Chapter 12 Pay for Performance and Financial Incentives 1) Frederick Taylor referred to the tendency of employees to work at the slowest pace possible and to produce at the minimum acceptable level as ________. A) social loafing B) systematic soldiering C) work shifting D) group logrolling Answer: B Explanation: B) Frederick Taylor popularized using financial incentives in the late 1800s. As a supervisory employee of the Midvale Steel Company, Taylor was concerned with what he called "systematic soldiering"—the tendency of employees to work at the slowest pace possible and to produce at the minimum acceptable level. 2) Which of the following terms refers to financial rewards paid to workers whose production exceeds some predetermined standard? A) indirect financial payments B) merit payments C) hardship allowances D) financial incentives Answer: D Explanation: D) Financial incentives are financial rewards paid to workers whose production exceeds some predetermined standard. Indirect financial payments are a type of employee compensation that includes health benefits. 3) A management approach based on improving work methods through observation and analysis is known as ________. A) strategic management B) scientific management C) management by objectives D) performance management Answer: B Explanation: B) Frederick Taylor spearheaded the scientific management movement, a management approach that emphasized improving work methods through observation and analysis. Taylor also popularized the use of incentive pay as a way to reward employees who produced over standard. 4) Who proposed a two-factor theory that explains how motivator factors relate to satisfaction and hygiene factors relate to dissatisfaction? A) Frederick Taylor B) Abraham Maslow C) Frederick Herzberg D) David McClelland Answer: C Explanation: C) Herzberg says the factors ("hygienes") that satisfy lower-level needs are different from those ("motivators") that satisfy or partially satisfy higher-level needs. 5) Which of the following is a true statement about Herzberg's Hygiene-Motivator theory? A) Highly motivated workers rely equally on lower-level and higher-level needs. B) Assigning workers to teams can eliminate job-associated stress and frustration. C) Providing employees with feedback and challenge satisfies their lower-level needs. D) Managers can create a self-motivated workforce by providing feedback and recognition. Answer: D Explanation: D) Instead of relying on lower-level hygienes, says Herzberg, managers interested in creating a self-motivated workforce should emphasize "job content" or motivator factors. Managers do this by enriching workers' jobs so that the jobs are more challenging, and by providing feedback and recognition. 6) According to Herzberg's Hygiene-Motivator theory, which of the following factors will most likely satisfy employees' higher-level needs? A) base salary B) achievement C) incentive pay D) co-worker relationships Answer: B Explanation: B) Feedback, recognition, challenging work, and achievement help satisfy a worker's higher-level needs. Working conditions, salary, and incentives address a workers' lower-level needs. 7) Which of the following found that extrinsic rewards could detract from an employee's intrinsic motivation ? A) Frederick Taylor B) Frederick Herzberg C) David McClelland D) Edward Deci Answer: D Explanation: D) Psychologist Edward Deci's work highlights a potential downside to relying too heavily on extrinsic rewards: They may backfire. Deci found that extrinsic rewards could at times actually detract from the person's intrinsic motivation. Herzberg's work indicates that it is more effective to satisfy an employee's higher-level rather than lower-level needs. 8) Rebecca's manager wants to acknowledge her outstanding service record for the past quarter. The manager decides to give Rebecca a bonus of $1000 as a reward. According to Edward Deci, which of the following will most likely occur as a result? A) The bonus will encourage Rebecca to work harder than before. B) The bonus will detract from Rebecca's inner desire to work hard. C) Rebecca's bonus will satisfy her higher-level needs and increase her motivation. D) Rebecca will feel inadequate because the bonus fails to address hygiene factors. Answer: B Explanation: B) Psychologist Edward Deci's work highlights a potential downside to relying too heavily on extrinsic rewards: They may backfire. Deci found that extrinsic rewards could at times actually detract from the person's intrinsic motivation. Herzberg's work indicates that it is more effective to satisfy an employee's higher-level rather than lower-level needs. 9) According to Victor Vroom, expectancy could also be referred to as the ________. A) probability that effort will lead to success B) relationship between performance and reward C) perceived value a person attaches to a reward D) employer's strategy for motivating employees Answer: A Explanation: A) Vroom says a person's motivation to exert effort depends on the person's expectancy that his or her effort will lead to performance; instrumentality, or the perceived connection between successful performance and actually obtaining the rewards; and valence, which represents the perceived value the person attaches to the reward. 10) The perceived relationship between successful performance and obtaining the reward is referred to by Vroom as ________. A) instrumentality B) valence C) expectancy D) optimism Answer: A Explanation: A) Instrumentality is the perceived connection (if any) between successful performance and actually obtaining the rewards. Valence represents the perceived value the person attaches to the reward. 11) In Vroom's theory of motivation, motivation is equal to E * I * V, where E represents ________. A) existence B) expectancy C) esteem D) energy Answer: B Explanation: B) In Vroom's theory, motivation is thus a product of three things: Motivation = (E × I × V), where, of course, E represents expectancy, I instrumentality, and V valence. If E or I or V is zero or inconsequential, there will be no motivation. 12) In Vroom's theory of motivation, motivation is equal to E * I * V, where I represents ________. A) intrinsic needs B) internalization C) instrumentality D) incentives Answer: C Explanation: C) In Vroom's theory, motivation is thus a product of three things: Motivation = (E × I × V), where, of course, E represents expectancy, I instrumentality, and V valence. If E or I or V is zero or inconsequential, there will be no motivation. 13) In Vroom's theory of motivation, which of the following terms refers to the perceived value a person attaches to a reward? A) valence B) instrumentality C) expectancy D) variable pay Answer: A Explanation: A) Valence represents the perceived value the person attaches to the reward. Instrumentality is the perceived connection (if any) between successful performance and actually obtaining the rewards. 14) According to Vroom's theory, when managers design incentive plans they should do all of the following EXCEPT ________. A) focus on behavior modification methods B) make incentive plans easy to understand C) provide training and support to employees D) boost the confidence level of employees Answer: A Explanation: A) Vroom's theory has implications for how managers design incentive plans. Managers must ensure that their employees have the skills to do the job, and believe they can do the job. Thus training, job descriptions, and confidence building and support are important in using incentives. Managers should also create easy to understand incentive plans. Skinner addressed behavior modification methods rather than Vroom. 