Strategic Human Resource Management Gaining a Competitive Advantage 2nd edition By Andrew Noe – Test Bank

Strategic Human Resource Management Gaining a Competitive Advantage 2nd edition By Andrew Noe – Test Bank

Chapter 09
Recognizing Employee Contributions with Pay

True / False Questions

1. Pay plans are typically used to energize, direct, or control employee behaviour.
   TRUE

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-02 How Does Pay Influence Individual Employees?

2. The reinforcement theory to compensation management suggests that managers pay at-or below-market wages.
   FALSE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-03 Reinforcement Theory

3. While the agency theory has value in the analysis and design of managerial compensation, it is not applicable to non-managerial compensation.
   FALSE

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

4. Different pay systems appear to attract people with different personality traits and values.
   TRUE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-02 Describe the fundamental pay programs for recognizing employees’ contributions to the organization’s success.
Topic: 09-06 How Does Pay Influence Labour Force Composition?

5. Organizations that link pay to individual performance may be more likely to attract individualistic employees, whereas organizations relying more heavily on team rewards are more likely to attract team-oriented employees.
   TRUE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-02 Describe the fundamental pay programs for recognizing employees’ contributions to the organization’s success.
Topic: 09-06 How Does Pay Influence Labour Force Composition?

6. One disadvantage of merit pay is its inability to define and reward a broad range of performance dimensions.
   FALSE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

7. The performance motivational effects of either profit sharing or gainsharing are likely to be greater in smaller firms or units than in larger organizations or units.
   TRUE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

8. Under merit pay, the flow of feedback tends to be multidirectional, from supervisor, peers, and subordinates to the employee.
   FALSE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

9. Incentive pay refers to linking annual pay increases to performance appraisal ratings.
   FALSE

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-09 Individual Incentives

10. A criticism of merit pay programs is that the differential in pay between high performers and mediocre, or even poor performers is not significant enough to influence employee behaviour or attitudes.
    TRUE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

11. Individual incentive pay plans are more commonly found in organizations than are merit pay plans.
    FALSE

Bloom’s: Comprehension
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-09 Individual Incentives

12. There is strong research evidence that profit-sharing plans contribute to organizational performance.
    FALSE

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

13. One solution to profit-sharing during a downturn is to design plans that have downside risk but not upside risk.
    FALSE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

14. From a reinforcement theory standpoint, the performance motivation of stock option plans is particularly high.
    FALSE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

15. One significant difference between gainsharing and profit-sharing plans is that gainsharing-plan payouts are generally distributed more frequently.
    TRUE

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

16. Gainsharing plans, like the Scanlon plan, and other pay-for-performance plans include monetary awards only.
    FALSE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

17. Group incentive pay plans tend to use a broader range of performance measures than do individual-oriented plans.
    TRUE

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

18. The four performance measures of a balanced scorecard include financial measures, customer measures, internal measures, and learning and growth measures.
    TRUE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-04 Describe how organizations combine incentive plans in a balanced scorecard.
Topic: 09-12 Balanced Scorecard

19. Research suggests that the use of pay-for-performance plans among top-and middle-level managers result in increased levels of profitability.
    TRUE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-05 Discuss issues related to performance-based pay for executives.
Topic: 09-13 Managerial and Executive Pay

20. The Canadian Securities Administrators (CSA) requires companies to report compensation levels for top-paid executives.
    TRUE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-05 Discuss issues related to performance-based pay for executives.
Topic: 09-13 Managerial and Executive Pay

21. Companies do not have to show how the compensation plan performed against the share index.
    FALSE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-05 Discuss issues related to performance-based pay for executives.
Topic: 09-13 Managerial and Executive Pay

22. Employee involvement in the design and implementation of pay policies has been linked to higher pay satisfaction and job satisfaction.
    TRUE

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of process issues such as communication in compensation management.
Topic: 09-15 Employee Participation in Decision Making

23. Rumours and assumptions based on poor or incomplete information are always an issue in administering compensation.
    TRUE

