Chapter 13-Variable Pay and Executive Compensation: Multiple Choice

Chapter 13—Variable Pay and Executive Compensation
MULTIPLE CHOICE
1. Susan, the president of the school board for a rural school district, is interested in implementing a pay-
for-performance compensation system in the school. The school board has called you in as an expert
in incentive compensation to explore this option. You tell Susan that
a. pay-for-performance is not appropriate for public sector employees.
b. a teacher pay-for-performance system rarely works unless the teachers are involved in the
design of the system.
c. teachers’ unions usually support the idea of pay-for-performance because it increases
teacher pay which is usually low.
d. improvements in student test scores are a non-controversial measure of teacher
performance.
ANS: B PTS: 1 DIF: Moderate REF: p. 391
OBJ: 1 NAT: AACSB Analytic LOC: HRM
TOP: Application
2. What are variable pay plans?

a. methods of tying compensation to the Consumer Price Index (CPI) in order to keep up
with inflation
b. additional tangible rewards given to employees for performance beyond normal
expectations
c. compensation that increases as employees gain new job-related knowledge, skills, and
abilities
d. incentives to meet required performance standards
OBJ: 1 NAT: AACSB Reflective Thinking LOC: HRM
TOP: Definitional
3. Traditional compensation systems pay employees differently based on their job responsibilities and
base employee increases mainly on
a. level of performance.
b. growth in capabilities.
c. increasing length of service.
d. changes in the labor market pay rates.
ANS: C PTS: 1 DIF: Easy REF: p. 392
TOP: Conceptual
4. Which of the following is an assumption of variable-pay systems?

a. Some jobs contribute more to organizational success than others.
b. Employee performance is more a function of the design of the job and organizational
support than of individual differences in effort or abilities.
c. Equality in pay is a strong motivator of exceptional employee performance.
d. Both good and poor performing employees will perceive a pay system that rewards high
performance as satisfying.
ANS: A PTS: 1 DIF: Moderate REF: p. 392
TOP: Conceptual
5. As director of compensation for BlueBottle Enterprises, you have implemented a highly successful
pay-for-performance system. This system has worked successfully for three years as measured by a
number of financial and non-financial measures. Because of this success you are considering quitting
BlueBottle and setting up your own consulting firm to promote this system. Which of the following
statements is TRUE?
a. This will be a successful undertaking because effective pay-for-performance systems are
translatable across industries.
b. You should target poor-performing firms as potential clients because most firms’
performance will be enhanced by a pay-for-performance system.
c. As long as most employees will experience an increase in pay with this system, they will
be satisfied with it.
d. You need to have a way to evaluate organizational cultures in order to select the
organizations in which your pay-for-performance system will be effective.
ANS: D PTS: 1 DIF: Challenging REF: p. 393
TOP: Application
6. Performance incentives include all the following EXCEPT