15) Behavior modification is based upon the principles of rewards and punishments advanced by ________. A) Frederick Taylor B) Frederick Herzberg C) B.F. Skinner D) Edward Deci Answer: C Explanation: C) Psychologist B. F. Skinner's findings provide the foundation for much of what we know about incentives. Managers apply Skinner's principles by using behavior modification. 16) Which of the following terms refers to changing behavior through rewards or punishments that are contingent on performance? A) behavior modification B) personal development C) instrumentality D) internal motivation Answer: A Explanation: A) Managers apply Skinner's principles by using behavior modification. Behavior modification means changing behavior through rewards or punishments that are contingent on performance 17) Which of the following is NOT a basic tenet of behavior modification? A) Behavior that leads to rewards tends to be repeated. B) Properly scheduled rewards can be used to encourage some behaviors. C) Properly scheduled punishments can be used to minimize some behaviors. D) Employees must understand the link between rewards, punishments, and behavior. Answer: D Explanation: D) For managers, behavior modification boils down to following two main principles: (1) That behavior that appears to lead to a positive consequence (reward) tends to be repeated, while behavior that appears to lead to a negative consequence (punishment) tends not to be repeated; and (2) that, therefore, managers can get someone to change his or her behavior by providing the properly scheduled rewards (or punishment). 18) Which of the following terms refers to an incentive plan that ties a group's pay to the firm's profitability? A) piecework B) variable pay C) pay-for-performance D) merit pay Answer: B Explanation: B) Traditionally, all incentive plans are pay-for-performance plans. They all tie employees' pay to the employees' performance. Variable pay is more specific: It is usually an incentive plan that ties a team's pay to some measure of the firm's overall profitability. 19) Under the Fair Labor Standards Act, which of the following would NOT be included in overtime pay computations? A) bonus for new hires B) Christmas bonus C) efficiency bonus D) union contract bonus Answer: B Explanation: B) Christmas bonuses are not based on hours worked and may be excluded from overtime pay calculations. Other types of incentive pay must be included according to the Fair Labor Standards Act (FLSA). Bonuses to include in overtime pay computations include those promised to newly hired employees; those provided for in union contracts; those announced to induce employees to work more efficiently; and those for attendance. 20) What type of pay plan is being used when workers are paid a sum for each unit they produce? A) competency-based pay B) job-based pay C) piecework D) bonus Answer: C Explanation: C) Piecework is the oldest and still most popular individual incentive plan. Here you pay the worker a sum (called a piece rate) for each unit he or she produces. 21) Which of the following terms refers to an incentive plan in which a person is paid a sum for each item he or she makes or sells, with a strict proportionality between results and rewards? A) variable pay B) straight piecework C) straight hourly pay D) standard hour plan Answer: B Explanation: B) Piecework generally implies straight piecework, which entails a strict proportionality between results and rewards regardless of output. However, some piecework plans allow for sharing productivity gains between employer and worker. 22) In which of the following do workers receive a basic hourly rate plus a premium equal to the percent by which their performance exceeds the standard? A) variable pay B) straight piecework C) standard hour plan D) standard piecework Answer: C Explanation: C) The standard hour plan is a plan by which a worker is paid a basic hourly rate but is paid an extra percentage of his or her rate for production exceeding the standard per hour or per day. It is similar to piecework payment but based on a percent premium. 23) All of the following are disadvantages associated with piecework plans EXCEPT that workers ________. A) resist attempts to modify production standards B) focus on production quantity instead of quality C) view the plans as unfair and complicated D) dislike new technology or processes Answer: C Explanation: C) Piecework plans are understandable, appear equitable in principle, and can be powerful incentives, since rewards are proportionate to performance. However, workers on piecework may resist attempts to revise production standards, downplay quality, or resist switching from job to job. Attempts to introduce new technology or processes may also trigger resistance. 24) Which of the following is the primary advantage of piecework plans? A) powerful incentive to workers B) workers earn efficiency bonuses C) firms save on overtime wages D) entices independent contractors Answer: A Explanation: A) Piecework plans are understandable, appear equitable in principle, and can be powerful incentives, since rewards are proportionate to performance. 25) Which of the following terms refers to any salary increase the firm awards to an individual employee based on his or her individual performance? A) competency-based pay B) variable pay C) merit pay D) base pay Answer: C Explanation: C) Merit pay is any salary increase the firm awards to an individual employee based on his or her individual performance. It is different from a bonus in that it usually becomes part of the employee's base salary, whereas a bonus is a one-time payment. 26) How does merit pay differ from a bonus? A) Merit pay becomes part of an employee's base pay, but a bonus does not. B) A bonus becomes part of an employee's base pay, but merit pay does not. C) Merit pay is linked to individual performance, while a bonus is linked to profits. D) A bonus is linked to individual performance, while merit pay is linked to profits. Answer: A Explanation: A) Merit pay is any salary increase the firm awards to an individual employee based on his or her individual performance. It is different from a bonus in that it usually becomes part of the employee's base salary, whereas a bonus is a one-time payment. 27) Studies indicate that in order for merit pay to be most effective, it should be linked to ________. A) company profits B) annual base salary C) employee overtime D) employee performance Answer: D Explanation: D) Merit raises are more likely to be effective if they are linked to performance, which involves establishing effective appraisal procedures. Merit pay linked to company profits or employees' salaries, overtime, or awards are less likely to be effective incentives. 28) Ryobi is a large, international power tool manufacturer that develops affordable, high-quality products, such as drills, circular saws, and routers, for both homeowners and craftspeople. As the company continues to grow, its top executives want to ensure that employees are appropriately paid for their performance and that financial incentives are both fair and effective. Currently, the firm provides merit raises based on performance appraisals; however, executives are considering changing the current incentive plan. Which of the following, if true, supports the argument that Ryobi should eliminate all merit raises? A) Performance appraisals at Ryobi occur annually, and standards vary from manager to manager. B) Ryobi employees have the option of accepting lump-sum raises or traditional merit raises. C) Ryobi recently began using an enterprise incentive management system to automate compensation. D) The commission percentage for Ryobi sales people is based on the ability to meet monthly quotas. Answer: A Explanation: A) In order for merit raises to be effective, performance appraisals need to be consistent and fair. The distribution method of a merit raise, monthly sales quotas, and enterprise management systems are less relevant to the decision. 