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of process issues such as communication in compensation management.
Topic: 09-16 Communication

24. Growth organizations are thought to benefit from a more bureaucratic orientation.
    FALSE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-07 List the major factors to consider in matching the pay strategy to the organization’s strategy.
Topic: 09-18 Organization Strategy and Compensation Strategy: A Question of Fit

25. In a concentration business strategy, pay decisions are centralized.
    TRUE

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-07 List the major factors to consider in matching the pay strategy to the organization’s strategy.
Topic: 09-18 Organization Strategy and Compensation Strategy: A Question of Fit

Multiple Choice Questions

26. The Scanlon plan is an example of
    A. profit sharing.
    B. gainsharing.
    C. a merit pay plan.
    D. an individual incentive plan.

Bloom’s: Comprehension
Difficulty: Easy
Learning Objective: 09-02 Describe the fundamental pay programs for recognizing employees’ contributions to the organization’s success.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

27. The pay system that motivates performance by measuring physical output is
    A. profit sharing.
    B. a seniority system.
    C. a merit system.
    D. an individual incentive system.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-09 Individual Incentives

28. Relying exclusively on merit pay or individual incentives may result in
    A. high levels of work motivation but unacceptable levels of individualistic and competitive behaviour and too little concern for broader plant or organization goals.
    B. low levels of work motivation but acceptable levels of individualistic and competitive behaviour and no regard for broader plant or organization goals.
    C. a perfect balance of work motivation and acceptable levels of individualistic and competitive behaviour.
    D. high levels of work motivation, acceptable levels of individualistic and competitive behaviour and high levels of concern for broader plant or organization goals.

Bloom’s: Comprehension
Difficulty: Difficult
Learning Objective: 09-04 Describe how organizations combine incentive plans in a balanced scorecard.
Topic: 09-12 Balanced Scorecard

29. The pay-for-performance program that does not use a bonus payment as a payment method is
    A. Employee Share Ownership Plan.
    B. profit sharing.
    C. a Scanlon plan.
    D. incentive pay.

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-07 Pay-For-Performance Programs

30. A(n) ____________ pay level, with long-run potential, and _____________ pay decisions are pay strategy dimensions best suited for growth organizations.
    A. below market; centralized
    B. below market; decentralized
    C. above market; centralized
    D. above market; decentralized

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-07 List the major factors to consider in matching the pay strategy to the organization’s strategy.
Topic: 09-18 Organization Strategy and Compensation Strategy: A Question of Fit

31. Which of the following pay strategy dimensions best fits with a business strategy of growth?
    A. Low variable pay
    B. Below-market short-term pay level
    C. Above-market benefits level
    D. Centralization of pay decisions

Bloom’s: Comprehension
Difficulty: Difficult
Learning Objective: 09-07 List the major factors to consider in matching the pay strategy to the organization’s strategy.
Topic: 09-18 Organization Strategy and Compensation Strategy: A Question of Fit

32. Which of the following pay strategy dimensions best fits with a business strategy of concentration?
    A. Long-term time orientation
    B. Below-market short-term pay level
    C. Above-market benefits level
    D. Decentralization of pay decisions

Bloom’s: Comprehension
Difficulty: Difficult
Learning Objective: 09-07 List the major factors to consider in matching the pay strategy to the organization’s strategy.
Topic: 09-18 Organization Strategy and Compensation Strategy: A Question of Fit

33. Which of the following theories emphasizes the importance and immediacy of a reward following a certain behaviour?
    A. Reinforcement theory
    B. Expectancy theory
    C. Agency theory
    D. Equity theory

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-03 Reinforcement Theory

34. Which of the following is not a feature of outcome-oriented principal-agent contracts?
    A. When profits are high, compensation goes up.
    B. The principal must invest in monitoring information.
    C. Agents require a compensating wage differential.
    D. Risk is increased for the agent.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

35. Many merit increase grids indicate both the size and frequency of pay increases as determined by the individual’s performance rating and which one of the following?
    A. An individual’s compa-ratio
    B. An individual’s pay grade
    C. An individual’s seniority
    D. An individual’s time spent in the current pay grade

