Chapter 12—Variable Pay and Executive Compensation

MULTIPLE CHOICE

1. Variable pay is _____.

a. compensation that is tied to the employee’s performance
b. compensation that is tied to the employee’s seniority
c. compensation that is tied to the employee’s ethnicity
d. compensation that is tied to the employee’s qualification
ANS: A PTS: 1 DIF: Easy OBJ: LO: 12-01
NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Knowledge

2. Which of the following is the best example of variable pay?

a. Basic pay
b. Conveyance allowance
c. Severance pay
d. Incentive
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 12-01
NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Comprehension

3. Which of the following is a disadvantage of the individual incentive system?

a. The net result is typically less than optimal for the competing individual.
b. Employees may primarily focus on what is best for them personally.
c. This system can be used only for providing monetary incentives.
d. This system does not include any form of bonus.
ANS: B PTS: 1 DIF: Moderate OBJ: LO: 12-01
NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Comprehension

4. Which of the following is typically classified as an organizational incentive?

a. Commissions
b. Group team results
c. Executive stock options
d. Cost reductions
ANS: C PTS: 1 DIF: Easy OBJ: LO: 12-01
NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Knowledge

5. AirCar LLC, a producer of consumer electronics, had provided its employees an annual bonus. After a
change in management, the company has decided to replace bonuses with a stock option plan. Which
of the following statements is true of AirCar LLC?
a. It provided group incentives; now it provides organizational incentives.
b. It provided individual incentives; now it provides group incentives.
 c. It provided individual incentives; now it provides organizational incentives.
d. It provided organizational incentives; now it provides individual incentives.
ANS: C PTS: 1 DIF: Moderate OBJ: LO: 12-01
NAT: BUSPROG: Reflective Thinking TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Application

6. Group Viewer LLC, a software company, provides profit sharing plans for its employees. After
organizational restructuring, the management has decided to replace the profit sharing plan with
commissions for each employee. Which of the following is true of Group Viewer LLC?
a. It provided individual incentives; now it provides group incentives.
b. It provided individual incentives; now it provides organizational incentives.
c. It provided group incentives; now it provides individual incentives.
d. It provided organizational incentives; now it provides individual incentives.
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 12-01
NAT: BUSPROG: Reflective Thinking TOP: Variable Pay: Incentives for Performance
KEY: Bloom's: Application

7. Hikoma LLC, a toy manufacturer, provides employees with incentives depending on their individual
performances. This best exemplifies _____.
a. an employee stock plan
b. a commission
c. an executive stock option
d. a deferred compensation
ANS: B PTS: 1 DIF: Moderate OBJ: LO: 12-01
NAT: BUSPROG: Reflective Thinking TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Application

8. Leah LLC, a producer of sporting goods, provided its employees with a stock option plan. After
organizational restructuring, the management has decided to replace the stock option plan with profit
sharing. Which of the following is true of Leah LLC?
a. It provided organizational incentives; now it provides individual incentives.
b. It provided organizational incentives; now it provides group incentives.
c. It provided organizational incentives; now also it provides the same.
d. It provided individual incentives; now also it provides the same.
ANS: C PTS: 1 DIF: Moderate OBJ: LO: 12-01
NAT: BUSPROG: Reflective Thinking TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Application

9. Team Spark LLC, a producer of consumer goods, practiced gainsharing. After organizational
restructuring, the management has decided to replace gainsharing plans with a piece-rate system.
Which of the following is true of Team Spark LLC?
a. It provided group incentives; now it provides individual incentives.
b. It provided individual incentives; now it provides group incentives.
c. It provided group incentives; now it provides organizational incentives.
d. It provided individual incentives; now it provides organizational incentives.
ANS: A PTS: 1 DIF: Moderate OBJ: LO: 12-01
 NAT: BUSPROG: Reflective Thinking TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Application

10. RedCat LLC, a footwear manufacturing company, practiced gainsharing. After organizational
restructuring, the management has decided to replace gainsharing with profit sharing. Which of the
following is true of RedCat LLC?
a. It provided individual incentives; now it provides group incentives.
b. It provided organizational incentives; now it provides individual incentives.
c. It provided individual incentives; now it provides organizational incentives.
d. It provided group incentives; now it provides organizational incentives.
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 12-01
NAT: BUSPROG: Reflective Thinking TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Application

11. In a straight piece-rate system, wages are determined by:

a. dividing the number of units produced by the piece rate for one unit.
b. multiplying the number of units produced by the piece rate for one unit.
c. adding the piece rate for one unit by the number of units produced.
d. dividing the piece rate for one unit by the number of units produced.
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-02
NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Knowledge

12. A differential piece-rate system pays employees:

a. one piece-rate wage for all units produced irrespective of employee productivity or work
output.
b. one piece-rate wage for units produced up to a standard output and the employee is not
paid for units produced over the standard.
c. one piece-rate wage for units produced up to a standard output and the employee is
compensated through nonmonetary incentives for units produced over the standard.
d. one piece-rate wage for units produced up to a standard output and a higher piece-rate
wage for units produced over the standard.
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 12-02
NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Comprehension

13. Which of the following is an example of massive kinked bonus?

a. A sponsor rewarding an athlete only in the case of victory at an event
b. An organization that gives a one piece-rate wage for all units produced irrespective of
employee productivity
c. A sponsor rewarding an athlete for participation in an event
d. An organization rewarding an employee for referring someone who is later hired
ANS: A PTS: 1 DIF: Moderate OBJ: LO: 12-02
NAT: BUSPROG: Reflective Thinking TOP: Individual Incentives
KEY: Bloom's: Application
14. Which of the following best exemplifies spot bonus?
a. An organization that gives a one piece-rate wage for all units produced irrespective of
employee productivity
b. An organization rewarding an employee for installing a software upgrade
c. A sponsor rewarding an athlete for participation in an event
d. An organization rewarding an employee for referring someone who is later hired
ANS: B PTS: 1 DIF: Moderate OBJ: LO: 12-02
NAT: BUSPROG: Reflective Thinking TOP: Individual Incentives
KEY: Bloom's: Application

15. Which of the following is true of spot bonuses?

a. They are only given in the form of nonmonetary incentives.
b. They can be awarded only during appraisals.
c. They can be given for extra time worked.
d. They are given to a team and not to individual employees.
ANS: C PTS: 1 DIF: Easy OBJ: LO: 12-02
NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Knowledge