a. team bonuses.
b. piece-rate systems.
c. annual increases.
d. profit-sharing.
ANS: C PTS: 1 DIF: Easy REF: p. 393, Figure 13-1
TOP: Conceptual
7. In a TV interview, the CEO of Trevelyan, Inc., commented that the pay-for-performance system was
working well at her company because, “Now everyone is pulling in the same direction.” What does
the CEO mean by this observation?
a. The pay-for-performance system is linking employee performance and the organization’s
strategic goals.
b. Employees have high levels of satisfaction with pay.
c. Employees are receiving higher total compensation.
d. Important HR objectives have been achieved, such as reduction in turnover and better
attendance.
TOP: Application
8. The CEO of MasterFiber Textiles attended a conference where he spoke with the CEO of Golden
Fleece Manufacturing. Golden Fleece has had great success in implementing an individual pay-for-
performance system. The CEO of MasterFiber has directed the vice president of HR to implement the
Golden Fleece method at MasterFiber. The FIRST concern of the VP of HR should be
a. Does the plan reward the appropriate employee actions?
b. Can the plan be administered properly?
c. Does the plan fit with the business strategies and culture at MasterFiber?
d. Can MasterFiber afford the plan?
ANS: C PTS: 1 DIF: Challenging REF: p.393
OBJ: 1 NAT: AACSB Analytic LOC: Strategy
TOP: Application
9. Caroline works on a design team that develops costumes for historically-based and fantasy movies.
The team’s designs are executed by professional seamstresses and tailors. Caroline’s
a. job would be suited for individual pay for performance because one can objectively judge
the artistic merits of the costumes.
b. individual performance can be isolated and measured separately from her team members’
contributions.
c. job would not be suited for pay for performance because the quality of the work product of
the team is mostly based on subjective judgment.
d. individual performance can be measured by the number of design drawings she produces,
and her pay could effectively be tied to this number.
ANS: C PTS: 1 DIF: Challenging REF: p. 394
TOP: Application
10. It is important to make sure that what is being rewarded by the compensation system is strongly tied to
organizational objectives, because people tend to
a. guess what they think management wants done.
b. produce what is convenient.
c. produce what is measured and rewarded.
d. avoid doing unpleasant tasks.
TOP: Conceptual
11. Max is studying the new pay-for-performance incentive plan. Max realizes that under the new
standards if he continues his normal rate of production, which takes a steady effort over the work day
with few “slack” times where he can rest, he can continue to earn what he earns now. But if he puts
forward maximum effort all day long, which will leave him physically and mentally exhausted by the
end of the day, he can earn an extra $10 before taxes. Max’s current pay is about $30 an hour. Which
of the statements is most likely to be TRUE?
a. Max is likely to continue to exert his typical effort.
b. No incentive pay system is likely to motivate higher effort from Max.
c. If this incentive plan is not effective in motivating extra effort from Max, he is a low-
motivation employee whose turnover would be functional.
d. Max is likely to exert maximum effort every day in order to earn this production incentive.
ANS: A PTS: 1 DIF: Challenging REF: p. 395
OBJ: 1 NAT: AACSB Analytic LOC: Motivation Concepts
TOP: Application
12. As director of HR you need to calculate the return on investment of a new differential piece-rate
system. To do this you need to calculate
a. the ratio of the cost of the old incentive system to the cost of the new incentive system
multiplied by the dollar value of the increase in production.
b. the dollar value of the increase in production divided by the cost of the new incentive
system.
c. the ratio of the cost savings of the new incentive system compared with the return on
investment which the shareholders expect.
d. the dollar value of the additional production minus the cost of the new incentive system
divided by the cost of the new incentive system
TOP: Application
13. Which of the following statements is TRUE?

a. Global firms cannot use pay-for-performance systems because of variations in national
culture.
b. Global firms can use pay-for-performance systems if the organization has the same
competitive strategy in each country in which it operates.
c. Global incentive programs tend to be too complex to be understood by employees which
undermines the programs’ effectiveness.
d. Global firms can use incentive systems if they are adapted to appropriate goals in different
geographic regions.
OBJ: 1 NAT: AACSB Reflective Thinking LOC: Environmental Influence
TOP: Conceptual
14. Potential metrics for variable pay plans include all of the following EXCEPT
a. increase in market share.
b. reduction of total compensation expense.
c. increase in customer satisfaction levels.
d. return on investment.
ANS: B PTS: 1 DIF: Moderate REF: p. 396Figure 13-2
TOP: Conceptual
15. HR-related performance measures for a variable pay plan include all the following EXCEPT
a. absenteeism costs.
b. turnover costs.
c. customer satisfaction.
d. accident rates.
ANS: C PTS: 1 DIF: Easy REF: p. 396, Figure 13-2
TOP: Conceptual
16. Research shows that individual pay-for-performance compensation systems work best when they are
accompanied by
a. high levels of teamwork and cooperation among co-workers.
b. directive supervision and strong central leadership.
c. an entrepreneurial and individualistic organizational culture.
d. employee distrust of top management motives.
ANS: C PTS: 1 DIF: Moderate REF: p. 397
TOP: Conceptual
17. An effect of variable pay plans is that _____ incentives increase the competition among individual
employees.
a. divisional
b. individual
c. work team
d. organizational
ANS: B PTS: 1 DIF: Easy REF: p. 397
TOP: Conceptual
18. Bernard is very upset when he learns that the company is changing to a pay-for-performance system
where lump-sum bonuses instead of raises will be used. The system will record the performance of
each work team and reward everyone on the team equally. All of the following are reasons for Bernard
to be upset EXCEPT
a. Bernard’s base pay will be essentially frozen.
b. Bernard is a low to average performer on his work team.
c. Bernard is the highest individual performer on his team.
d. The pay-for-performance plan is phrased in vague, technical terms.
ANS: B PTS: 1 DIF: Challenging REF: pp. 398, 400
TOP: Application
19. An individual incentive system will be counterproductive when