29) Ryobi is a large, international power tool manufacturer that develops affordable, high-quality products, such as drills, circular saws, and routers, for both homeowners and craftspeople. As the company continues to grow, its top executives want to ensure that employees are appropriately paid for their performance and that financial incentives are both fair and effective. Currently, the firm provides merit raises based on performance appraisals; however, executives are considering changing the current incentive plan. Which of the following, if true, undermines the argument that Ryobi should discontinue all merit raises? A) Ryobi employees have expressed that they would prefer stock options to merit raises. B) Ryobi managers have not received significant training about conducting performance appraisals. C) Ryobi managers have noticed significant productivity improvements among employees who receive merit raises. D) Ryobi's top executives receive a combination of base salary and stock options to encourage them to focus on the firm's strategic goals. Answer: C Explanation: C) If Ryobi managers have noticed productivity improvements among employees who receive merit raises, then the system is most likely effective and should not be discontinued. The decision to discontinue merit raises is supported by employees who prefer stock options and managers who lack performance appraisal training. Executive pay is less relevant to the decision. 30) Ryobi is a large, international power tool manufacturer that develops affordable, high-quality products, such as drills, circular saws, and routers, for both homeowners and craftspeople. As the company continues to grow, its top executives want to ensure that employees are appropriately paid for their performance and that financial incentives are both fair and effective. Currently, the firm provides merit raises based on performance appraisals; however, executives are considering changing the current incentive plan. Which of the following questions is most relevant to the decision by Ryobi executives to discontinue all merit raises? A) What are the guidelines for implementing a gainsharing plan? B) What type of merit raises are effective for high-performing managers? C) What organization wide incentive plans are used by other manufacturing firms? D) What is the connection between merit pay increases and employee productivity? Answer: D Explanation: D) In order for merit raises to be effective, there should be a clear and consistent connection between productivity and merit pay. There are not different types of merit raises. 31) Which of the following is the most commonly used reward for motivating employees? A) individual travel B) recognition programs C) training programs D) variable pay Answer: B Explanation: B) Surveys find that firms most frequently use employee recognition programs to motivate employees. Travel, training, and variable pay are used less frequently. 32) Craig is a line manager at a paper supply company. All of the following are methods that Craig should most likely implement to motivate his subordinates EXCEPT ________. A) recognizing an employee's contribution B) encouraging workers to earn overtime pay C) gaining agreement on goals with employees D) using positive reinforcement on a daily basis Answer: B Explanation: B) The best option for motivating employees is to make sure the employee has a doable goal and that he or she agrees with that. Next, recognizing an employee's contribution is a powerful motivation tool. Finally, managers can use social recognition as daily positive reinforcement. Encouraging overtime is less likely to motivate employees. 33) Enterprise incentive management systems enable firms to ________. A) compare corporate incentive programs B) accurately calculate sales commissions C) efficiently administer employee incentive programs D) create a matrix of merit awards and incentive options Answer: C Explanation: C) Incentive programs can be expensive and complicated to administer. As one solution, vendors provide enterprise incentive management (EIM) systems. These automate the planning, analysis, and management of incentive compensation plans. 34) A straight salary is most appropriate when a salesperson's primary duties involve ________. A) finding new clients B) meeting sales quotas C) pushing hard-to-sell items D) fostering relationships with customers Answer: A Explanation: A) Some firms pay salespeople fixed salaries , which makes sense when the main task involves prospecting (finding new clients) or account servicing (such as participating in trade shows). Meeting with clients and selling difficult items should be paid with commissions. 35) Using a straight salary to compensate salespeople is most likely ineffective because it ________. A) discourages sales flexibility B) lacks connection to performance C) makes it hard to switch territories D) depends on annual corporate profits Answer: B Explanation: B) The main disadvantage is that straight salary can demotivate potentially high-performing salespeople. The straight salary approach makes it easier to switch territories or to reassign salespeople, and it can foster sales staff loyalty. 36) All of the following are disadvantages of straight commission plans EXCEPT ________. A) salespeople avoid pushing hard-to-sell items B) salespeople fail to service small accounts C) payments are complicated to calculate D) significant variations in pay exist Answer: C Explanation: C) Straight commission plans are easy to understand and compute. However, salespeople tend to focus on making the sale and on high-volume items, and may neglect non-selling duties like servicing small accounts, cultivating dedicated customers, and pushing hard-to-sell items. Wide variations in pay may occur; this can make some feel the plan is inequitable. 37) Which of the following is the primary advantage of using a combination of salary and commission as compensation for salespeople? A) provides a guaranteed minimum salary B) all freedom of work activities C) completely links to performance D) offers simple administration Answer: A Explanation: A) The main advantage of combination plans is that they offer salespeople a floor to their earnings. However, such plans are usually complicated and difficult to administer, and only the commission percentage is linked to performance. 