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Chapter 12
<Recognizing Employee Contributions with Pay>
True / False Questions
1. | Pay plans are typically used to energize, direct, or control employee behavior.
True False |
2. | A pay plan’s ability to draw highly qualified applicants for jobs at a particular organization is known as the incentive effect.
True False |
3. | According to E. L. Thorndike's Law of Effect, high performance followed by a reward will motivate employees to repeat the performance and make it recur more often in the future.
True False |
4. | Valence of pay outcomes should change according to different pay systems.
True False |
5. | An example of the sorting effect is a social media firm offering employee stock options to attract a higher caliber of applicants for positions in the organization.
True False |
6. | In incentive pay programs, annual pay increases are usually linked to performance appraisal ratings.
True False |
7. | In merit pay systems, performance is measured based on a supervisor's rating.
True False |
8. | Merit pay has the ability to define and reward a broad range of performance dimensions.
True False |
9. | The flow of feedback tends to be multi-directional in merit pay programs.
True False |
10. | An employee's assessment of the fairness of his or her compensation based on how much pay the employee receives is referred to as procedural fairness.
True False |
11. | Merit pay systems rely on 360-degree performance feedback.
True False |
12. | Individual incentives are rolled into the base pay of employees.
True False |
13. | Deferred profit-sharing plans increase employee motivation.
True False |
14. | One solution to profit sharing during a downturn is to design plans that have upside but not downside risk.
True False |
15. | The performance motivation of stock option plans is particularly high from a reinforcement theory standpoint.
True False |
16. | Employee stock ownership plans (ESOPs) carry significant investment risks for employees.
True False |
17. | Gainsharing programs offer a means of sharing productivity gains with employees based on organization-level performance.
True False |
18. | One way of achieving employee ownership is through stock options, which give employees the opportunity to buy stock at a fixed price.
True False |
19. | Gainsharing plans encompass more than just a monetary component.
True False |
20. | Employee stock ownership plans (ESOPs) give employees the right to vote their securities if registered on a national exchange.
True False |
21. | Relying exclusively on merit pay or individual incentives may result in high levels of work motivation but unacceptable levels of individualistic and competitive behavior.
True False |
22. | The Securities and Exchange Commission (SEC) requires companies to report compensation levels for the five highest paid executives.
True False |
23. | The Dodd-Frank Wall Street Reform and Consumer Protection Act requires shareholders to have a "say on pay," meaning that they have the right to a (nonbinding) vote on executive pay plans.
True False |
24. | With respect to employee participation in decision-making, the more agents there are, the lower the monitoring cost.
True False |
25. | When an organization has a growth strategy, the short-run pay level and benefit level tend to be below market level.
True False |
Multiple Choice Questions
26. | E. L. Thorndike's Law of Effect states that _____.
A. | a response followed by a reward is more likely to recur in the future |
B. | behavior is a function of ability and knowledge |
C. | valence of pay outcomes should vary under different pay systems |
D. | monetary incentives increase intrinsic motivation |
E. | principals have perfect information on the degree to which an agent is pursuing goals |
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27. | Which of the following theories suggests that high employee performance not followed by a monetary reward will make future high performance less likely?
A. | Herzberg's two-factor theory |
C. | Freud's psychoanalytical theory |
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28. | _____ focuses on the link between rewards and behaviors and emphasizes anticipated rewards.
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29. | _____ can be described as a function of ability and motivation.
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30. | According to expectancy theory, motivation is hypothesized to be a function of _____.
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31. | According to expectancy theory, compensation systems differ according to their impact on the components of motivation; the main influence of compensation is on _____.
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32. | Which of the following components is a perceived link between behavior and pay?
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33. | _____ perception is the perceived link between effort and performance.
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34. | Expectancy theory implies that linking an increased amount of rewards to performance will increase motivation and performance. Followers of cognitive evaluation theory are likely to question this assumption, arguing that
A. | monetary rewards may decrease extrinsic motivation. |
B. | intrinsic rewards do not affect job satisfaction. |
C. | monetary rewards may decrease intrinsic motivation. |
D. | extrinsic rewards are not effective for managers. |
E. | behaviors are determined by genes rather than reinforcement. |
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35. | Which of the following is most likely to provide intrinsic motivation?