16. Which of the following is a disadvantage associated with spot bonuses?

a. They are typically given in the form of nonmonetary incentives.
b. They can be awarded only during appraisals.
c. They can fuel jealousy among employees.
d. They are given to a team and not to individual employees.
ANS: C PTS: 1 DIF: Easy OBJ: LO: 12-02
NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Comprehension

17. Which of the following is true of recognition awards?

a. The criteria used for rewarding performance is typically the length of service rather than
employees’ actual performance.
b. They can be awarded only during appraisals.
c. They are given to a team and not to individual employees.
d. The criteria for selecting award winners may be determined subjectively in some
situations.
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 12-02
NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Comprehension

18. Which of the following statements is true of commissions and tips?

a. Tips are paid by the employer; commissions are paid by the customer.
b. Both tips and commissions are paid by the customer.
c. Both tips and commissions are paid by the employer.
d. Tips are paid by the customer; commissions are paid by the employer.
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 21-02
NAT: BUSPROG: Analytic TOP: Individual Incentive
 KEY: Bloom's: Comprehension

19. Which of the following statements is true of group/team incentives?

a. They ensure that members of a group are not put under social pressure.
b. They are always distributed equally among team members.
c. They can foster cohesiveness among team members.
d. They are in the form of cash bonuses and cannot be given in the form of nonmonetary
incentives.
ANS: C PTS: 1 DIF: Moderate OBJ: LO: 12-02
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Comprehension

20. Which of the following is the most commonly used frequency of distributing team/group incentives?
a. Monthly
b. Semiannually
c. Annually
d. Quarterly
ANS: C PTS: 1 DIF: Easy OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

21. A free rider is a _____.

a. member of a group who contributes a lot
b. member of a group who contributes little
c. member of a group who contributes on par with other team members
d. member of a group who contributes only during the time of a need
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

22. Group incentives are most likely to work efficiently if _____.

a. the social pressure on members of the group is high
b. the individual performance level is clear
c. the incentive plan is imposed in the absence of employee input
d. individual performance cannot be identified
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Comprehension

23. Group incentives is least likely to work if _____.

a. most of the members are free riders
b. cooperation is necessary to do the job
c. the reward is distributed equally among the members
d. the reward involved is in the form of cash
ANS: A PTS: 1 DIF: Moderate OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
 KEY: Bloom's: Comprehension

24. Gainsharing is the system of _____.

a. treating all employees as equals irrespective of their productivity and the gains they bring
b. sharing with employees the gains in profits and productivity equally
c. rating employees on the basis of their productivity and the profits they bring
d. sharing with employees greater-than-expected gains in profits and productivity
ANS: D PTS: 1 DIF: Easy OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

25. The focus of gainsharing is to _____.

a. decrease discretionary efforts
b. decrease pay variances
c. increase discretionary efforts
d. increase pay variances
ANS: C PTS: 1 DIF: Easy OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

26. Which of the following statements is true of discretionary efforts?

a. It is the difference between the amount of effort a person has exerted and the minimum
amount of effort that he or she needs to exert to keep from being fired.
b. It is the difference between the maximum amount of effort a person can exert and the
minimum amount of effort that he or she needs to exert to keep from being fired.
c. It is the difference between the maximum amount of effort a person can exert and the
amount of effort a person has exerted while on-the-job.
d. It is the difference between the amount of effort a person has exerted and the maximum
amount of effort that a person can exert while on-the-job.
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

27. Improshare is a gainsharing method that typically _____.

a. uses employee committees to calculate and pass on savings to the employees
b. sets group piece-rate standards and pays weekly bonuses when those standards
are exceeded
c. identifies favorable employee behavior and rewards employees who adhere to the set
standards
d. uses employee unions to encourage and promote a positive environment in an organization
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

28. The Scanlon plan typically _____.

a. uses employee committees to calculate and pass on savings to the employees
 b. sets group piece-rate standards and pays weekly bonuses when those standards
are exceeded
c. identifies favorable employee behavior and rewards employees who adhere to the
standards
d. uses employee unions to encourage and promote a positive environment in an organization
ANS: A PTS: 1 DIF: Easy OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

29. Which of the following is a disadvantage of profit-sharing plans?

a. Employees must trust that management will accurately disclose financial and profit
information.
b. Employees are taxed heavily on the income that they generate from profit sharing plans.
c. Employees cannot access the funds that they receive from profit sharing plans for up to
three years.
d. Employers get little or no rebate on income tax for choosing profit-sharing plans.
ANS: A PTS: 1 DIF: Moderate OBJ: LO: 12-04
NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Comprehension

30. Which of the following is typically a funding choice in profit-sharing plans?

a. Based on percentage of employee earnings
b. Based on years of service
c. Based on sliding percentage of purchases
d. Based on sliding percentage of sales
ANS: D PTS: 1 DIF: Easy OBJ: LO: 12-04
NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Comprehension

31. Which of the following is an allocation choice in profit-sharing plans?

a. Fixed percentage of profits
b. Based on years of service
c. Sliding percentage based on sales
d. Unit profits
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-04
NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Comprehension

32. Stock option plans give employees the right to purchase:

a. an unlimited number of shares of company stock at a specified exercise price for a limited
period of time.
b. an unlimited number of shares of company stock at a specified exercise price for an
unlimited period of time.
c. a fixed number of shares of company stock at a specified exercise price for a limited
period of time.
d. a fixed number of shares of company stock at a specified exercise price for an unlimited
period of time.
 ANS: C PTS: 1 DIF: Easy OBJ: LO: 12-04
NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Knowledge

33. In a stock option plan, if the market price of the stock exceeds the exercise price, _____.
a. employees can then exercise the option and buy the stock
b. employees have to purchase the stock at the new price
c. employees have to forfeit their claims to the company shares
d. employees will make a loss through stock ownership
ANS: A PTS: 1 DIF: Moderate OBJ: LO: 12-04
NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Comprehension

34. Which of the following is an advantage of establishing employee stock ownership plans?
a. Employees are not dependant on the employers for their retirement benefits.
b. Firms can receive favorable tax treatment.
c. Firms have lesser control over organizational productivity.
d. The employees can purchase shares of company stock for an unlimited period of time.
ANS: B PTS: 1 DIF: Moderate OBJ: LO: 12-04
NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Comprehension