38) Edward is the new sales manager at Wilson Auto Mart. The previous sales manager set commission rates informally without considering how much each sale covered expenses. As a result, Wilson Auto Mart barely breaks even on each car sale once commissions are paid. Edward wants to motivate his sales force but avoid having excessive commissions. All of the following questions are relevant to developing an effective sales compensation plan EXCEPT ________. A) How much time does each Wilson salesperson spend with qualified prospects? B) What are the motivation and skill levels of Wilson sales team members? C) What is the average annual bonus received by Wilson's CEO? D) What is Wilson's desired profit for each car sale? Answer: C Explanation: C) Questions about profit, motivation, skill levels, and time spent with likely customers are relevant to developing an effective sales compensation plan. The annual bonus received by Wilson's CEO is not directly relevant to motivating the sales team. 39) Edward is the new sales manager at Wilson Auto Mart. The previous sales manager set commission rates informally without considering how much each sale covered expenses. As a result, Wilson Auto Mart barely breaks even on each car sale once commissions are paid. Edward wants to motivate his sales force but avoid having excessive commissions. Which of the following, if true, supports the argument that Edward should pay his sales team a combination of salary plus commission? A) Wilson Auto Mart's sales team consists of high-performing, experienced salespeople. B) Wilson Auto Mart has successfully implemented a "one price no hassle" pricing program. C) Each Wilson Auto Mart sales person is encouraged to sell at least ten vehicles each month. D) Wilson Auto Mart salespeople are primarily asked to find new clients and service current accounts. Answer: B Explanation: B) The transition to salary plus bonus reflects the growing emphasis among car dealers on "one price no hassle" pricing, and the desire on the part of more dealers to make the purchase process less tense. A combination of salary and commission is appropriate for Wilson's no-hassle pricing plan. High-performing salespeople would prefer straight commissions, while a straight salary is better when salespeople only need to prospect or service accounts. 40) Which of the following terms refers to the right to purchase a stated number of shares of a company stock at today's price at some time in the future? A) at-risk variable plan B) multiplier method C) stock option D) gainsharing plan Answer: C Explanation: C) A stock option is the right to purchase a specific number of shares of company stock at a specific price during a specific period. The assumption is that the price of the stock will go up. 41) With which of the following can an executive NOT profit until the stock makes significant gains? A) indexed options B) phantom stock C) restricted stock D) premium priced options Answer: D Explanation: D) With premium priced options, the exercise price is higher than the stock's closing price on the date of the grant, so the executive can't profit from the options until the stock makes significant gains. 42) With a ________, an executive receives units instead of shares of company stock. In the future, the executive receives cash equal to the appreciation of the units owned. A) nonqualified stock option B) premium priced option C) phantom stock plan D) restricted stock plan Answer: C Explanation: C) Under phantom stock plans, executives receive not shares but "units" that are similar to shares of company stock. Then at some future time, they receive value (usually in cash) equal to the appreciation of the "phantom" stock they own. 43) Which term refers to payments companies make in connection with a change in ownership or control of a company? A) pension B) golden parachute C) retirement bonus D) stock option Answer: B Explanation: B) Golden parachutes are extraordinary payments companies make to executives in connection with a change in ownership or control of a company. For example, a company's golden parachute clause might state that, with a change in ownership of the firm, the executive would receive a one-time payment of $2 million. 44) All of the following are advantages of team incentive plans EXCEPT that ________. A) jealousy is reduced B) wage equity is guaranteed C) team planning is reinforced D) problem solving is encouraged Answer: B Explanation: B) The benefits of team incentive plans include reduced jealousy and increased team planning, problem solving, and collaboration. The primary problem relates to inequity in financial compensation because everyone is paid equally but does not work equally. 45) The employees at DataMax participate in a profit-sharing plan. DataMax distributes 15% of its profits as profit shares to employees at regular intervals. Which of the following is most likely used at DataMax? A) current profit-sharing B) Lincoln incentive system C) deferred profit-sharing plan D) employee stock ownership plan Answer: A Explanation: A) There are several types of profit-sharing plans. With current profit-sharing or cash plans, employees share in a portion of the employer's profits quarterly or annually. In cash plans, the firm simply distributes a percentage of profits (usually 15% to 20%) as profit shares to employees at regular intervals. 46) Tanner's employer puts a predetermined portion of profits into a trust account for Tanner's retirement. Which of the following is most likely the type of profit-sharing plan used by Tanner's employer? A) deferred profit-sharing plan B) Lincoln incentive system C) Jefferson incentive system D) gainsharing plan Answer: A Explanation: A) With deferred profit-sharing plans, the employer puts cash awards into trust accounts for the employees' retirement. Here the employer generally distributes the awards based on a percentage of the employee's salary, or some measure of the employee's contribution to company profits. 47) Which profit-sharing plan provides tax advantages for employees by postponing income taxes, often until the employee retires? A) cash plan B) Lincoln incentive system C) deferred profit-sharing plan D) employee stock ownership plan Answer: C Explanation: C) With deferred profit-sharing plans, the employer puts cash awards into trust accounts for the employees' retirement. Here the employer generally distributes the awards based on a percentage of the employee's salary, or some measure of the employee's contribution to company profits. There is a tax advantage, since employees' income taxes on the distributions are deferred, often until the employee retires. 48) The Scanlon plan includes all of the following features EXCEPT ________. A) identity B) competence C) a philosophy of cooperation D) a focus on individual achievement Answer: D Explanation: D) The five features of the Scanlon plan include a philosophy of cooperation, identity, competence, an involvement system, and a sharing of benefits formula. The plan does not call for focusing on individual achievement. 49) Which incentive plan is based on a philosophy that managers and employees must cooperate together? A) cash plan B) Scanlon plan C) deferred profit-sharing plan D) employee stock ownership plan Answer: B Explanation: B) The Scanlon plan is based on a philosophy of cooperation. This philosophy assumes that managers and workers must rid themselves of the "us" and "them" attitudes that normally inhibit employees from developing a sense of ownership in the company. 50) Which of the following best explains identity in regards to the Scanlon plan? A) philosophy of cooperation among employees B) clear articulation of the company mission C) high level of competence from all employees D) corporate-wide benefits and savings Answer: B Explanation: B) One feature of the Scanlon plan is identity. Identity means that in order to focus employee involvement, the company must articulate its mission or purpose, and employees must understand how the business operates in terms of customers, prices, and costs. 51) Competence in the Scanlon plan refers to a focus on ________. A) cooperation B) corporate vision C) employee abilities D) significant improvements Answer: C Explanation: C) Competence is a third basic feature of the Scanlon plan. The program, say three experts, "explicitly recognizes that a Scanlon plan demands a high level of competence from employees at all levels." This suggests careful selection and training. 