A. | A sponsored vacation to Europe |
B. | A monthly salary of $10,000 |
D. | Paid leave for three months |
E. | An interesting work assignment |
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36. | Which of the following is an example of the sorting effect?
A. | A mid-year merit bonus encourages Lavar to keep improving his productivity at Star Industries. |
B. | Bevlink’s full match for employee retirement plan contributions encourages Tina to apply for a job there. |
C. | Two years without a wage increase for employees at Fractal Castings has led to a decrease in product quality. |
D. | Implementation of profit sharing at RedCube Robotics inspires Zack’s team to identify potential supply chain savings. |
E. | Freezing of year-end bonuses at Harvest Organics leads employees to question the organization’s values. |
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37. | Separating the functions of principals and agents is likely to result in
A. | immobility of financial capital. |
B. | diversification of investment risk. |
C. | reduction in agency costs. |
D. | better goal congruence. |
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38. | According to the agency theory, the principals are the _____.
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39. | Agency costs are likely to arise when _____.
A. | principals and agents have different goals |
B. | owners and managers are the same |
C. | stockholders are involved in day-to-day operations of the company |
D. | the stockholders are aware of the degree to which the agents are pursuing the principal's goals |
E. | there is information symmetry between the agent and the principal |
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40. | Which of the following is true of how agents may differ from principals?
A. | Agents can diversify the risks more easily. |
B. | Agents are more likely to pursue projects with high potential payoffs. |
C. | Agents can diversify investments better. |
D. | Agents are more averse to risk. |
E. | Agents are likely to prefer more emphasis on uncertain incentives than base pay. |
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41. | Which of the following is true of how managers may differ from shareholders?
A. | Managers can diversify the risks more easily. |
B. | Managers are more likely to pursue projects with high potential payoffs. |
C. | Managers diversify investments more easily. |
D. | Managers are less averse to risk. |
E. | Managers are likely to prefer more emphasis on uncertain incentives than base pay. |
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42. | Which of the following must a principal do to reduce agency costs?
A. | Encourage the agent to maximize his or her benefits |
B. | Provide complete autonomy to the agent |
C. | Discourage the agent from pursuing projects with high potential payoffs |
D. | Increase information asymmetry and goal congruence |
E. | Align the agent's interests with the principal's interests |
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43. | Which of the following is an example of a behavior-oriented contract?
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44. | Which of the following is true about outcome-oriented contracts?
A. | They require more supervision than behavior-oriented contracts. |
B. | When profits drop, agents' compensation goes up in outcome-oriented contracts. |
C. | Agents do not demand compensating wage differentials in such contracts. |
D. | Agents face minimal risks in such contracts. |
E. | They are typically a major component of executive compensation. |
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45. | Which of the following statements about outcome-oriented or behavior-oriented contracts is true?
A. | Merit pay is an example of an outcome-based contract. |
B. | Behavior-oriented contracts do not transfer risk to the agent. |
C. | Outcome-oriented contracts do not require a compensating wage differential. |
D. | Outcome-oriented contracts decrease the agent's risks. |
E. | In behavior-based contracts, information asymmetry is not an important issue. |
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46. | Agents prefer a behavior-based contract when _____.
A. | they are inclined to take more risks |
B. | job outcomes are more measurable |
C. | they desire higher compensation |
D. | outcome uncertainty is high |
E. | jobs become less programmable |
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47. | As jobs become less programmable,
A. | outcome-oriented contracts become less likely. |
B. | monitoring becomes less difficult. |
C. | behavior-oriented contracts become less likely. |
D. | the agent's risk decreases. |
E. | the requirement for compensating wage deferential increases. |
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48. | Which of the following makes outcome-oriented contracts less likely to occur?
A. | Risk aversion among agents |
B. | High outcome uncertainty |
C. | More programmable jobs |
D. | Less measurability of outcomes |
E. | Low risk premium in compensations |
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49. | Agency theory is of particular value in compensation management because of its emphasis on the _____ trade-off.
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50. | ______ are decisions about whether to join or remain with an organization.
B. | Organizational behaviors |
D. | Organizational structures |
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51. | Which of the following is likely to occur when pay for performance with stronger incentive intensity is replaced with one having a weaker incentive pay?