35. Which of the following is the most accurate metric of organizational performance in variable pay
plans?
a. Customer satisfaction
b. Accident rates
c. Revenue growth
d. Employee satisfaction
ANS: C PTS: 1 DIF: Easy OBJ: LO: 12-04
NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Knowledge

36. Which of the following is a metric of sales programs in variable pay plans?
a. Return on investment
b. Turnover costs
c. Accident rates
d. Increase in market share
ANS: D PTS: 1 DIF: Easy OBJ: LO: 12-04
NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Comprehension

37. Which of the following is a metric of human resources in variable pay plans?
a. Revenue growth
b. Employee satisfaction
c. Customer satisfaction
d. Return on investment
 ANS: B PTS: 1 DIF: Challenging OBJ: LO: 12-04
NAT: BUSPROG: Reflective Thinking TOP: Organizational Incentives
KEY: Bloom's: Comprehension

38. Which of the following statements is true of the salary-only approach?

a. The salary-only approach is useful when an organization emphasizes serving and retaining
existing accounts.
b. The salary-only approach is useful when an organization emphasizes on generating new
sales and accounts.
c. The salary-only approach is useful only when an organization is compensating
experienced sales executives.
d. The salary-only approach is not useful in compensating sales representatives who are new
to a job.
ANS: A PTS: 1 DIF: Easy OBJ: LO: 12-05
NAT: BUSPROG: Analytic TOP: Sales Compensation
KEY: Bloom's: Knowledge

39. _____ is a compensation typically computed as a percentage of sales in units or dollars.

a. Severance pay
b. Wage
c. Basic salary
d. Commission
ANS: D PTS: 1 DIF: Easy OBJ: LO: 12-05
NAT: BUSPROG: Analytic TOP: Sales Compensation
KEY: Bloom's: Knowledge

40. Entitlement culture is the idea that _____.

a. basic salaries are extra pay for sales performance rather than deferred bonuses
b. basic salaries are deferred bonuses rather than extra pay for extra sales performance
c. bonuses are extra pay for sales performance rather than deferred salary
d. bonuses are deferred salary rather than extra pay for extra sales performance
ANS: D PTS: 1 DIF: Moderate OBJ: LO: 12-05
NAT: BUSPROG: Analytic TOP: Sales Compensation
KEY: Bloom's: Comprehension

41. According to the provisions of the _____, publically listed companies now must allow shareholders to
vote on executive compensation.
a. Sarbanes-Oxley Act
b. Dodds-Frank Act
c. Lilly Ledbetter Fair Pay Act
d. Walsh-Healy Public Contracts Act
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge
42. The “clawbacks” provision in the _____ allows a company to recover any incentive-based pay that
was paid out during the prior three years if it would not have been paid under restated financial
statements.
a. Sarbanes-Oxley Act
b. Dodds-Frank Act
c. Lilly Ledbetter Fair Pay Act
d. Walsh-Healy Public Contracts Act
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

43. Which of the following is typically classified as a regular benefit?

a. Health insurance
b. Corporate-owned employee life insurance
c. Company-paid financial planning for executives
d. Estate planning
ANS: A PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

44. Which of the following is typically classified as a supplemental benefit plan?

a. Health insurance
b. Estate planning
c. Retirement insurance
d. Basic salary
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

45. _____ are special benefits—usually noncash items—for executives.

a. Executive Salaries
b. Base Salaries
c. Perquisites
d. Golden Parachutes
ANS: C PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

46. Which of the following is an advantage of perquisites?

a. Perks offer substantial tax savings because some of them are not taxed as income.
b. Perks offer substantial tax savings because some of them are not taxed as an expenditure.
c. Perks ensure a source of regular additional income for the employees apart from the salary.
d. Perks help in reducing the total cost of benefits provided by the organization.
ANS: A PTS: 1 DIF: Moderate OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Comprehension
 47. Which of the following statements is true of a discretionary system of determining bonuses?
a. The federal and state governments decide the bonuses.
b. All the shareholders of the company decide the bonuses.
c. The labor unions and employees decide the bonuses.
d. The CEO and the board of directors decide the bonuses.
ANS: D PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

48. _____ refer to the compensation given to an executive if he or she is forced to leave an organization.
a. Perquisites
b. Golden parachutes
c. Commissions
d. Short-term Incentives
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

49. The compensation committee is a:

a. subgroup of the board of directors that is composed of directors who are not officers of the
firm.
b. subgroup of the management that is composed of managers who are currently the officers
of the firm.
c. subgroup of the union that is composed of employees who are not officers of the firm.
d. subgroup of the shareholders that is composed of investors who are currently the officers
of the firm.
ANS: A PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

50. A compensation committee generally makes recommendations to the _____ on overall pay policies,
salaries for top officers, supplemental compensation such as stock options and bonuses, and additional
perquisites for executives.
a. labor union
b. board of directors
c. federal government
d. state government
ANS: B PTS: 1 DIF: Easy OBJ: LO: 12-06
NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

TRUE/FALSE

1. Variable pay plans attempt to provide tangible rewards, or incentives, to employees for performance
beyond normal expectations.
 ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-01
NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Knowledge

2. Nonfinancial rewards cannot be used as incentives in pay-for-performance plans.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 12-01

NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Knowledge

3. The most common means of providing individual variable pay are profitsharing plans and employee
stock plans.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-01

NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Knowledge

4. The most prevalent forms of organization-wide incentives are piece-rate systems, sales commissions,
and individual bonuses.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-01

NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Knowledge

5. Cost reduction is classified as a group/team incentive.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-01

NAT: BUSPROG: Analytic TOP: Variable Pay: Incentive for Performance
KEY: Bloom's: Knowledge

6. Under a straight piece-rate system, wages are determined by dividing the number of units produced by
the piece rate for one unit.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-02

NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Knowledge

7. A differential piece-rate system pays employees one piece-rate wage for units produced up to a
standard output and a higher piece-rate wage for units produced over the standard.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-02

NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Knowledge

8. To ensure that spot bonuses works efficiently, employers must keep the amounts reasonable and
provide them only for exceptional performance accomplishments.
 ANS: T PTS: 1 DIF: Moderate OBJ: LO: 12-02
NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Knowledge

9. Merchandise, gift certificates, and travel are the most frequently used incentives for recognition
awards.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-02

NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Knowledge

10. Recognition awards ensure that the award winners are determined objectively.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 12-02

NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Comprehension

11. A straight salary has no additional commission incentive, while a straight commission has all
compensation tied to the incentive.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 12-02

NAT: BUSPROG: Analytic TOP: Individual Incentives
KEY: Bloom's: Comprehension

12. A free rider is a member of the group who contributes the most in a group venture.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-03

NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Comprehension

13. The focus of gainsharing is to increase “discretionary efforts.”

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-03

NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

14. The Improshare approach uses employee committees to calculate and pass on savings to the
employees.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-03

NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

15. The Scanlon plan approach sets group piece-rate standards and pays weekly bonuses when those
standards are exceeded.
 ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-03
NAT: BUSPROG: Analytic TOP: Group/Team Incentives
KEY: Bloom's: Knowledge

16. Profitsharing distributes some portion of organizational profits to employees.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-04

NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Knowledge

17. A stock option plan gives employees the right to purchase an unlimited number of shares of company
stock at a specified exercise price for a limited period of time.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 12-04

NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Comprehension

18. Employee stock ownership plan is a plan designed to give employees significant stock ownership by
their employers.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-04

NAT: BUSPROG: Analytic TOP: Organizational Incentives
KEY: Bloom's: Knowledge

19. The salary-only approach is useful only when an organization emphasizes generating new sales and
accounts.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 12-05

NAT: BUSPROG: Analytic TOP: Sales Compensation
KEY: Bloom's: Comprehension

20. The straight commission system combines the stability of a salary with the performance aspect of a
commission.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 12-05

NAT: BUSPROG: Analytic TOP: Sales Compensation
KEY: Bloom's: Comprehension

21. A draw is a system in which sales representatives can draw advance payments against future
commissions.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-05

NAT: BUSPROG: Analytic TOP: Sales Compensation
KEY: Bloom's: Knowledge

22. The advantage of a salary-plus-commission system is that it requires the sales representative to sell to
receive any form of payment.
 ANS: F PTS: 1 DIF: Moderate OBJ: LO: 12-05
NAT: BUSPROG: Analytic TOP: Sales Compensation
KEY: Bloom's: Comprehension

23. According to the Dodds-Frank Act, publicly listed companies now must allow shareholders to vote on
executive compensation.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-06

NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

24. The “clawbacks” provision in Civil Rights Act of 1964 allows a company to recover any incentive-
based pay that was paid out during the prior three years if it would not have been paid under restated
financial statements.

ANS: F PTS: 1 DIF: Moderate OBJ: LO: 12-06

NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Comprehension

25. Supplemental benefit plans are plans that are available to nonexecutive employees.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-06

NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

26. Perquisites (Perks) are special benefits, usually noncash items, for executives.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-06

NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

27. A restricted stock option indicates that company stock shares will be paid as a grant of shares to
individuals.

ANS: T PTS: 1 DIF: Moderate OBJ: LO: 12-06

NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Comprehension

28. Compensation given to an executive if he or she is forced to leave an organization is called golden
parachute.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-06

NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge
 29. The reason for giving compensation in the form of incentives is that it is thought to be effective in
motivating employees and increasing corporate performance and stock values.

ANS: T PTS: 1 DIF: Easy OBJ: LO: 12-06

NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

30. The compensation committee usually is a subgroup of the board of directors that is composed of
directors who are currently the officers of the firm.

ANS: F PTS: 1 DIF: Easy OBJ: LO: 12-06

NAT: BUSPROG: Analytic TOP: Executive Compensation
KEY: Bloom's: Knowledge

SHORT ANSWER

1. List the three basic assumptions that the philosophical foundation of variable pay plans rest on.

ANS:
The philosophical foundation of variable pay rests on three basic assumptions:

1. Some people or groups contribute more to organizational success than others.

2. Some people perform better and are more productive than others.
3. Employees or groups who perform better or contribute more should receive more
compensation.

PTS: 1 DIF: Easy OBJ: LO: 12-01 NAT: BUSPROG: Analytic

TOP: Variable Pay: Incentive for Performance KEY: Bloom's: Knowledge

2. Why do employers use variable pay?

ANS:
Employers use variable pay for many reasons. Some of these reasons include the following:

1. Link strategic business goals and employee performance

2. Enhance organizational results and reward employees financially for their
contributions
3. Recognize different levels of employee performance through different rewards
4. Achieve HR objectives, such as increasing retention, reducing turnover, recognizing
succession training, and rewarding safety

PTS: 1 DIF: Moderate OBJ: LO: 12-01 NAT: BUSPROG: Analytic

TOP: Variable Pay: Incentive for Performance KEY: Bloom's: Knowledge

3. Describe the conditions necessary for the use of individual incentives.

 ANS:
Individual incentive systems tie personal effort to additional rewards for the individual employee.
Conditions necessary to use individual incentive plans are as follows:

1. Individual performance must be identifiable. The performance of each individual must be such that
it can be measured and identified. Each employee must have job responsibilities and tasks that can be
separated from those of other employees.
2. Individual competitiveness must be desirable. Since individuals generally pursue the incentives for
themselves, competition among employees may occur. Therefore, independent competition in which
some individuals “win” and others do not must be something the employer can tolerate.
3. Individualism must be stressed in the organizational culture. The culture of the organization must be
one that emphasizes individual growth, achievements, and rewards. If an organization emphasizes
teamwork and cooperation, then individual incentives may be counterproductive.

PTS: 1 DIF: Moderate OBJ: LO: 12-02 NAT: BUSPROG: Analytic

TOP: Individual Incentives KEY: Bloom's: Knowledge

4. Explain commissions.

ANS:
A commission is a percentage of the money taken in on sales, usually given in addition to a salary to
an agent or sales person. As such, a commission represents a potential incentive for employees who
qualify. Tips can be similar, even though they are paid by the customer rather than the employer. A
straight salary has no additional commission incentive, while a straight commission has all
compensation tied to the incentive. Finding the best mix of salary and commission to fit a situation is
one of the decisions compensation managers must make.

PTS: 1 DIF: Moderate OBJ: LO: 12-02 NAT: BUSPROG: Analytic

TOP: Individual Incentives KEY: Bloom's: Comprehension

5. Describe the two primary ways of distributing group/team incentives.

ANS:
The two primary ways for distributing group/team rewards are as follows:

1. Same-size reward for each member: All members receive the same payout, regardless of job level,
current pay, seniority, or individual performance differences. This is the most common approach.