a. the organization emphasizes teamwork and cooperation.
b. there is a dynamic technological environment.
c. it results in competition among the employees.
d. the organizational culture stresses individualism.
TOP: Conceptual
20. Which of the following statements is TRUE?

a. The majority of employees covered by incentive systems are unhappy with them.
b. A large majority of employers have incentive systems that cover all their employees.
c. Unions tend to support monetary performance incentive plans if employers do not
abandon pay for seniority.
d. An assumption of variable pay systems is that some jobs contribute more to organizational
success than do other jobs.
TOP: Conceptual
21. Which of the following is classified as an individual variable pay plan?

a. Scanlon plan
b. profit-sharing
c. piece-rate
d. employee stock options
ANS: C PTS: 1 DIF: Easy REF: p. 397 , Figure 13-3
TOP: Definitional
22. After working five years as a service coordinator at BlueBottle Enterprises, Mandy has developed
some timesaving shortcuts that allow her to process a higher volume of work than the other service
coordinators. If Mandy would train her co-workers in her techniques, the entire department could be
more efficient. The performance incentive system that would be LEAST likely to encourage Mandy to
share her expertise with her co-workers would be a/an
a. individual-level incentive system.
b. team-based incentive system.
c. organization-level incentive system.
d. Scanlon plan.
TOP: Application
23. An individual-level pay-for-performance system would be LEAST effective for which of the following
employees?
a. an employee who guts chickens in a poultry processing plant.
b. a sales clerk at a fashionable women’s shoe store.
c. the CEO of a middle-sized builder of manufactured housing.
d. a marketing specialist on a cross-functional product development team.
ANS: D PTS: 1 DIF: Moderate REF: p. 397
TOP: Application
24. __________ is an example of a group or team variable pay system.

a. Sales compensation
b. Gainsharing
c. Employee stock options.
d. Deferred compensation
ANS: B PTS: 1 DIF: Moderate REF: p. 397, Figure 13-3
TOP: Definitional
25. Robert is paid by the number of bicycle tires he attaches to wheel rims. If he attaches more than his
daily quota of tires, he receives 25 cents extra per extra tire. Robert is paid under a ________ system.
a. pro-rated bonus
b. differential piece-rate
c. straight piece-rate
d. straight commission
TOP: Application
26. A differential piece-rate system pays employees

a. one piece-rate wage for standard production, but less if producing below quota.
b. one piece-rate wage for units produced up to a standard output, and a higher piece-rate
wage for units produced over the standard.
c. a higher rate per piece for employees with more experience and seniority.
d. differential wages depending on the differing responsibilities in the production of each
unit.
TOP: Definitional
27. When Claudette found a flaw in a major outgoing order and corrected it before it was shipped, her boss
immediately gave her a voucher to the best day spa in town. This type of incentive is called an
a. immediate payout.
b. spot bonus.
c. golden handshake.
d. spontaneous reward.
TOP: Application
28. The downside of bonuses is that

