71
90. Overlapping _____ give the organization more flexibility in transferring employees among jobs,
because transfers need not always involve a change in pay.
A. pay rates
B. pay ranges
C. pay policies
D. pay differentials
E. pay ranks
Overlapping pay ranges gives the organization more flexibility in transferring employees among
jobs, because transfers need not always involve a change in pay.

Blooms: Remember
12-72
91. Assuming an organization wants to motivate employees through promotions, and assuming
enough opportunities for promotions are available, the organization would want to:
A. increase the overlap from one level to the next.
B. reduce its compa-ratio to less than 1.
C. implement a broad-band pay structure.
D. limit the overlap from one pay range to the next.
E. use a fixed interval promotion policy.
Assuming the organization wants to motivate employees through promotions (and assuming
enough opportunities for promotions are available), the organization will want to limit the
overlap from one level to the next.

Blooms: Remember
12-73
92. Which of the following is an adjustment to a pay rate to reflect differences in working
conditions or labor markets?
A. Bonus
B. Pay differential
C. Green-circle rate
D. Rank-and-file adjustment
E. Red-circle rate
Pay differential is an adjustment to a pay rate to reflect differences in working conditions or
labor markets.

Blooms: Remember
12-74
93. Both Thomas and his cousin, Alex, work for two different branches of the same organization.
Both have the same level of experience in management. However, Thomas earns more than
Alex. Under the laws governing Fair Labor Standards Act (FLSA), which of the following will
justify the organization's decision to pay Thomas more than Alex?
A. Thomas lives in a location where living expenses are higher.
B. Alex is younger than Thomas.
C. Thomas is a U.S. citizen.
D. Alex is physically disabled.
E. Alex is a substance abuser.
Organizations may pay extra to employees in locations where living expenses are higher. These
adjustments are called pay differentials.

Blooms: Analyze
Topic: Pay Differentials
12-75
94. Which of the following statements is true about job-based pay structures?
A. A pay structure that rewards employees for winning promotions will encourage them to
gain valuable experience through lateral career moves.
B. Their focus on higher pay for higher status can work in favor of efforts for empowerment.
C. They typically reward desired behaviors, particularly in a rapidly changing environment.
D. Organizations may avoid change because it requires repeating the time-consuming process
of creating job descriptions and related paperwork.
E. They always encourage flexibility, innovation, quality, and customer service.
Organizations may avoid change because it requires repeating the time-consuming process of
creating job descriptions and related paperwork.

Blooms: Understand
12-76
95. Joy Limon, a manufacturing company, has a job structure that focuses on higher pay for higher
status. When the company's CEO decides that the company will need a new set of knowledge,
skills, and abilities, he realizes that the existing pay structure may be rewarding the wrong
behaviors. In this case, which of the following alternatives to job-based pay structures may help
the organization to respond to this problem?
B. Skill-based pay system
C. Delayering
D. Quality-based pay system
E. Benchmarking
Some organizations have found greater flexibility through delayering, or reducing the number
of levels in the organization's job structure. By combining more assignments into a single layer,
organizations give managers more flexibility in making assignments and awarding pay
increases.

Blooms: Apply
12-77
96. Instruck Inc. is a real estate firm based in Colorado. The company ensures that employees' pay
is dependent on what they are capable of doing. The company also supports efforts to
empower its employees by encouraging them to be independent and making decisions in
various areas. This, in turn, ensures job enrichment. Based on this information, identify the pay
structure being exemplified in this scenario.
B. Skill-based pay systems
C. Merit pay system
D. Differential piece rates
E. Standard hour plan
Skill-based pay systems are pay structures that set pay according to the employees' level of skill
or knowledge and what they are capable of doing. Paying for skills makes sense at
organizations where changing technology requires employees to continually widen and deepen
their knowledge.

Blooms: Apply
12-78
97. Which of the following is a disadvantage of a pay structure that rewards employees for winning
promotions?
A. It does not focus on setting pay for groups of jobs.
B. It does not make adjustments to a pay rate to reflect differences in labor markets.
C. It discourages employees from gaining valuable experience through lateral career moves.
D. It rewards employees for acquiring skills but does not provide a way to ensure that
employees can use their new skills.
E. It places the employer at an economic disadvantage relative to other employers that pay
the market rate, by raising the pay for some jobs.
A pay structure that rewards employees for winning promotions may discourage them from
gaining valuable experience through lateral career moves.