2. Different-size reward for each member: Employers vary rewards given to team members depending
on such factors as individual contribution to group/team results, current pay, years of experience, or
skill levels of jobs performed.

PTS: 1 DIF: Moderate OBJ: LO: 12-03 NAT: BUSPROG: Analytic

TOP: Group/Team Incentives KEY: Bloom's: Comprehension

6. Define gainsharing.
 ANS:
The system of sharing with employees greater-than-expected gains in profits and/or productivity is
gainsharing. Also called teamsharing or goalsharing, the focus is to increase “discretionary efforts,”
which are the difference between the maximum amount of effort a person can exert and the minimum
amount of effort that he or she needs to exert to keep from being fired.

PTS: 1 DIF: Easy OBJ: LO: 12-03 NAT: BUSPROG: Analytic

TOP: Group/Team Incentives KEY: Bloom's: Knowledge

7. Describe the primary objectives of profit sharing plans.

ANS:
The primary objectives of profit-sharing plans are to increase organizational performance, attract or
retain employees, improve product/service quality, and enhance employee morale.

PTS: 1 DIF: Moderate OBJ: LO: 12-04 NAT: BUSPROG: Analytic

TOP: Organizational Incentives KEY: Bloom's: Comprehension

8. What are employee stock ownership plans?

ANS:
Employee stock ownership plans are designed to give employees significant stock ownership in their
employers.

PTS: 1 DIF: Easy OBJ: LO: 12-04 NAT: BUSPROG: Analytic

TOP: Organizational Incentives KEY: Bloom's: Knowledge

9. Explain the salary-only approach of sales compensation.

ANS:
The salary-only approach is useful when an organization emphasizes serving and retaining existing
accounts over generating new sales and accounts. This approach is also frequently used to protect the
income of new sales representatives for a period of time while they are building up their clientele.
Generally, the employer extends the salary-only approach for new sales representatives to no more
than six months, at which point it implements one of the other systems discussed later in this section.
Salespeople who want additional rewards often function less effectively in salary-only plans because
they are less motivated to sell without additional performance-related compensation.

PTS: 1 DIF: Moderate OBJ: LO: 12-05 NAT: BUSPROG: Analytic

TOP: Sales Compensation KEY: Bloom's: Knowledge

10. Explain perquisites.

ANS:
Perquisites (Perks) are special benefits—usually noncash items—for executives. Many executives
value the status enhancement of these visible symbols, which allow the executives to be seen as “very
important people” both inside and outside their organizations. Perks can
 offer substantial tax savings because some of them are not taxed as income. Some commonly used
executive perks are company cars, health club and country club memberships, first-class air travel, use
of private jets, stress counseling, and chauffeur services.

PTS: 1 DIF: Moderate OBJ: LO: 12-06 NAT: BUSPROG: Analytic

TOP: Executive Compensation KEY: Bloom's: Comprehension

ESSAY

1. Describe the three categories of variable pay.

ANS:
Variable pay plans can be classified into three categories: individual, group/team, and organizational.
There are advantages and disadvantages associated with using each type.

Individual incentives are given to reward the effort and performance of individuals. Some common
means of providing individual variable pay are piece-rate systems, sales commissions, and individual
bonuses. Others include special recognition rewards such as trips or merchandise. However, with
individual incentives, employees may focus on what is best for them personally, which may harm the
performance of other individuals with whom they are competing. The net result might be good for an
individual but less than optimal for the organization. For this reason, group/team incentives may be
more appropriate in some situations.

When an organization rewards an entire group/team for its performance, cooperation among the
members may increase. The most common group/team incentives are gainsharing (or goalsharing)
plans, whereby the employees on a team that meets certain performance goals share in the gains. Such
programs often focus on quality improvement, cost reduction, and other measurable results.

Organizational incentives reward people according to the performance results of the entire
organization. This approach assumes that all employees working together can generate improved
organizational results that lead to better financial performance. These programs often share some of
the financial gains made by the firm with employees through payments calculated as a percentage of
the employees’ base pay. The most prevalent forms of organization-wide incentives are profitsharing
plans and employee stock plans.

PTS: 1 DIF: Easy OBJ: LO: 12-01 NAT: BUSPROG: Analytic

TOP: Variable Pay: Incentive for Performance KEY: Bloom's: Knowledge

2. Describe piece-rate systems.

ANS:
The most basic individual incentive systems are piece-rate systems. Under a straight piece-rate system,
wages are determined by multiplying the number of units produced (such as garments sewn or service
calls handled) by the piece rate for one unit. The wage for each employee is easy to figure, and labor
costs can be accurately predicted.
 A differential piece-rate system pays employees one piece-rate wage for units produced up to a
standard output and a higher piece-rate wage for units produced over the standard. Managers can
determine the quotas or standards by using time and motion studies. For example, assume that the
standard production quota for a worker is set at 300 units per day and the standard rate is 14 cents per
unit. However, for all units over the standard, the employee receives 20 cents per unit. Under this
system, the worker who produces 400 units in one day would get $62. Many possible combinations of
straight and differential piece-rate systems can be used. Not everyone responds the same to piece-rate
systems. Some work hard to make more money, others do the minimum. When workers are paid with a
piece-rate system inequality in pay naturally arises. This inequality can also affect how people respond
to the idea of piece rates.

Despite their incentive value, piece-rate systems can be difficult to apply because determining
appropriate standards can be a complex and costly process for many types of jobs. In some instances,
the cost of determining and maintaining the standards may be greater than the benefits derived. Also,
jobs in which individuals have limited control over output or high standards of quality are necessary
may be unsuited to piecework unless quality can be measured.

PTS: 1 DIF: Easy OBJ: LO: 12-02 NAT: BUSPROG: Analytic

TOP: Individual Incentives KEY: Bloom's: Knowledge

3. Explain bonuses.

ANS:
Individual employees may receive additional compensation in the form of a bonus, which is a one-time
payment that does not become part of the employee’s base pay. Individual bonuses are used at all
levels in firms and are a popular short-term incentive.

A bonus can recognize performance by an employee, a team, or the organization as a whole. When
performance results are good, bonuses go up. When performance results are not met, bonuses go down
or disappear. Many employers base part of an employee’s bonus on individual performance and part on
company results, as appropriate. CEOs can receive bonuses on the basis of specific revenue or profit
results.