52) The Scanlon plan is an early version of a ________ plan, an incentive plan that engages employees in a common effort to achieve productivity objectives. A) performance achievement B) golden parachute C) gainsharing D) variable pay Answer: C Explanation: C) The Scanlon plan is one early version of a gainsharing plan. Gainsharing is an incentive plan that engages many or all employees in a common effort to achieve a company's productivity objectives, with any resulting cost-savings gains shared among employees and the company. 53) Gainsharing is an incentive plan that ________. A) uses a trust to hold stock in individual employee accounts and distributes it to employees upon retirement B) engages employees in a common effort to achieve a company's productivity objectives with any resulting cost-savings gains shared among employees and the company C) contributes company shares of its own stock or cash to be used to purchase company stock to a trust established to purchase shares of the firm's stock for employees D) provides tax advantages for employees by deferring income taxes, often until the employee retires Answer: B Explanation: B) Gainsharing is an incentive plan that engages many or all employees in a common effort to achieve a company's productivity objectives, with any resulting cost-savings gains shared among employees and the company. ESOPs involve company stock contributions. 54) Which of the following is NOT a type of gainsharing plan? A) Improshare B) Lincoln C) Rucker D) Roth Answer: D Explanation: D) In addition to the Scanlon plan, other popular gainsharing plans include the Lincoln, Rucker, and Improshare plans. Roth is not a type of gainsharing plan. 55) Tyler Oil offers a profit-sharing plan to its employees. Each year, Tyler Oil distributes total annual profits less taxes among employees based on employee merit ratings. Which of the following is most likely used by Tyler Oil? A) cash plan B) Lincoln incentive system C) deferred profit-sharing plan D) employee stock ownership plan Answer: B Explanation: B) In one version of the Lincoln incentive system, first instituted at the Lincoln Electric Company of Ohio, employees work on a guaranteed piecework basis. The company distributes total annual profits (less taxes, 6% dividends to stockholders, and a reserve) each year among employees based on their merit rating. 56) The Lincoln incentive system is an incentive plan that ________. A) uses a trust to hold stock in individual employee accounts and distributes it to employees upon retirement B) engages many or all employees in a common effort to achieve a company's productivity objectives with any resulting cost-savings gains shared among employees and the company C) contributes company shares of its own stock or cash to be used to purchase company stock to a trust established to purchase shares of the firm's stock for employees D) involves the firm distributing total annual profits each year among employees based on their merit rating Answer: D Explanation: D) In one version of the Lincoln incentive system, first instituted at the Lincoln Electric Company of Ohio, employees work on a guaranteed piecework basis. The company distributes total annual profits each year among employees based on their merit rating. 57) When hired by Delmar Designs, Shane agreed to forego 6% of his normal pay if he didn't meet his goals in return for a 12% bonus if he exceeded his goals. In which type of plan does Shane most likely participate? A) earnings-at-risk pay plan B) variable risk sharing plan C) at-risk gainsharing plan D) employee at-risk plan Answer: A Explanation: A) At-risk variable pay plans are plans that put some portion of the employee's weekly, monthly, or yearly pay at risk. If employees meet or exceed their goals, they earn back not only the portion of their pay that was at risk, but also an incentive. If they fail to meet their goals, they forego some of the pay they would normally earn. 58) Elaine, the HR manager at Western Enterprises, has been assigned the task of implementing a gainsharing plan. What does Elaine most likely need to do first? A) choose specific performance measures B) decide how often to pay bonuses C) establish general plan objectives D) develop an involvement system Answer: C Explanation: C) The first step in implementing a gainsharing plan is to establish general plan objectives like lowering labor costs. The second step is choosing specific performance measures. 59) Jack is in the process of implementing a gainsharing plan for his firm. He has already determined that the plan's objectives will be to lower labor costs. What is the next step that Jack needs to take? A) choose specific performance measures B) decide on a funding formula C) decide how often to pay bonuses D) select the form of payment Answer: A Explanation: A) After establishing general plan objectives, Jack needs to choose specific performance measures. Choosing a funding formula, deciding the frequency of bonuses, and determining the payment form are additional steps in the process. 60) When developing the involvement system for a gainsharing plan, which of the following is NOT a commonly used element? A) update meetings B) employee mediations C) suggestion systems D) problem-solving teams Answer: B Explanation: B) Developing the involvement system is the seventh step in implementing a gainsharing plan. The most commonly used elements include steering committees, update meetings, suggestion systems, and problem-solving teams. Employee mediations are not used. 61) What is the most common form of payment in gainsharing plans? A) common stock B) preferred stock C) promotions D) cash Answer: D Explanation: D) Cash is the most common form of payment with gainsharing plans, but common stock is occasionally used. 62) How often do most firms tend to compute financial performance measures used in gainsharing plans? A) weekly B) monthly C) quarterly D) annually Answer: D Explanation: D) Firms tend to pay based on financial performance measures annually and on labor productivity measures quarterly or monthly. 63) Employees at Game Time Software participate in a gainsharing plan. Employee bonuses are calculated by dividing payroll expenses by total sales. Game Time Software most likely uses which of the following plans? A) Lincoln B) Rucker C) Improshare D) Scanlon Answer: D Explanation: D) The Scanlon formula divides payroll expenses by total sales (or, sometimes, by total sales plus increases in inventory). The Rucker plan uses a value-added formula. With the Lincoln incentive system, employees work on a guaranteed piecework basis. 64) McDonald Manufacturing contributes cash to a trust established to purchase shares of McDonald stock for employees. Which of the following is most likely offered by McDonald Manufacturing? A) cash plans B) Lincoln incentive systems C) deferred profit-sharing plans D) employee stock ownership plans Answer: D Explanation: D) Employee stock ownership plans (ESOPs) are company-wide plans in which the employer contributes shares of its own stock to a trust established to purchase shares of the firm's stock for employees. The firm generally makes these contributions annually in proportion to total employee compensation, with a limit of 15% of compensation. 65) Which of the following is the primary benefit of employee stock ownership plans? A) Firms are able to implement the plans with minimal costs and complications. B) Firms pay distribution taxes for employees prior to retirement. C) Firms may borrow against employee stock held in trust. D) Employees are able to diversify their investments. Answer: C Explanation: C) The main reason that ESOPs are popular is that a firm gets a tax deduction equal to the fair market value of the shares it transfers to the trustee and can claim an income tax deduction for dividends paid on ESOP-owned stock. Employees are taxed when they receive a distribution from the trust., usually at retirement. 