Blooms: Understand
12-79
98. Which of the following is a characteristic of delayering?
A. It increases an organizations' flexibility.
B. It increases the opportunities for promoting employees.
C. It sets pay according to the employees' level of knowledge.
D. It encourages a climate of learning.
E. It decreases the flexibility of managers in making assignments.
Some organizations have found greater flexibility through delayering, or reducing the number
of levels in the organization's job structure.

Blooms: Understand
12-80
99. Which of the following is the result of combining more assignments into a single layer, thus
giving managers more flexibility in making assignments and awarding pay increases?
A. Outsourcing
B. Broad bands
C. Rightsizing
D. Benchmarks
E. Downsizing
By combining more assignments into a single layer, organizations give managers more
flexibility in making assignments and awarding pay increases. These broader groupings often
are called broad bands.

Blooms: Remember
12-81
100. Which of the following is a disadvantage of broad bands?
A. They reduce managers' flexibility in making assignments.
B. They always result in pay decreases.
C. They increase the number of levels in the organization's job structure.
D. They reduce the opportunities for promoting employees.
E. They discourage employees from gaining valuable experience through lateral career moves.
Broad bands reduce the opportunities for promoting employees, so organizations that
eliminate layers in their job descriptions must find other ways to reward employees.

Blooms: Understand
12-82
101. Which of the following is a disadvantage of skill-based pay systems?
A. It makes organizations inflexible.
B. It reduces employee empowerment.
C. It does not guarantee that employees can use their new skills.
D. It reduces opportunities for promoting employees.
E. It does not contribute to job enrichment.
Skill-based pay has its own disadvantages. It rewards employees for acquiring skills but does
not provide a way to ensure that employees can use their new skills. The result may be that the
organization is paying employees more for learning skills that the employer is not benefiting
from.

Blooms: Understand
12-83
102. Which of the following statements is true about skill-based pay?
A. Skill-based pay provides a way to ensure that employees can use their new skills.
B. Gathering market data about skill-based pay is easy.
C. Skill-based pay ensures that the employer pays the employee for learning skills that benefit
the employer.
D. Skill-based pay does not necessarily provide an alternative to the bureaucracy and
paperwork of traditional pay structures.
E. Skill-based pay does not require records related to skills, training, and knowledge acquired.
Skill-based pay does not necessarily provide an alternative to the bureaucracy and paperwork
of traditional pay structures, because it requires records related to skills, training, and
knowledge acquired.

Blooms: Understand
12-84
103. Compa-ratio:
A. is defined as the ratio of average pay to the midpoint of the pay range.
B. is defined as the ratio of the average pay for the grade divided by the minimum pay for the
grade.
C. can range from 0 to 100 percent.
D. uses data from market-pay surveys.
E. measures the degree to which new skills learnt are consistent with the increases in pay.
As part of its management responsibility, the HR department should compare actual pay to the
pay structure, making sure that policies and practices match. A common way to do this is to
measure a compa-ratio, the ratio of average pay to the midpoint of the pay range.

Blooms: Remember
Topic: Pay Structure and Actual Pay
12-85
104. The _____ requires employers to make jobs available to their workers when they return after
fulfilling military duties for up to five years.
A. USERRA
B. FLSA
C. EEOA
D. NLRB
E. FMLA
The Uniformed Services Employment and Reemployment Rights Act (USERRA) requires
employers to make jobs available to their workers when they return after fulfilling military duties
for up to five years.

Blooms: Remember
12-86
105. Executive pay has drawn public scrutiny in recent years. Which of the following statements best
explains the reason?
A. Top executives' pay is much higher than average workers' pay.
B. Most of the top executives' pay is in the form of a salary.
C. Top executives come under the category of exempt employees.
D. Top executives are paid in the form of commissions.
E. Executives are denied short-term or long-term incentives with their pay.
The media have drawn public attention to the issue of executive pay. The issue attracts notice
because of the very high pay that the top executives of major U.S. companies have received in
recent years.

Blooms: Analyze
Essay Questions
12-87
106. Define job structure, pay level, and pay structure.
Job structure consists of the relative pay for different jobs within an organization. It establishes
relative pay among different functions and different levels of responsibility. Pay level is the
average amount (including wages, salaries, and bonuses) the organization pays for a particular
job. Together, job structure and pay levels establish a pay structure that helps the organization
achieve goals related to employee motivation, cost control, and the ability to attract and retain
talented human resources.