Bonuses also can be used to reward employees for contributing new ideas, developing skills, or
obtaining professional certifications. When helpful skills or certifications are acquired by an employee,
a pay increase or a one-time learning bonus may follow. For example, a financial services firm
provides the equivalent of two weeks’ pay to employees who master job-relevant computer skills.
Another firm gives one week of additional pay to members of the HR staff who obtain professional
certifications such as Professional in Human Resources (PHR), Senior Professional in Human
Resources (SPHR), or Certified Compensation Professional (CCP).
 Massive Kinked Bonuses: A very large all or nothing bonus is called a massive kinked bonus. For
example, golfer Darren Clarke ranked 111th in the world earned a $3 million bonus from his sponsor,
Dunlop. For some time, Clarke wore the company’s logo on his golf shirt and was paid nothing. He
would be paid only if he won a major tournament (there are only four). When he won the British Open
(odds of winning 200 to 1), he received the $1.45 million prize and the $3 million bonus from Dunlop.
Did this all-or-nothing bonus motivate him more than just paying him $2,000 per tournament to be a
clothes horse with logos? If so, what did it motivate him to do? Was he a better billboard for the
sponsor prior to winning? This kind of bonus raises questions of motivating potential.

“Spot” Bonuses: A unique type of bonus is a spot bonus, so called because it can be awarded at any
time. Spot bonuses are given for many reasons, perhaps for extra time worked, extra efforts, or an
especially demanding project. For instance, a spot bonus may be given to an information technology
employee who installed a computer software upgrade that required extensive time and effort. Often,
spot bonuses are given in cash, although some firms provide managers with gift cards, travel vouchers,
or other noncash rewards. Noncash rewards vary in types and levels, but they need to be visible and
immediately useful to be seen as desirable. The keys to successful use of spot bonuses are to keep the
amounts reasonable and to provide them only for exceptional performance accomplishments. The
downside to their use is that they can create jealousy and resentment in other employees who believe
that they deserved a spot bonus but did not get one.

Other Bonuses: Bonuses can be given for almost anything noteworthy, but some more common ones
are referral bonuses (given for referring someone who is later hired), and hiring bonuses (given when
someone agrees to hire on with a firm). Retention bonuses are used to keep someone with the
company, and project completion bonuses are given upon completion of difficult projects.

PTS: 1 DIF: Moderate OBJ: LO: 12-02 NAT: BUSPROG: Analytic

TOP: Individual Incentives KEY: Bloom's: Comprehension

4. Explain nonmonetary incentives.

ANS:
Numerous nonmonetary incentive programs can be used to reward individuals ranging from one-time
contests for meeting performance targets to awards for performance over time. For instance, safe-
driving awards are given to truck drivers with no accidents or violations on their records during a year.
Although such special programs can be developed for groups and for entire organizations, they often
focus on rewarding individuals.

Advocates of nonmonetary incentives hold that there is a growing acceptance of noncash

compensation for recognition purposes. In fact, they argue that recognition may be their greatest value
recognition from an employee’s manager, may include a simple “good morning” or “thank you, I really
appreciate the job you are doing.” However, research suggests that while nonmonetary incentives may
have intrinsic motivating properties, the way in which they are perceived by employees depends on
several factors, especially perceptions of pay equity, organizational justice, and managerial discretion.
 Performance Awards: Merchandise, gift certificates, and travel are the most frequently used incentives
for performance awards. Cash is still highly valued by many employees because they can decide how
to spend it. However, noncash incentives may be stronger motivators in some cases according to a
study that considered awards such as vacation cruises, home kitchen equipment, groceries, and other
noncash items. For instance, travel awards appeal to many U.S. employees, particularly trips to
popular destinations such as Disney World, Las Vegas, Hawaii, and international locations. These
examples indicate that many employees appreciate the trophy value of such awards and the variety
they provide as much as the actual monetary value.

Recognition Awards: Another type of program recognizes individual employees for their work. For
instance, many organizations in industries such as hotels, restaurants, and retailers have established
“employee of the month” and “employee of the year” awards. Hotels often use favorable guest
comment cards as the basis for providing recognition awards to front-desk representatives,
housekeepers, and other hourly employees. Recognition awards often work best when given to
acknowledge specific efforts and activities that the organization has targeted as important. Global
employers may use recognition awards that reflect cultural differences in various countries. The
criteria for selecting award winners may be determined subjectively in some situations. However,
formally identified criteria provide greater objectivity and are more likely to be seen as rewarding
performance rather than being based on favoritism. When giving recognition awards, organizations
should use specific examples to describe clearly how those receiving the awards were selected.

Service Awards: Another type of reward given to individual employees is the service award. Although
service awards often may be portrayed as rewarding performance over many years, in reality the
programs in most firms recognize length of service (e.g., 1, 3, 5, or 10 years) rather than employees’
actual performance. Many of these awards increase in value as the length of service increases, and
sometimes they are made as dollar amounts rather than as gifts. Some firms give recipients gift cards
to retail or restaurant locations, while others let qualifying employees select items from a range of
merchandise choices (e.g., cameras, watches, and other items). Firms can even offer employees special
trips to resorts or social events. The overall goal of these awards is to give appreciation to employees
for years of service.

PTS: 1 DIF: Moderate OBJ: LO: 12-02 NAT: BUSPROG: Analytic

TOP: Individual Incentives KEY: Bloom's: Comprehension

5. Describe the challenges faced by group/team incentives.

ANS:
 The difference between rewarding team members equally and rewarding them equitably triggers many
of the problems associated with group/team incentives. Rewards distributed in equal amounts to all
members may be perceived as unfair by employees who work harder, have more capabilities, or
perform more difficult jobs. This problem is compounded when an individual who is performing
poorly prevents the group/ team from meeting the goals needed to trigger the incentive payment. A
related challenge is that of “free riders.” A free rider is a member of the group who contributes little.
Such behavior can cause hard feelings and conflict in the group. Employee perceptions of the fairness
of the ways in which the group incentives handle free riders influence the trust in management and in
the program. Lack of trust can certainly reduce the value of any group variable pay plan. Social
pressure from group members to hold down effort or results does occur. Further, group agreement and
pressure can result in cheating to dishonestly pad results. Group size is another consideration in team
incentives. If a group becomes too large, employees may feel that their individual efforts have little or
no effect on the total performance of the group and the resulting rewards. But group/team incentive
plans may also encourage cooperation in small groups where interdependence is high. Such plans have
been used in many industries.