66) Research indicates that employee stock ownership plans most likely ________. A) encourage employees to retire too early B) place firms at greater risk for employee lawsuits C) increase employee commitment and motivation D) encourage transparency within global organizations Answer: C Explanation: C) Research suggests that ESOPs do encourage employees to develop a sense of ownership in and commitment to the firm. For the plans to be effective, firms must be responsible for their funds. 67) Top executives at DYS Enterprises are considering the idea of implementing an employee incentive plan. Which of the following suggests that an incentive plan would NOT be appropriate at DYS Enterprises? A) Delays rarely occur. B) The job is standardized C) Employees are unskilled but motivated. D) A link exists between employee effort and output. Answer: C Explanation: C) Incentive plans are effective and appropriate when motivation (and not ability) is the problem. They are also appropriate when there is a clear relationship between employee effort and quantity or quality of output, the job is standardized, and delays are few or consistent. 68) All of the following are essential in order for incentive plans to be effective EXCEPT ________. A) incentives appear to be logical B) incentives are linked to behaviors C) rewards are attractive to employees D) standards are clear and complete Answer: A Explanation: A) Effective incentive plans link employee behaviors with incentives, offer attractive rewards, and establish clear standards. Incentives that seem logical may not be contributing to performance, so it is important to gather evidence and analyze the long-term effects of the plan. 69) Which of the following was shown by the Harvard Business School to have the greatest impact on employee engagement? A) feedback B) job design C) responsibility D) challenging work Answer: B Explanation: B) A study by Harvard Business School researchers concluded that job design is a primary driver of employee engagement. A study by Sibson consulting concluded that job responsibility and feedback from a job were the fifth and seventh most important drivers of employee engagement. A study by Towers Watson concluded that challenging work ranked as the seventh most important driver for attracting employees. 70) Hanover Publications has a large sales staff. Over the last two years, the HR department at Hanover has been reviewing the firm's sales pay plans more frequently and factoring in more growth-oriented metrics. Which of the following most likely explains the reason for these changes at Hanover? A) increased globalization B) new federal legislation C) recent economic recession D) employee stock option plans Answer: C Explanation: C) However, with the recent recession, employers are moving to align the metrics they use to reward their sales people with the firms' strategies. For instance they're factoring in more growth-oriented metrics, and reviewing their sales pay plans more often. 71) Robert Katz popularized the use of financial incentives for workers whose production exceeds some predetermined standard. Answer: False Explanation: Frederick Taylor popularized the use of financial incentives in the late 1800s. 72) Most firms link employees' pay to performance because financial incentives are extremely successful at motivating employees to perform above required standards. Answer: False Explanation: Studies suggest that employees don't see a strong connection between pay and performance, and their performance is not particularly influenced by the company's incentive plan. About 83% of companies with such programs say their programs are only somewhat successful or not successful at all. 73) According to Maslow's theory, a manager will not be able to motivate an employee with challenging tasks if the employee does not make enough money to pay for basic necessities. Answer: True Explanation: Maslow's theory has many practical implications. For example, insecure employees won't be as concerned with doing jobs that might be "beneath them"; and, don't try to motivate someone with more challenging work if he or she doesn't earn enough to pay the bills. 74) In Herzberg's Hygiene-Motivator theory, working conditions are motivator factors, and challenging assignments are hygiene factors. Answer: False Explanation: Hygiene factors are factors outside the job itself, such as working conditions, salary, and incentive pay. Motivator factors include challenging tasks, feedback, and recognition. 75) Herzberg's Hygiene-Motivator theory is based on Maslow's hierarchy of needs. Answer: True Explanation: Frederick Herzberg said the best way to motivate someone is to organize the job so that doing it provides the feedback and challenge that helps satisfy the person's "higher-level" needs for things like accomplishment and recognition. Satisfying "lower level" needs for things like better pay and working conditions just keeps the person from becoming dissatisfied. Herzberg's theory is based on Maslow's hierarchy of needs. 76) According to Herzberg's motivation theory, good working conditions will prevent dissatisfaction but will not lead to feelings of satisfaction. Answer: True Explanation: Frederick Herzberg said the best way to motivate someone is to organize the job so that doing it provides the feedback and challenge that helps satisfy the person's "higher-level" needs for things like accomplishment and recognition. Satisfying "lower level" needs for things like better pay and working conditions just keeps the person from becoming dissatisfied. 77) The work of Edward Deci suggests that managers should primarily rely on extrinsic rewards to motivate employees. Answer: False Explanation: Psychologist Edward Deci's work highlights another potential downside to relying too heavily on extrinsic rewards: They may backfire. Deci found that extrinsic rewards could at times actually detract from the person's intrinsic motivation. 78) Vroom's expectancy theory observes that people will not pursue rewards that they find unattractive or where their chances of success are very low. Answer: True Explanation: An important motivational fact is that, in general, people won't pursue rewards they find unattractive, or where the odds of success are very low. Psychologist Victor Vroom's expectancy motivation theory echoes these common sense observations. 79) According to Vroom's theory, if expectancy, instrumentality, or valence is equal to zero, there will be no employee motivation. Answer: True Explanation: In Vroom's theory, motivation is thus a product of three things: Motivation = (E × I × V), where E represents expectancy, I instrumentality, and V valence. If E or I or V is zero or inconsequential, there will be no motivation. 80) Behavior modification is based on the idea that people will repeat behavior for which they are punished. Answer: False Explanation: According to Skinner's theory, behavior that appears to lead to a positive consequence (reward) tends to be repeated, while behavior that appears to lead to a negative consequence (punishment) tends not to be repeated. 81) Behavior modification principles can be useful to managers who seek to change employee behavior through rewards or punishments linked to performance. Answer: True Explanation: Behavior modification means changing behavior through rewards or punishments that are contingent on performance. Managers apply Skinner's principles of behavior modification when overseeing employees. 