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

36. Organizations that link pay to individual performance are more likely to
    A. attract team-oriented employees.
    B. attract individualistic employees.
    C. attract older workers.
    D. result in none of the above, as different pay systems do not affect the nature or composition of an organization’s workforce.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-02 Describe the fundamental pay programs for recognizing employees’ contributions to the organization’s success.
Topic: 09-07 Pay-For-Performance Programs

37. According to agency theory, when a compensation system aligns the interests of the agent with the principal’s own interests, the compensation system should
    A. be behaviour oriented.
    B. reduce agency costs.
    C. be outcome oriented.
    D. reduce risks.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

38. Individual incentive plans are relatively rare for all but one of the following reasons. Name the exception.
    A. Because many jobs have no physical output measures.
    B. Because there are many potential administrative problems.
    C. Because such plans are inconsistent with the goals of acquiring multiple skills and proactive problem solving.
    D. Because employees generally do not favour such plans due to their lack of distributive justice.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-09 Individual Incentives

39. Which of the following compensation systems would not be classified as an outcome-oriented contracting scheme (using agency theory terminology)?
    A. Stock options
    B. Profit sharing
    C. Commissions
    D. Merit pay

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

40. In merit pay programs, an individual’s compa-ratio represents his or her
    A. performance rating.
    B. position in the pay range.
    C. comparable worth versus others.
    D. ratio of pay to benefits.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

41. Relying too heavily on profit-sharing and gainsharing plans may
    A. decrease cooperation and concern for the welfare of the entire plant or organization, but it may increase individual work motivation to acceptable levels.
    B. increase cooperation and concern for the welfare of the entire plant or organization and increase individual work motivation to acceptable levels.
    C. decrease cooperation and concern for the welfare of the entire plant or organization, but it may reduce individual work motivation to unacceptable levels.
    D. increase cooperation and concern for the welfare of the entire plant or organization, but it may reduce individual work motivation to unacceptable levels.

Bloom’s: Comprehension
Difficulty: Difficult
Learning Objective: 09-04 Describe how organizations combine incentive plans in a balanced scorecard.
Topic: 09-12 Balanced Scorecard

42. A(n) _____ plan gives employees the opportunity to buy the company’s stock at a previously fixed price.
    A. mutual fund
    B. individual incentive
    C. dividend disbursement
    D. share options

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

43. Because most profit-sharing plans are of the deferred type, their motivational impact is reduced. This argument is most consistent with the
    A. agency theory.
    B. equity theory.
    C. efficiency wage theory.
    D. reinforcement theory.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

44. There is ample evidence that gainsharing programs that rely almost exclusively on the monetary component can have substantial effects on
    A. productivity.
    B. efficiency.
    C. employee satisfaction.
    D. employee development.

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of process issues such as communication in compensation management.
Topic: 09-17 Pay and Process: Intertwined Effects

45. Which one of the following is not a necessary organizational condition for successful gainsharing?
    A. Management commitment
    B. Mechanistic structure
    C. Employment security
    D. Information sharing on productivity and costs

Bloom’s: Comprehension
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

46. There is significant pressure from regulators and shareholders to link pay and performance more effectively. As of December 31, 2008, the _____________ now require disclosure of many types of compensation and benefits of top-paid executives.
    A. Canada Labour Code (CLC)
    B. Canadian Securities Administrators (CSA)
    C. Employment Standards Acts (ESA)
    D. Human Resources and Skills Development Canada (HRSDC)

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-05 Discuss issues related to performance-based pay for executives.
Topic: 09-13 Managerial and Executive Pay

47. Which of the following is not a recognized characteristic of profit sharing programs?
    A. Employers are encouraged to think like owners.
    B. Increased employee citizenship is expected.
    C. Evidence clearly shows a link to better organization performance.
    D. Payments do not become part of base pay.