A. | Greater motivation for employees in sales, executives, and stockbrokers |
B. | Motivation for high performers to stay with the organization and improve their efficiency |
C. | Greater chance for unintended, undesirable behavior driven by pay-linked incentives |
D. | Excessive risk-taking for greater premium and compensation |
E. | Competitors possibly winning over high performers with stronger incentive intensity |
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52. | In incentive pay, performance measures are primarily based on _____.
A. | a supervisor's appraisal |
B. | individual productivity |
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53. | In skill-based pay systems, performance measures are primarily based on _____.
A. | a supervisor's appraisal |
B. | individual productivity |
E. | employees' competency acquisition |
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54. | Which of the following is a compensation program that would best support an organizational culture of cooperation and problem solving?
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55. | Which type of compensation program is most likely to attract learning-oriented employees?
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56. | Overtime pays better performers more in _____ programs.
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57. | Culture based on _____ is most likely to prevail in companies that use a profit-sharing compensation program.
A. | individual competition |
D. | problem-solving orientation |
E. | learning and flexibility |
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58. | A(n) _____ is suitable for an organization with a culture that promotes individual competition.
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59. | Which of the following compensation programs uses a management style that gives importance to control?
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60. | Which of the following is a compensation program that relates costs to the ability to pay?
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61. | Which of the following pay programs has the highest frequency of payout?
progra |
62. | Which of the following is a design feature according to which employee contribution programs differ?
D. | Number of employee groups |
E. | Company's annual output |
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63. | In _____ programs, annual compensation increases are usually linked to performance appraisal ratings.
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64. | According to a merit increase grid, one of the factors that determine the size and frequency of pay increases is the _____.
A. | company's annual output |
B. | attrition rate in the company |
E. | individual's performance rating |
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65. | In merit pay programs, an individual's compa-ratio represents his or her _____.
C. | position in the pay range |
E. | ratio of pay to benefits |
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66. | In a merit increase grid, the _____ determines the size and frequency of pay increases.
A. | time spent in the current pay grade |
B. | overall profitability of the company |
D. | compa-ratio of employees |
E. | the skill developed by the employee |
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67. | Allan works as a typesetter in a publishing company. If the organization uses merit pay programs, Allan's salary is based primarily on information collected from _____.
B. | the human resource manager |
C. | his immediate supervisor |
E. | performance indicators |
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68. | Which of the following is a criticism of traditional merit pay programs?
A. | Peer and subordinate ratings are frequent, and they tend to receive more weight than supervisory ratings. |
B. | The feedback under this system tends to occur too frequently, which may cause average employees to feel more discouraged than appreciated. |
C. | These programs lack emphasis on individual performance and focus too much on teamwork. |
D. | These programs often involve gathering inappropriate feedback from external sources. |
E. | Employees are encouraged to focus on personal gains rather than what is good for the organization. |
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69. | Employees assess fairness along the distributive dimension when their assessment is based on _____.
A. | organizational procedures |
B. | the systems used to assess performance |
E. | their judgment of the management |
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70. | In the _____ dimension, employees base their fairness assessments on the processes that were used to decide the amount of compensation.
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71. | Which of the following is true of individual incentives?
A. | They contribute to a more disintegrated workforce. |
B. | They are helpful in the pursuit of total quality management objectives. |
C. | They encourage employees to go beyond the call of duty. |
D. | They reduce the motivation of acquiring multiple skills and proactive problem solving. |
E. | They must be continuously earned and re-earned. |
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72. | In a(n) _____ plan, performance is usually measured as physical output and the payment is not rolled into the base pay.
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73. | Which of the following is a drawback of using profit sharing?
A. | It promotes individual goals rather than organizational goals. |
B. | It promotes competition between work groups. |
C. | It increases the probability of individual competition. |
D. | It fails to make labor costs more variable. |
E. | It runs the risk of contributing to employee dissatisfaction. |
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74. | From a(n) _____ standpoint, the effect on performance motivation may be limited in ownership programs because of the less obvious link between pay and performance.
C. | efficiency wage theory |
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75. | Which of the following is a difference between profit-sharing plans and employee ownership plans?