82) If an employee earns an incentive in the form of a prize or cash award, the value of the award is not included when calculating the employee's overtime pay. Answer: False Explanation: Under the Fair Labor Standards Act, if the performance-based pay is in the form of a prize or cash award, the employer generally must include the value of that award when calculating the worker's overtime pay for that pay period. 83) The complicated nature of piecework makes it an unpopular individual incentive plan among employers. Answer: False Explanation: Piecework is the oldest and still most popular individual incentive plan. The straightforward plan requires an employer to pay the worker a sum (called a piece rate) for each unit he or she produces. 84) The standard hour plan is like the piece rate plan except instead of getting a rate per piece, the employee gets a premium equal to the percent by which his or her performance exceeds the standard. Answer: True Explanation: The standard hour plan is a plan by which a worker is paid a basic hourly rate but is paid an extra percentage of his or her rate for production exceeding the standard per hour or per day. It is similar to piecework payment but based on a percent premium. 85) With a standard hour plan, employers do not need to recalculate piece rates when changes are made to the hourly pay rate. Answer: True Explanation: Some firms find that expressing the incentive in percentages reduces the workers' tendency to link their production standard to pay (thus making the standard easier to change). It also eliminates the need to recalculate piece rates whenever hourly wage rates are changed. 86) Employers are shifting away from piecework in many industries due to the incentive plan's poor reputation. Answer: True Explanation: In the garment industry and other industries, the term piecework has a dreadful reputation because the hourly pay didn't always fulfill the Wage and Hour Act's minimum wage requirements. For these and other reasons, more employers are moving to other plans. 87) All merit raises become part of an employee's base salary. Answer: True Explanation: A merit raise is any salary increase the firm awards to an individual employee based on his or her individual performance. It usually becomes part of the employee's base salary. 88) According to the FLSA, merit pay can only be given to exempt, nonmanagement employees at a company. Answer: False Explanation: Although the term merit pay can apply to the incentive raises given to any employee—exempt or nonexempt, office or factory, management or nonmanagement—the term is more often used for white-collar employees and particularly professional, office, and clerical employees. 89) Lump sum merit increases can be a more significant motivator than traditional merit pay because the amount seems greater when received all at once. Answer: True Explanation: Lump-sum merit increases can also be more dramatic motivators than a traditional merit raise. For example, a 5% lump-sum merit payment to a $30,000 employee is $1,500 cash, as opposed to a traditional weekly merit payout of $29 for 52 weeks. 90) Straight commission plans are attractive to high-performing salespeople. Answer: True Explanation: Commission plans tend to attract high-performing salespeople who see that effort clearly produces rewards. 91) Annual bonus plans are long-term incentives, and stock options are short-term incentives. Answer: False Explanation: Most firms have annual bonus plans aimed at motivating managers' short-term performance. Short-term bonuses can easily result in plus or minus adjustments of 25% or more to total pay. Stock options are a type of long-term incentive. 92) Cash, stock, stock options, stock appreciation rights, and phantom stock are known as "golden handcuffs" because they are long-term incentives for executives. Answer: True Explanation: Long-term incentives are also "golden handcuffs"—they motivate executives to stay with the company by letting them accumulate capital that they can only cash in after a certain number of years. Popular long-term incentives include cash, stock, stock options, stock appreciation rights, and phantom stock. 93) Experts assert that stock options encourage executives to take dangerous risks and are to blame for many corporate scandals. Answer: True Explanation: Many blame stock options for contributing to corporate scandals, in which executives allegedly manipulated the dates they received their options to maximize their returns. Options may also encourage executives to take perilous risks in pursuit of higher, short-term profits. 94) Studies suggest that team incentive plans enhance productivity because the work load is equally distributed among team members, which fosters cooperation. Answer: False Explanation: Most large employers use team incentive plans, but studies suggest they are counterproductive. Inequity is the issue because usually a few people do the work but everyone shares the reward. 95) The Scanlon plan is a type of gainsharing plan. Answer: True Explanation: The Scanlon plan is one early version of a gainsharing plan. Gainsharing is an incentive plan that engages many or all employees in a common effort to achieve a company's productivity objectives, with any resulting cost-savings gains shared among employees and the company. 96) Common stock is the most common payment form used in gainsharing plans. Answer: False Explanation: Cash is the most common payment form, but sometimes common stock is offered. 97) Research suggests that employee stock ownership plans discourage employees from developing a sense of ownership in and commitment to the firm, which is why the programs are decreasing in popularity. Answer: False Explanation: Research suggests that ESOPs encourage employees to develop a sense of ownership in and commitment to the firm. 98) In order for a firm to have an effective incentive plan, there should be a clear relationship between employee effort and quantity or quality of output. Answer: True Explanation: It makes sense to use an incentive plan when there is a clear relationship between employee effort and the quantity or quality of output. 99) An effective incentive plan involves gathering evidence and evaluating the long-term effects on employee performance. Answer: True Explanation: In order to have an effective incentive plan, firms should gather evidence and analyze the effects of the incentive plan over time. Such analysis will ascertain whether the plan is influencing the measures that a firm intended to improve through the incentive plan. 100) Dual-career ladders are effective tools for managing the professional pay of working mothers who desire a work-life balance. Answer: False Explanation: Dual-Career Ladders are another way to manage professionals' pay but not necessarily working mothers.. At many employers, a bigger salary and bonus requires re-routing from, say, engineering into management. However, not all professionals want such paths. Therefore, many employers institute dual career paths, in other words one path for managers, and another for technical experts. 101) Briefly describe Vroom's theory and its three components. How can managers use Vroom's theory as they develop effective incentive plans? Answer: Vroom states that a person's motivation to exert some level of effort or specific behavior is a function of three things: valence, instrumentality, and expectancy. Valence is the perceived value the person attaches to the reward. Instrumentality is the perceived relationship between successful performance and obtaining the reward. Expectancy is the probability that performance of the behavior or exertion of the effort will result in achieving the desired reward. Motivation is equal to E * I * V. Victor Vroom would say there should be a clear link between effort and performance, and between performance and reward, and that the reward must be attractive to the employee. 