Bloom’s: Comprehension
Difficulty: Difficult
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

48. We have seen how the Balanced Scorecard approach could be applied to applying manufacturing employees. It is also useful in designing and measuring
    A. supervisor pay
    B. board of directors pay
    C. executive pay
    D. temporary employee pay

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-05 Discuss issues related to performance-based pay for executives.
Topic: 09-13 Managerial and Executive Pay

49. Because of their significant ability to influence organization performance, _______ and _______ are a strategically important group whose compensation warrants special attention.
    A. top managers; executives
    B. top managers; board of directors
    C. executives; supervisors
    D. executives; union workers

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-05 Discuss issues related to performance-based pay for executives.
Topic: 09-13 Managerial and Executive Pay

50. A(n) _____ plan is a based on a group or plant performance that does not become a part of the employee’s base salary.
    A. profit-sharing
    B. stock option
    C. gainsharing
    D. individual incentive

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

51. In an organization where there is a culture that supports cooperation and problem solving, the compensation program that would best reinforce that culture is
    A. group incentive pay.
    B. merit pay.
    C. gainsharing.
    D. individual incentive pay.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-07 Pay-For-Performance Programs

52. Share options have their greatest motivational potential during periods of
    A. high unemployment.
    B. downturns in the economy.
    C. high economic and company growth.
    D. low inflation.

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

53. A change in any part of the compensation system is likely to give rise to employee concerns, thus it is critical in how to ________ reasons for the changes to employees.
    A. prove
    B. demonstrate
    C. implement
    D. communicate

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-06 Explain the importance of process issues such as communication in compensation management.
Topic: 09-16 Communication

54. Which type of compensation program attracts learning-oriented employees?
    A. Skill-based pay
    B. Merit pay
    C. Incentive pay
    D. Gainsharing

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-07 Pay-For-Performance Programs

55. Which one of the following pay programs has the greatest frequency of payout?
    A. Merit pay
    B. Profit sharing
    C. Incentive pay
    D. Gainsharing

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-07 Pay-For-Performance Programs

56. In a(n) _____ plan, payments are based on a measure of organizational performance and do not become part of the employees’ base salary.
    A. ESOP
    B. profit sharing
    C. individual incentive
    D. merit pay

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

57. Which of the following is not true of individual incentive pay programs?
    A. Payments are not rolled into base pay.
    B. Performance is usually measured by physical output.
    C. Individual incentives have the potential to significantly increase performance.
    D. Individual incentive pay programs are quite common in organizations.

Bloom’s: Comprehension
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-09 Individual Incentives

58. According to expectancy theory, motivation is a function of all of the following EXCEPT
    A. coordination
    B. valence
    C. instrumentality
    D. expectancy

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-04 Expectancy Theory

59. Researchers have suggested that the two factors critical to encouraging self-monitoring and peer monitoring are:
    A. monetary incentives and an environment that fosters trust and cooperation.
    B. intrinsic motivation and a competitive environment.
    C. intrinsic motivation and a participatory management style.
    D. empowerment and team-based work.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-06 Explain the importance of process issues such as communication in compensation management.
Topic: 09-15 Employee Participation in Decision Making

60. It is possible that an organization that links pay to performance may attract more high performers than an organization that does not link the two. There may be a similar effect with respect to
    A. job recruitment.
    B. job enhancement.
    C. job retention.
    D. job sustainability.

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-02 Describe the fundamental pay programs for recognizing employees’ contributions to the organization’s success.
Topic: 09-06 How Does Pay Influence Labour Force Composition?

61. _____ can be described as a function of ability and motivation.
    A. Attitude
    B. Job performance
    C. Leadership
    D. Team work

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-04 Expectancy Theory

62. A characteristic of most merit pay programs is
    A. frequent feedback.
    B. feedback comes primarily from the supervisor.
    C. linking of pay increases to group performance.
    D. linking of pay increases to output.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

63. A ____________ time orientation and _____________ benefit levels are pay strategy dimensions best suited for concentration-oriented organizations.
    A. short-term; below market
    B. short-term; above market
    C. long-term; below market
    D. long-term; above market