PTS: 1 DIF: Moderate OBJ: LO: 12-03 NAT: BUSPROG: Analytic

TOP: Group/Team Incentives KEY: Bloom's: Comprehension

6. Describe the different types of group/team incentives.

ANS:
Group/team reward systems can use different ways of compensating the group. The two most common
types of group/team incentives are team results and gainsharing.

Group/Team Results: Results to be measured may include group production, cost savings, or quality
improvement. Those results may be rewarded with cash bonuses, group awards, or some other
incentive. The results chosen may be part of a balanced scorecard that includes several pertinent results
in a combination approach.
 Gainsharing: The system of sharing with employees greater-than-expected gains in profits and/or
productivity is gainsharing. Also called teamsharing or goalsharing, the focus is to increase
“discretionary efforts,” which are the difference between the maximum amount of effort a person can
exert and the minimum amount of effort that he or she needs to exert to keep from being fired.
Workers in many organizations believe they are not paid for additional discretionary efforts, but are
paid to meet the minimum acceptable level of effort required. When workers do demonstrate
discretionary efforts, the organization can afford to pay them more than the going rate, because the
extra efforts produce financial gains over and above the returns of minimal efforts. For example, in a
global pharmaceutical plant, group effort was seen as contributing to improved productivity and lower
direct labor costs, making more money available for group variable pay. To develop and implement a
gainsharing or goalsharing plan, management identifies the ways in which increased productivity,
quality, and/or financial performance can occur and decide how some of the resulting gains should be
shared with employees. These group incentives may be based on a self-funding model, which means
that the money to be used as rewards came from the improvement in organizational results (e.g.,
reduced costs). Measures such as labor costs, overtime hours, and quality benchmarks often are used.
Both organizational measures and departmental measures may be targeted, with the weights for
gainsharing split between the two categories. Plans can also require that an individual in the group
must exhibit satisfactory performance to receive the gainsharing payments.

Two older approaches similar to gainsharing are still used. One, called Improshare, sets group piece-
rate standards and pays weekly bonuses when those standards are exceeded. The other, the Scanlon
plan, uses employee committees to calculate and pass on savings to the employees.

PTS: 1 DIF: Easy OBJ: LO: 12-03 NAT: BUSPROG: Analytic

TOP: Group/Team Incentives KEY: Bloom's: Knowledge

7. Explain profit sharing.

ANS:
As the name implies, profitsharing distributes some portion of organizational profits to employees.
One research study found that profit-sharing plans in small firms can help to enhance employee
commitment and increase job-related performances of individuals. The primary objectives of profit-
sharing plans can include the following:

• Increase organizational performance

• Attract or retain employees
• Improve product/service quality
• Enhance employee morale

Typically, the percentage of the profits distributed to employees is set by the end of the year before
distribution, although both timing and payment levels are considerations that might be determined
later. In some profit-sharing plans, employees receive their portions of the profits at the end of the
year. In others, the profits are deferred, placed in a fund, and made available to employees on
retirement or on their departure from the organization. Often the level of profits is influenced by
factors not under the employees’ control, such as accounting decisions,
 marketing efforts, competition, and elements of executive compensation. In recent years, some labor
unions have supported profit-sharing plans that tie employees’ pay increases to improvements in
broader organizational performance measures.

Drawbacks of Profit-Sharing Plans: When used throughout an organization, including with lower-level
workers, profit-sharing plans can have some drawbacks. First, employees must trust that management
will accurately disclose financial and profit information. As businesspeople know, the definition and
level of profit can depend on the accounting system used and on good and bad decisions made. To be
credible, management must be willing to disclose sufficient financial and profit information to
alleviate the skepticism of employees, particularly if profit-sharing levels fall from those of previous
years. If profitsharing communication is done well, employee pay satisfaction and commitment can be
improved. Profits may vary a great deal from year to year, resulting in windfalls or losses beyond the
employees’ control. Payoffs are generally far removed by time from employees’ individual efforts;
therefore, higher rewards may not be obviously linked to better performance.

PTS: 1 DIF: Moderate OBJ: LO: 12-04

NAT: BUSPROG: Reflective Thinking TOP: Organizational Incentives
KEY: Bloom's: Comprehension

8. Explain employee stock plans.

ANS:
Organizational incentive plans can use stock ownership in the organization to reward employees. The
goal of these plans is to get employees to think and act like “owners.”

A stock option plan gives employees the right to purchase a fixed number of shares of company stock
at a specified exercise price for a limited period of time. If the market price of the stock exceeds the
exercise price, employees can then exercise the option and buy the stock. The number of firms giving
stock options to nonexecutives has declined in recent years, primarily because of changing laws and
accounting regulations, but is rebounding as companies are offering the plans globally.

Firms in many industries have an employee stock ownership plan (ESOP), which is designed to give
employees significant stock ownership in their employers. According to the National Center for
Employee Ownership, an estimated 11,000 firms in the United States offer broad employee-ownership
programs covering about 13 million workers. Firms in many industries have ESOPs. For example, a
clothing designer in New York, Eileen Fisher, has an ESOP for about 600 employees. The account was
established when Fisher transferred about 30% of her total shares to the ESOP. Doing this gave her
employees more incentive to enhance the performance of the firm, which hopefully would raise its
stock value. Even private companies that do not have stock are using LTI (long-term incentives) to do
the same thing.

Establishing an ESOP creates several advantages. The major one is that the firm can receive favorable
tax treatment on the earnings earmarked for use in the ESOP. Another is that an ESOP gives employees
a “piece of the action” so that they can share in the growth and profitability of their firm. Employee
ownership may motivate employees to be more productive and focused on organizational performance.
 Many people approve of the concept of employee ownership as a kind of “people’s capitalism.”
However, the sharing can also be a disadvantage for employees because it makes their wages/salaries
and retirement benefits dependent on the performance of their employers. This concentration poses
even greater risk for retirees because the value of pension fund assets may also be dependent on how
well the company does or does not perform. The financial downturns, bankruptcies, and other travails
of some firms during tough economic conditions have illustrated that an ESOP does not necessarily
guarantee success for the employees who become investors.