102) Explain the advantages and disadvantages of using piecework as a pay plan? Answer: Piecework plans appear equitable in principle and can be powerful as an incentive, because rewards are proportionate to performance. Employees may resist attempts to revise production standards even if the change is justified. Employees could focus on output and be less willing to focus on quality standards or switching tasks since both could result in lower output. Attempts to introduce new technology could be resisted for the same reason. 103) Employers may award merit pay as traditional merit increases that increase an employee's base pay or as a lump sum merit raise. Explain the pros and cons of these two choices. Answer: Traditional merit increases are cumulative but most lump sum merit raises are not. For employees receiving traditional merit increases, raises in subsequent years are based on the new higher amount. With lump sum merit raises, payroll expenses can be minimized over time while still offering an incentive. Further, the lump sum amount may seem more impressive to employees because it is a large amount paid at one time. First instance, a lump sum merit payment of $1500 may seem more desirable than a traditional weekly merit payout of $29 for 52 weeks. 104) You are the CEO of Blue Bay Motor Boat Company, a mid-size firm that manufactures speed boats. What incentive plan would you implement for the firm's engineers? What incentive plan would you implement for the firm's managers? Answer: Stock options, bonuses, and profit sharing would be appropriate for the engineers. Recognition-based awards and nonfinancial incentives would most likely encourage engineers to work hard as well. For executives, stock options, performance shares, stock plans, and golden parachutes are useful long-term incentives. Annual bonuses are useful in motivating the short-term performance of managers. 105) Sometimes managers need to reinforce positive behavior but cannot turn to a cash incentive to do so. Identify at least five positive reinforcement rewards that a manager could use on a day-to-day basis to reward employees. What does research suggest about the impact of financial and nonfinancial incentives on employees? Answer: There is a long list possible such as to provide more challenging work assignments, autonomy, making work more fun, job rotation, encouraging learning and continuous improvement, providing encouragement, giving complements, allowing employees to set their own goals, expressing appreciation in front of others, sending a note of thanks, giving an employee of the month award, providing a bigger or nicer desk or office. Research indicates that both the financial and nonfinancial incentives improve employee and store performance. For example, store profits rose 30% for those units where managers used financial rewards. Store profits rose 36% for those units where managers used nonfinancial rewards. During the same 9-month period, drive through times decreased 19% for the financial incentives group, and 25% for the nonfinancial incentives groups. Turnover improved 13% for the financial incentives group, and 10% for the nonfinancial incentives group. 106) You are the manager of large used car retailer, and sales are sluggish. What incentive plan would be best for motivating your sales team? What steps should you take to ensure that your incentive plan is effective? Answer: Most companies pay salespeople a combination of salary and commissions, usually with a sizable salary component. An incentive mix of about 70% base salary/30% incentive seems typical; this cushions the salesperson's downside risk (of earning nothing), while limiting the risk that the commissions could get out of hand from the firm's point of view. Combination plans give salespeople a floor to their earnings, let the company specify what services the salary component is for (such as servicing current accounts), and still provide an incentive for superior performance. When developing the incentive plan, you need to first determine if it makes more sense to use an incentive plan. Next, you should link the incentive with your strategy, make sure the program is motivational, set complete standards, and be scientific by gathering evidence and analyzing the effects of the plan. 107) What is the Sarbanes-Oxley Act? How does it affect incentive plans? Do you support the legislation? Why or why not? Answer: The Sarbanes-Oxley Act of 2002 affects how employers formulate their executive incentive programs. Congress passed Sarbanes-Oxley to inject a higher level of responsibility into executives' and board members' decisions. It makes them personally liable for violating their fiduciary responsibilities to their shareholders. The act also requires CEOs and CFOs of a public company to repay any bonuses, incentives, or equity-based compensation received from the company during the 12-month period following the issuance of a financial statement that the company must restate due to material noncompliance with a financial reporting requirement stemming from misconduct. 108) In a brief essay, discuss the difference between annual bonuses for employees and gainsharing plans. Answer: Most firms have annual bonus plans aimed at motivating managers' short term performance. Short-term bonuses can easily result in plus or minus adjustments of 25% or more to total pay. Three factors influence one's bonus: eligibility, fund size, and individual performance. Gainsharing is an incentive plan that engages many or all employees in a common effort to achieve a company's productivity objectives, with any resulting cost-savings gains shared among employees and the company. 109) Explain the advantages of employee stock ownership plans. Answer: The company that offers the ESOP receives a tax deduction equal to the fair market value of the shares that are transferred to the trustee and can claim an income tax deduction for dividends paid on ESOP-owned stock. Employees aren't taxed until they receive a distribution from the trust, usually at retirement when the tax rate is lower. The Employee Retirement Income Security Act allows a firm to borrow against employee stock held in trust and then repay the loan in pretax rather than after-tax dollars. ESOPs also help shareholders of closely held corporations to diversify their assets by placing some of their own shares of the company's stock into the ESOP trust and purchasing other marketable securities for themselves in their place. ESOPs also encourage employees to develop a sense of ownership in and commitment to the firm. They provide increased financial incentives, create a sense of ownership, and help to build teamwork 110) List the basic steps in implementing a gain sharing plan. Answer: The steps are as follows. • Establish general plan objectives • Choose specific performance measures • Decide on a funding formula • Decide on a method for dividing and distributing the employees' share of the gains • Choose the form of payment • Decide how often to pay bonuses • Develop the involvement system Test Bank for Human Resource Management Gary Dessler 9780132668217, 9789353942205, 9780135226803, 9780136089964, 9780134235455, 9780130141248
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