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-07 List the major factors to consider in matching the pay strategy to the organization’s strategy.
Topic: 09-18 Organization Strategy and Compensation Strategy: A Question of Fit

64. Today, share options are typically being granted to
    A. all employees.
    B. all exempt employees.
    C. low-and middle-level managers.
    D. executives.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

65. Which of the following is not a type of agency cost that arises in managerial compensation?
    A. Management’s desire for perquisites
    B. Management’s risk aversion
    C. Management’s desire for outcome-based pay systems
    D. Management’s focus on short-term performance and pay

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

66. In agency theory, the _____ seeks to direct the behaviour of the _____.
    A. owner; principal
    B. agent; principal
    C. manager; agent
    D. principal; agent

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

67. Research shows that owner-controlled and manager-controlled firms differ in which manner?
    A. Owners like to change ownership more often than managers.
    B. Managers are less likely to maximize short-run performance and pay.
    C. Managers prefer relatively little risk in their pay.
    D. Owners pursue more perquisites.

Bloom’s: Comprehension
Difficulty: Difficult
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

68. Group incentive pay programs differ from team awards pay programs in that they
    A. typically are plant-wide programs.
    B. encourage competition between employee groups.
    C. measure performance in terms of physical output.
    D. de-emphasize the standard-setting process.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

69. Which among the following is an example of a group incentive measure?
    A. Physical output
    B. Cost savings
    C. Meeting deadlines
    D. Completion of product design

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

70. A(n) _____ is suitable for an organization whose culture promotes knowledge of business and cooperation among its employees.
    A. gainsharing plan
    B. profit sharing plan
    C. merit pay plan
    D. incentive pay plan

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-07 Pay-For-Performance Programs

71. Which compensation program offers payouts on a monthly or quarterly basis?
    A. Gainsharing.
    B. Profit sharing.
    C. Merit pay.
    D. Incentive pay.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-07 Pay-For-Performance Programs

72. From an agency theory perspective, linking executive pay to organization performance may mean
    A. more emphasis on non-contingent pay and less emphasis on outcome-oriented contracts.
    B. less emphasis on non-contingent pay and more emphasis on outcome-oriented contracts.
    C. more emphasis short term compensation and less emphasis on long term compensation.
    D. more emphasis on base pay and less emphasis on stock performance.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-05 Discuss issues related to performance-based pay for executives.
Topic: 09-13 Managerial and Executive Pay

73. Agency theory is of particular value in compensation management because of its emphasis on the _____ trade-off.
    A. performance-reward
    B. risk-reward
    C. motivation-reward
    D. ability-reward

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

74. ______ refer to decisions about whether to join or remain with the organization.
    A. Membership behaviours
    B. Identification behaviours
    C. Organizational gregariousness
    D. Associative habits

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-02 Describe the fundamental pay programs for recognizing employees’ contributions to the organization’s success.
Topic: 09-06 How Does Pay Influence Labour Force Composition?

75. Which of the following factors would support the use of a behaviour-based contract between principals and agents?
    A. A tradition of using outcome-oriented contracts
    B. R&D-oriented jobs
    C. Outcome uncertainty
    D. Employer has the ability to pay

Bloom’s: Comprehension
Difficulty: Difficult
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

76. The compensation program that least requires a participatory management style is
    A. gainsharing plan.
    B. incentive pay.
    C. ownership.
    D. profit sharing.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-07 Pay-For-Performance Programs

77. Gainsharing plans differ from profit-sharing plans in that they
    A. distribute payouts more frequently.
    B. encourage employee pursuit of organizational goals.
    C. pay lump sum payments.
    D. can be attached to all types of jobs in the organization.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

78. Deming’s concerns about too much emphasis on “individual” performance in organizations are based on all of the following except
    A. system factors (e.g., coworkers, materials, and equipment) can affect individual performance.
    B. merit pay encourages individualistic behaviours.
    C. performance ratings are essentially “the result of a lottery.”
    D. employees discuss and compare their performance ratings with those of other employees.