Blooms: Remember
12-88
107. Discuss the three major provisions of the Fair Labor Standards Act (FLSA).
The FLSA establishes a minimum wage and requirements for overtime pay and child labor:
1) Minimum Wage: At the federal level, the 1938 FLSA establishes a minimum wage that is now
$7.25 per hour. The FLSA also permits a lower "training wage," which employers may pay to
workers under the age of 20 for a period of up to 90 days. This subminimum wage is
approximately about 85 percent of the minimum wage. Some states have laws specifying
minimum wages, and in these states, employers must pay whichever rate is higher.
2) Overtime Pay: The overtime rate under the FLSA is one and a half times the employee's usual
hourly rate, including any bonuses and piece-rate payments. The overtime rate applies to the
hours worked beyond 40 in one week. Time worked includes not only hours spent on
production or sales, but also time on such activities as attending required classes, cleaning up
the work site, or traveling between work sites. In addition, overtime is required whether or not
the employer specifically asked or expected the employee to work the extra hours. Under the
FLSA, executives, professionals, administrative personnel, and highly compensated white-collar
employees are exempt from the overtime pay requirements.

3) Child Labor: The FLSA restricts the use of child labor, with the aim of protecting children's
health, safety, and educational opportunities. The restrictions apply to children younger than 18.
Under the FLSA, children aged 16 and 17 may not be employed in hazardous occupations, while
children aged 14 and 15 may work only outside school hours in jobs defined as nonhazardous
and for limited periods of time. A child under age 14 may not be employed in any work
associated with interstate commerce, except work performed in a nonhazardous job for a
business entirely owned by the child's parent or guardian. A few additional exemptions from
this ban include acting, babysitting, and delivering newspapers to consumers.

Blooms: Remember
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108. What is benchmarking?
To compete for talent, organizations use benchmarking, a procedure in which an organization

compares its own practices against those of successful competitors. In terms of compensation,
benchmarking involves the use of pay surveys. These provide information about the going rates
of pay at competitors in the organization's product and labor markets.

Blooms: Remember
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109. How do employees judge the fairness of a pay structure?
Employees evaluate their pay relative to the pay of other employees. According to equity
theory, people measure outcomes such as pay in terms of their inputs. In general, employees
compare their pay and contributions against several yardsticks: what they think employees in
other organizations earn for doing the same job; what they think other employees holding
different jobs within the organization earn for doing work at the same or different levels; and
what they think other employees in the organization earn for doing the same job as theirs.
Employees' conclusions about equity depend on what they choose as a standard of
comparison. The ways employees respond to their impressions about equity can have a great
impact on the organization. Typically, if employees see their pay as equitable, their attitudes
and behavior continue unchanged. If employees see themselves as receiving an advantage,
they usually rethink the situation to see it as merely equitable. But if employees conclude that
they are underrewarded, they are likely to make up the difference in one of three ways. They
might put forth less effort (reducing their inputs), find a way to increase their outcomes, or
withdraw by leaving the organization or refusing to cooperate. Employees' beliefs about
fairness also influence their willingness to accept transfers or promotions.

Blooms: Remember
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110. Define hourly wage, piecework rate, and salary.
An organization's pay structure should reflect what the organization knows about market
forces, as well as its own unique goals and the relative contribution of each job to achieving the
goals. Within this structure, it may state the pay in terms of a rate per hour, commonly called an
hourly wage; a rate of pay for each unit produced, known as a piecework rate; or a rate of pay
per month or year, called a salary.

Blooms: Remember
111. What is a pay policy line? What is its relevance?
Mathematically, a pay policy line shows the relationship between job evaluation and rate of pay.
The line is plotted on a graph in which the vertical axis shows a range of possible pay rates, and
the horizontal axis measures the points from the job evaluation. The line slopes upward from
left to right, and if higher-level jobs are especially valuable to the organization, the line may
curve upward to indicate even greater pay for high-level jobs. Using this line, an analyst can
estimate the market pay level for a given job evaluation. Looking at the graph will give
approximate numbers, or the regression analysis will provide an equation for calculating the
rate of pay. The pay policy line reflects the pay structure in the market, which does not always
match rates in the organization.

Blooms: Remember
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112. What are the limitations of using a job-based pay structure?
Some of the limitations of job-based pay are as follows:
1) The precise definition of a job's responsibilities can contribute to an attitude that some
activities "are not in my job description," at the expense of flexibility, innovation, quality, and
customer service.
2) The job structure's focus on higher pay for higher status can work against an effort at
empowerment.
3) Changes to job descriptions involve significant investments of time and money, therefore
becoming a barrier to change.
4) The structure may reward undesired behaviors, particularly in a rapidly changing

environment where a new set of knowledge, skills, and abilities is required.
5) The structure discourages lateral employee movement and encourages promotion-seeking

behavior.