PTS: 1 DIF: Moderate OBJ: LO: 12-04 NAT: BUSPROG: Analytic

TOP: Organizational Incentives KEY: Bloom's: Comprehension

9. Describe the different types of sales compensation plans.

ANS:
Salary Only: Some companies pay salespeople only a salary. The salary-only approach is useful when
an organization emphasizes serving and retaining existing accounts over generating new sales and
accounts. This approach is also frequently used to protect the income of new sales representatives for a
period of time while they are building up their clientele. Generally, the employer extends the salary-
only approach for new sales representatives to no more than six months, at which point it implements
one of the other systems discussed later in this section. Salespeople who want additional rewards often
function less effectively in salary-only plans because they are less motivated to sell without additional
performance-related compensation.

Straight Commission: A widely used individual incentive system in sales jobs is the commission,
which is compensation computed as a percentage of sales in units or dollars. Commissions are
integrated into the pay given to sales workers in three common ways: straight commission, salary-plus-
commission, and bonuses. In the straight commission system, a sales representative receives a
percentage of the value of the sales the person has made. Consider a sales representative working for a
consumer products company who receives no compensation if that person makes no sales, but who
receives a percentage of the total amount of all sales revenues she has generated. The advantage of this
system is that it requires the sales representative to sell in order to earn. The disadvantage is that it
offers no security for the sales staff. To offset this insecurity, some employers use a draw system, in
which sales representatives can draw advance payments against future commissions. The amounts
drawn are then deducted from future commission checks. Arrangements must be made for repayment
of drawn amounts if individuals leave the organization before earning their draws in commissions. The
use of draws is influenced by the salary/ incentive ratio. When salary is low and incentive high draws
are more necessary.

Salary-Plus-Commission or Bonuses: The form of sales compensation used most frequently is the
salary-plus-commission, which combines the stability of a salary with the performance aspect of a
commission. A common split is 80%–20% or 70%–30% salary to commission, although the split
varies by industry and can be based on numerous other factors. Some organizations also pay
salespeople salaries and then offer bonuses that are a percentage of the base pay, tied to how well each
employee meets various sales targets or other criteria. A related method is using lump-sum bonuses,
which may lead to salespeople working more intensively to get more sales results than the package
approach.
 PTS: 1 DIF: Easy OBJ: LO: 12-05 NAT: BUSPROG: Analytic
TOP: Sales Compensation KEY: Bloom's: Knowledge

10. Describe the elements of executive compensation.

ANS:
Because many executives are in high tax brackets, and their compensation often is provided in ways
that offer significant tax savings, their total compensation packages consist of much more than just
their base pay. Executives often are interested in current compensation and the mix of items in the total
package because it affects the amount of actual value after taxes.

Executive Salaries: Salaries of executives vary by the type of job, size of organization, the industry,
and other factors. In some organizations, particularly nonprofits, salaries often make up 90% or more
of total compensation. In contrast, in large corporations salaries may constitute less than half of the
total package. Executive salaries are reviewed by boards of directors to ensure that their organizations
are competitive.

Executive Benefits: Many executives are covered by regular benefits plans that are also available to
nonexecutive employees, including retirement, health insurance, and vacation plans. In addition,
executives may receive supplemental benefits that other employees do not receive. For example,
corporate-owned insurance on the life of the executive is popular; this insurance pays both the
executive’s estate and the company in the event of death. One supplemental benefit that has grown in
popularity is company-paid financial planning for executives. Also, trusts of various kinds may be
designed by the company to help executives deal with estate-planning and tax issues. Deferred
compensation is another way of helping executives with tax liabilities caused by incentive
compensation plans.

Executive Perquisites (Perks): In addition to the regular benefits received by all employees, perquisites
often are received by executives. Perquisites (Perks) are special benefits—usually noncash items—for
executives. Many executives value the status enhancement of these visible symbols, which allow the
executives to be seen as “very important people” both inside and outside their organizations. Perks can
offer substantial tax savings because some of them are not taxed as income. Some commonly used
executive perks are company cars, health club and country club memberships, first-class air travel, use
of private jets, stress counseling, and chauffeur services.

Annual Executive Bonuses: Annual bonuses for senior managers and executives can be determined in
several ways. One way is to use a discretionary system whereby the CEO and the board of directors
decide bonuses. The absence of formal, measurable targets may detract significantly from this
approach. Another way is to tie bonuses to specific measures, such as return on investment, earnings
per share, and net profit before taxes. More complex systems create bonus pools and thresholds above
which bonuses are computed. Whatever method is used, it is important to describe it so that executives
attempting to earn additional compensation understand the plan, otherwise, the incentive effect will be
diminished.
Long-Term Incentives (LTI): Executive performance-based incentives should tie executive
compensation to the long-term growth and success of the organization. However, whether these
incentives really emphasize the long-term or merely represent a series of short-term successes is
controversial. Short-term rewards based on quarterly or annual performance may not result in the kind
of long-run-oriented decisions necessary for the company to perform well over many years. As would
be expected, the total amount of pay for performance incentives varies by management level, with
CEOs receiving significantly more than other senior managers. As noted, a stock option gives
individuals the right to buy stock in a company, usually at an advantageous price. Various types of
stock option plans are the most widely used executive incentive. Several types of stock option plans
are used for executives, with restricted stock options becoming more prevalent. A restricted stock
option indicates that company stock shares will be paid as a grant of shares to individuals, usually
linked to achieving specific performance criteria. Despite the prevalence of such plans, research has
found little relationship between providing CEOs with stock options and subsequent firm performance.
The two items may not be closely linked in some firms. Because of the corporate scandals involving
executives who received outrageously high compensation due to stock options and the backdating of
those options, the use of stock options has been changing. Also, the recent economic difficulties in the
automobile, banking, financial, investment, manufacturing, and other industries have led to more
governmental and regulatory oversight of these plans.

Exit Packages and Golden Parachutes: While severance payments and pension payments may not
ordinarily cause headlines, special executive compensation for separation agreements and payouts as
the executive is leaving are controversial. The payouts occur right at the time people are often fed up
with the executive and may smack of unfairness. For example, a veteran executive at GE got a $28.3
million package when he left, not to compete with GE. His exit allowance represented “a generous
severance package in exchange for his noncompete agreement,” a consultant noted. Corporate boards
are becoming wary of golden parachute severance agreements because as a study on the topic
concludes they don’t work the way they are supposed to work.

PTS: 1 DIF: Easy OBJ: LO: 12-06 NAT: BUSPROG: Analytic

TOP: Executive Compensation KEY: Bloom's: Knowledge