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

79. Intertwined effects of pay and process refers to the idea that
    A. the way workers are treated is just as important as the way they are paid.
    B. changing the way workers are paid is more important than the way that they are treated.
    C. productivity can only be boosted if employees in the same jobs are paid equally.
    D. pay decisions have no effect on productivity.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-06 Explain the importance of process issues such as communication in compensation management.
Topic: 09-17 Pay and Process: Intertwined Effects

80. Of the following pay programs, the weakest link between employees’ performance and their earnings is found in
    A. individual incentive plans.
    B. merit pay plans.
    C. profit-sharing plans.
    D. group incentive plans.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

81. An example of extrinsic motivation is
    A. challenging work.
    B. variety of work.
    C. promotion.
    D. social interaction.

Bloom’s: Comprehension
Difficulty: Easy
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-04 Expectancy Theory

82. In order to control compensation costs, administrators of merit pay programs must closely monitor the compa-ratio and what other factor?
    A. The number of pay grades in the pay structure.
    B. The distribution of performance ratings.
    C. The number of new hires.
    D. The company’s stock price.

Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

83. Gainsharing can motivate employees as much as individual plans do because of
    A. the controllable nature of the performance measure and the frequency of payouts.
    B. the level of employee involvement and management cooperation.
    C. the relatively simplistic performance targets and large payouts.
    D. the high levels of employee ownership and team-based compensation.

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-11 Gainsharing, Group Incentives, and Team Awards

84. In which way are employee ownership plans different from profit-sharing plans?
    A. Their focus is on the success of the organization as a whole
    B. Their relatively weak link between pay and performance
    C. Their performance measures
    D. Their deferred nature

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

85. Which of the following is an advantage of individual incentives?
    A. They contribute to a flexible, proactive, problem-solving 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 must be continuously earned and re-earned.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-09 Individual Incentives

86. Criticisms of traditional merit pay programs include all but one of the following. Name the exception.
    A. They tend to create an entitlement mentality
    B. They tend to be costly to develop and time-consuming to administer
    C. They tend to increase labour costs over the long run
    D. They tend to be subject to distributive and procedural process issues

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

87. In recognition of the fact that every pay plan has its advantages and disadvantages, companies are generally taking all but one of the following actions. Name the exception.
    A. Designing pay systems that include a mix of pay programs.
    B. Seeking to balance multiple objectives through the use of the balance scorecard.
    C. Tracking financial results while monitoring progress.
    D. Outsourcing their pay systems to third-party vendors.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-04 Describe how organizations combine incentive plans in a balanced scorecard.
Topic: 09-12 Balanced Scorecard

88. When a supervisor gives an employee the opportunity to express his or her views, this is an example of
    A. distributive justice.
    B. procedural fairness.
    C. trust.
    D. autonomy.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

89. Employee contribution programs differ according to all of these design features EXCEPT
    A. payment method.
    B. frequency of payout.
    C. type of work.
    D. ways of measuring performance.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-07 Pay-For-Performance Programs

90. Compensation systems differ according to their impact on the dimensions of expectancy theory, but, generally speaking, they have their greatest impact on which dimension?
    A. Expectancy
    B. Instrumentality
    C. Valence
    D. Equity

Bloom’s: Knowledge
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-04 Expectancy Theory

Short Answer Questions

91. Compare and contrast reinforcement theory with expectancy theory.
    Answers may vary

    Reinforcement theory states that a response followed by a reward is more likely to recur in the future. The theory emphasizes the importance of a person’s actual experience of the reward.
    Expectancy theory says that motivation is the function of valence, instrumentality, and expectancy. It focuses on the link between rewards and behaviours, but it emphasizes expected rather than experienced rewards. In other words, it focuses on the effects of incentives.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-03 Reinforcement Theory
Topic: 09-04 Expectancy Theory

92. Describe the agency theory as it applies to managerial compensation. Differentiate between outcome-based contracting schemes and behaviour-based schemes.
    Answers may vary