Blooms: Remember
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113. What is skill-based pay? What are its advantages and disadvantages?
Skill-based pay systems are pay structures that set pay according to the employees' level of skill
or knowledge and what they are capable of doing. Skill-based pay is desirable in situations
where employees need to learn more skills and become more flexible in the jobs they perform,
particularly in environments where the technology is changing.
Skill-based pay has its advantages. It helps organizations become more flexibility and
innovative. It encourages a climate of learning and adaptability. It helps employees use their
knowledge and ideas more productively. It gives employees a broader view of how the
organization functions.
Skill-based pay also has its own disadvantages. It rewards employees for acquiring skills, but
does not provide a way to ensure that employees use their new skills, resulting in the
organization paying employees for learning skills that the employer is not benefiting from. It
does not necessarily provide an alternative to the bureaucracy and paperwork of traditional pay
structures.

Blooms: Remember
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114. How do organizations compare actual pay to pay structure?
As part of its management responsibility, the HR department should compare actual pay to the
pay structure, making sure that policies and practices match. A common way to do this is to
measure a compa-ratio, the ratio of average pay to the midpoint of the pay range. Assuming
the organization has pay grades, the organization would find a compa-ratio for each pay
grade: the average paid to all employees in the pay grade divided by the midpoint for the pay
grade. If the average equals the midpoint, the compa-ratio is 1. More often, the compa-ratio is
somewhat above 1 or below 1. Assuming that the pay structure is well planned to support the
organization's goals, the compa-ratios should be close to 1. A compa-ratio greater than 1
suggests that the organization is paying more than planned for human resources and may have
difficulty keeping costs under control. A compa-ratio less than 1 suggests that the organization
is underpaying for human resources relative to its target and may have difficulty attracting and
keeping qualified employees. When compa-ratios are more or less than 1, the numbers signal a
need for the HR department to work with managers to identify whether to adjust the pay
structure or the organization's pay practices. The compa-ratios may indicate that the pay
structure no longer reflects market rates of pay, or maybe performance appraisals need to be
more accurate.

Blooms: Remember
Topic: Pay Structure and Actual Pay
12-95
115. How does equity theory justify the high pay of CEOs?
The issue of executive pay is relevant to pay structure in terms of equity theory. By many
comparisons, U.S. CEOs' pay is high. Data from the Economic Policy Institute compare average
CEO compensation with the compensation of the average U.S. worker. According to data from
the Associated Press and Equilar, median CEO compensation in 2012 was at 257 times the pay
of an average worker, up from 181 times in 2009. In a separate study by the Hay Group, CEO
pay increased at a rate of 5.5%, compared with a 1.8% increase in private-sector workers' pay.
To assess the fairness of this ratio, equity theory would consider not only the size of executive
pay relative to pay for other employees but also the amount the CEOs contribute. An
organization's executives potentially have a much greater effect on the organization's

performance than its lowest-paid employees have. An organization's executives potentially
have a much greater effect on the organization's performance than its lowest-paid employees
have. But if they do not seem to contribute 257 times more, employees will see the
compensation as unfair.

Blooms: Remember
12-96

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Chapter 12 Establishing a Pay Structure Answer Key

True / False Questions

1. Pay level is the total amount an employee pays to the organization.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

education to choice of occupation, affect a person's earnings.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

8. In a product market, different organizations have exclusive customer bases.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

In terms of compensation, benchmarking involves the use of pay surveys.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

system are less satisfied than the top-tier employees.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

organization's job structure.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

short of what they would earn in their civilian jobs.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

Multiple Choice Questions

each employee's pay is independently negotiated?

B. Equal pay distribution

C. Rates that are stable

AACSB: Analytical Thinking

AACSB: Reflective Thinking

B. It is the average amount an organization pays for a particular job.

D. It comprises regular pay, overtime pay, and bonuses.

AACSB: Analytical Thinking

29. An organization's job structure and pay levels:

A. reflect the organization's knowledge about inflationary pressures.

B. reflect the decisions about how much to pay each employee.

C. provide the total amount an organization pays for a particular job.

D. are annual earnings of key employees in the organization.

E. are policies of the organization.

amount a particular employee earns.

AACSB: Analytical Thinking

A. Straight piecework plan

C. Merit pay system

assembler, as well as the difference between an entry-level accountant, the accounting

AACSB: Knowledge Application

A. These laws guarantee equal pay for whites and minorities.

D. These laws guarantee equal pay for men and women.

E. Under these laws, employers cannot tie differences in pay to business-related

instead be tied to such business-related considerations as job responsibilities or performance.

AACSB: Analytical Thinking

A. Alex belongs to a poor family.

B. Alex has more experience compared to Cindy.

C. Alex is younger than Cindy.