A. | Unlike ownership plans, base pay is not reduced when profit-sharing plans are introduced. |
B. | Ownership plans focus on the success of the organization as a whole, unlike profit-sharing plans. |
C. | Profit-sharing plans promote individual competition, whereas ownership plans promote group competition. |
D. | The link between pay and performance is less obvious under ownership than under profit sharing. |
E. | Ownership plans promote individual competition, whereas profit-sharing plans promote group competition. |
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76. | A _____ plan gives employees the opportunity to buy the company's shares at a previously fixed price.
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77. | Which of the following is an example of an ownership plan used in compensation systems?
B. | Profit-sharing program |
E. | Individual incentive plan |
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78. | By law, what percentage of assets must an employee stock ownership plan (ESOP) invest in its company's stock?
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79. | Which of the following makes employee stock ownership plans (ESOPs) less attractive?
A. | Less diversification of investment risk |
B. | Lack of tax and financial advantages |
C. | High levels of liquidity |
D. | Inability to serve as a takeover defense |
E. | Giving employees the right to vote their securities |
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80. | A(n) _____ program is based on group or plant performance that does not become part of the employee's base salary.
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81. | Gainsharing plans differ from profit-sharing plans in that
A. | gainsharing plans use organization-wide performance parameters. |
B. | gainsharing plans distribute payouts more frequently. |
C. | gainsharing plans make lump sum payments. |
D. | gainsharing plans can be attached to all types of jobs in the organization. |
E. | gainsharing plans discourage pursuit of broader goals of the group. |
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82. | The Scanlon plan is an example of a(n) _____ plan.
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83. | Gainsharing can motivate employees as much as individual plans do because
A. | it allows more control over the performance measure and the frequency of payouts. |
B. | it uses organization-level performance measures. |
C. | it involves payouts that are deferred. |
D. | it encourages individual-oriented plans rather than broader goals. |
E. | it focuses more on the monetary component than on employee skills. |
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84. | Group incentives tend to measure performance in terms of _____.
C. | organizational environment |
E. | organizational profitability |
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85. | Which of the following is a tool that allows companies to track financial results while monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth?
B. | External employee grid |
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86. | The _____ requires companies to report compensation levels for the five highest paid executives and the company's performance relative to that of competitors over a five-year period.
A. | Bureau of Economic Analysis |
B. | Federal Bureau of Investigation |
C. | Federal Trade Commission |
D. | Securities and Exchange Commission |
E. | Bureau of Industry and Security |
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87. | Which of the following is true of how the agency theory views monitoring?
A. | Monitoring is more expensive when done by employees. |
B. | Employees' knowledge of the workplace is not reliable. |
C. | Monitoring is less effective when performed by employees. |
D. | Employees understand fellow employees better than managers do. |
E. | A compensation system does not influence peer monitoring. |
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88. | When an organization is using growth strategy, it will _____.
A. | have pay levels that are below market levels in the short run |
B. | have a time orientation that is short-term |
C. | make centralized pay decisions |
D. | not share risks with employees |
E. | have benefit levels that are above market levels |
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89. | When an organization is using concentration strategy, it will _____.
A. | have short-run pay levels below the market |
B. | have a long-term orientation |
C. | make centralized pay decisions |
D. | maintain high variable pay levels |
E. | have benefit levels below the market |
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90. | Which of the following pay strategy dimensions best fits with a business strategy of concentration?
A. | Long-term time orientation |
B. | Below-market short-run pay level |
C. | High levels of variable pay |
D. | Above-market benefits levels |
E. | Decentralization of pay decisions |
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Essay Questions
91. | What is Thorndike's Law of Effect? Explain its significance with reference to reinforcement theory.
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92. | Discuss expectancy theory.
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93. | Differentiate between outcome-oriented contracts and behavior-based contracts.
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94. | What are individual incentives? How are they different from merit pay?
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95. | Why is it useful for organizations to think in terms of designing a mix of programs rather than choosing one overall compensation program? Give examples.
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96. | How can executive pay be linked to organization performance?
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97. | Discuss any five governance practices that support director independence from management.
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98. | What are some of the potential consequences of employee involvement in compensation decision-making?
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99. | Explain why it is crucial to communicate the reasons for any changes in a compensation system to employees. Describe various ways an organization can communicate these changes.
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100. | Discuss the organization strategies of concentration and growth and how they influence pay dimensions.
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