    Agency theory focuses on the divergent interests and goals of the organization’s stockholders (the “principals”) and the organization’s management (the “agents”). The theory describes the ways that managerial compensation can be used to align these interests and goals. Because of the separation of ownership and management, most stockholders are far removed from the day-to-day operation of companies. This creates agency costs since the interest of the owners and managers may no longer converge.
    Three types of agency costs arise in managerial compensation. First, although shareholders seek to maximize their wealth, management may spend money on things like perquisites or “empire building.” Second, managers are more risk averse than shareholders. Third, managers may have shorter decision-making time frames than owners.
    To reduce agency costs, the theory says that the principal should choose a contracting scheme that helps align the interests of the agents with the principal’s own interests. These contracts are classified as either behaviour-oriented (e.g., merit pay) or outcome-oriented (e.g., stock, options, profit sharing). Outcome-oriented contracts increase the risk borne by the agent. Because agents are averse to risk, they may require higher pay to make up for it. Behaviour-based contracts do not transfer risk to the agent and thus do not require a compensating wage differential. However, the principal must either invest in monitoring information on what the agent has done or structure the contract so that pay is linked at least partly to outcomes.

Bloom’s: Comprehension
Difficulty: Difficult
Learning Objective: 09-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals.
Topic: 09-05 Agency Theory

93. Describe five reasons why merit pay programs may not help organizations increase their overall productivity.
    Answers may vary

    a. Many factors that affect productivity (e.g., coworkers, the job, materials, equipment, customers, management, supervision, and environmental conditions) are outside of the worker’s control and therefore cannot be influenced under a pay system that rewards individual behaviour.
    b. The individual focus of merit pay discourages teamwork, and as a result, individual goals are pursued at the expense of organizational goals.
    c. If the measurement of performance is not perceived as being fair and accurate, the entire system can break down. Since most rely exclusively on the supervisor for providing performance ratings and supervisors are not often the best people to be making these evaluations, the system is not always effective.
    d. If past pay increases for good performance were not perceived to be a large enough reward for past behaviour, then subsequent performance may have been negatively affected. Research has shown that high performers are not paid significantly more than mediocre or even poor performers in most cases. Research has also shown that 60 to 70 percent of employees fall into the top two (out of four or five) performance rating categories.
    e. Employees frequently do not get good or frequent-enough feedback from supervisors on performance problems, nor are they often given enough input. This can affect their motivation to perform. If employees do not see the process of administering merit pay as fair, then they are not motivated to perform.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

94. What are some issues of procedural justice that might arise in administering merit pay?
    Answers may vary

    In any situation where rewards are distributed, employees appear to assess fairness on two dimensions: distributive (based on how much they receive) and procedural (what process was used to decide how much). Some of the most important aspects of procedural fairness or justice include:

    a. The supervisor was honest and ethical in dealing with the employee.
    b. The supervisor gave the employee an opportunity to express his or her side.
    c. Consistent standards were used in evaluating employee performance.
    d. The supervisor considered the employee’s view regarding his or her performance.
    e. The supervisor gave feedback that helped the employee learn how well he or she was doing.
    f. The supervisor was completely candid and frank.
    g. The supervisor showed a real interest in trying to be fair.
    h. The supervisor became thoroughly familiar with the employee’s performance.
    i. The supervisor took into account factors beyond the employee’s control.
    j. The supervisor got input from employee before making a recommendation.
    k. The supervisor made clear what is expected of the employee.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-08 Merit Pay

95. How do employee stock ownership plans (ESOPs) differ from stock option plans?
    Answers may vary

    Both encourage employees to focus on the success of the organization as a whole. However, stock option plans give employees the opportunity to buy stock at a price that has been previously fixed. The employee stands to obtain a financial gain if the stock price has gone up since the price was fixed. ESOPs are more common and usually have broader eligibility to a larger group of employees. However, they carry more risk for employees since an ESOP must invest at least 51 percent of assets in the company’s stock, therefore allowing less diversification of the risk to the employee who must purchase the stock at cost with no guarantee of how the stock will perform in the future.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-03 List the advantages and disadvantages of pay-for-performance programs.
Topic: 09-10 Profit Sharing and Ownership

96. 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.
    Answers may vary

    Every pay program has its advantages and disadvantages. For example, relying exclusively on merit pay or individual incentives may result in high levels of individual motivation but unacceptable levels of individualistic and competitive behaviour at the expense of broader organizational goals. Relying too heavily on profit sharing and gainsharing plans may improve the degree of cooperation and concern for organizational goals, but may also reduce individual work motivation levels. However, a particular mix of programs that fits the situation at hand could contribute to acceptable performance on a broader range of performance dimensions.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-04 Describe how organizations combine incentive plans in a balanced scorecard.
Topic: 09-12 Balanced Scorecard

97. What are the six Executive Compensation Principles created by the Canadian Coalition for Good Governance?
    Answers may vary

    Principle 1-“Pay for performance” should be a large component of executive compensation.
    Principle 2-“Performance” should be based on measurable risk adjusted criteria, matched to the time horizon needed to ensure the criteria have been met.
    Principle 3-Compensation should be simplified to focus on key measures of corporate performance.
    Principle 4-Executives should build equity in their company to align their interests with shareholders.
    Principle 5-Companies should limit pensions, benefits, and severance and change of control entitlements.
    Principle 6-Effective succession planning reduces paying for retention.

Bloom’s: Knowledge
Difficulty: Difficult
Learning Objective: 09-05 Discuss issues related to performance-based pay for executives.
Topic: 09-13 Managerial and Executive Pay

98. What are some potential consequences of employee involvement in compensation decision making on employee attitudes and behaviours?
    Answers may vary

    Involvement in the design and implementation of pay policies has been linked to higher pay satisfaction and job satisfaction, presumably because employees have a better understanding of, and greater commitment to, the policy when they are involved.
    Agency theory suggests that the delegation of decision making by a principal to an agent creates agency costs, because employees may not act in the best interests of top management. In addition, the more agents there are, the higher the monitoring costs. On the other hand, agency theory also suggests that monitoring would be less costly and more effective if performed by employees because they have knowledge about the workplace and behaviour of fellow employees that managers do not have. As such, employee involvement in decision making might encourage self-monitoring and peer monitoring and thereby reduce monitoring costs.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-06 Explain the importance of process issues such as communication in compensation management.
Topic: 09-15 Employee Participation in Decision Making

99. Communication of compensation issues is argued to represent a strategic opportunity for an organization to distinguish itself from its competition. Why is this so?
    Answers may vary

    Significant differences exist across and between organizations on how compensation issues are communicated to employees. This suggests that organizations have considerable discretion in this aspect of compensation management, and therefore, it represents a strategic opportunity for organizations to distinguish themselves. Rumour and assumptions based on poor or incomplete information are always an issue in administering compensation, partly because of its importance to employee economic security and well-being. Therefore, in making any changes, it is strategically important to determine how best to communicate reasons for the changes to employees in order to minimize potentially negative effects of miscommunication on employee attitudes and behaviours. A well-communicated program may increase the positive effects that the compensation programs are believed to influence.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-06 Explain the importance of process issues such as communication in compensation management.
Topic: 09-16 Communication

100. Discuss the business-level strategies of concentration and growth and their corresponding differences in pay strategies.
     Answers may vary

     Concentration strategies require a very different set of pay practices by virtue of their lower rate of growth, more stable workforce, and greater need for consistency and standardization in pay decisions. Thus, the pay dimensions include low variable pay, short-term orientation, above-market benefits, above-market short-term pay, below-market long-term pay, and centralization of pay decisions.
     Growth strategies emphasize innovation, risk taking, and new markets, and therefore require high-risk sharing (variable pay), long-term orientation, above long-term market pay, below short-term market pay and benefits, and decentralized pay decisions.

Bloom’s: Comprehension
Difficulty: Moderate
Learning Objective: 09-07 List the major factors to consider in matching the pay strategy to the organization’s strategy.
Topic: 09-18 Organization Strategy and Compensation Strategy: A Question of Fit