a. they may cause low performing employees to quit.
b. employees who are passed over may become jealous of the bonus recipient.
c. a well-implemented bonus system may be more expensive to the firm than base pay raises
for improved performance.
d. bonuses are too trivial in amount to actually motivate exceptional behavior.
TOP: Conceptual
29. Bonuses are less costly to the organization than general wage increases, because
a. bonuses receive preferential tax treatment.
b. the annual amount given as a bonus tends to be smaller than the annual amount given as a
raise.
c. bonuses are frequently given in the form of non-cash items.
d. bonuses do not become part of employees' base wages.
TOP: Conceptual
30. If a company has an annual competition to reward the store manager with the highest dollar sales in
each state with a paid vacation to a luxury resort it will probably
a. improve sales at the stores with the historically lowest dollar sales.
b. help retain the store managers who feel they have a chance to win the award in the
upcoming year.
c. encourage teamwork among the store managers.
d. increase morale of most of the store managers.
ANS: B PTS: 1 DIF: Challenging REF: p. 399
TOP: Application
31. The disadvantage of “employee of the month” type awards is that

a. they can be seen as favoritism.
b. they are typically awarded on the basis of objective criteria.
c. it is difficult to link these awards with specific performance criteria.
d. eventually all employees will have been employee of the month and the award will have
lost its distinctiveness.
ANS: A PTS: 1 DIF: Moderate REF: P. 399
TOP: Conceptual
32. At the annual awards banquet, all employees who have been with the company 30 years or more
received their choice of a cruise or a week at a resort. This type of special incentive program is called
a ___________ award.
a. recognition
b. golden handshake
c. service
d. performance
TOP: Application
33. The most common type of group/team incentive plan used by organizations is paying
a. all team members the same base pay with equal bonuses based on team performance.
b. team members different base pay, with equal bonuses based on team performance.
c. all team members the same base pay with varying bonuses based on individual
contribution to the team’s performance.
d. team members different base pay, with varying bonuses based on individual contribution
to the team’s performance.
TOP: Conceptual
34. Distributing team incentives equitably means that

a. each team member gets the same amount of bonus.
b. team members are paid incentives that vary according to individual performance.
c. teams that are in competition with one another are paid incentives based on their relative
performance.
d. each team in the company receives the same amount of discretionary incentive dollars to
distribute.
OBJ: 4 NAT: AACSB Reflective Thinking LOC: Motivation Concepts
TOP: Conceptual
35. One of the differences between individual incentives and group incentives is that
a. individual incentives are more likely to be monetary whereas group incentives are more
likely to be non-monetary.
b. group incentives carry high “trophy” value for the members who receive them.
c. incentives for group members tend to be allocated equitably whereas individual incentives
tend to be allocated equally among employees.
d. group incentives place social pressure on group members.
TOP: Conceptual
36. In designing the company’s new team incentive plan, the vice president of HR wishes to strongly link
the team’s efforts with its effective performance. The timing of incentive payouts should be
a. monthly.
b. quarterly.
c. semiannually.
d. annually.
ANS: A PTS: 1 DIF: Easy REF: p. 400
TOP: Application
37. All of the following are conditions supporting successful use of group/team incentives EXCEPT
a. cooperation is necessary to do the job.
b. individual performance cannot be identified.
c. group members decide how to allocate bonuses.
d. employees understand how bonuses are earned and calculated.
TOP: Conceptual
38. Lucretia Toys is investigating the use of team incentives in its production plant. Each work group is
composed of about 25 individuals. As the manager of HR you
a. recommend using equal payouts for each team member.
b. express concern about the dilution of individual efforts on such large teams.
c. urge management to go forward with the plan because every job can benefit from
increased teamwork.
d. recommend that management wait to implement any team incentive plan because this may
trigger a union organizing attempt in a manufacturing environment.
TOP: Application
39. A consultant presenting a plan for a group/team incentive plan stresses that the money to be used as
incentive rewards will be generated by improved organizational performance. This aspect of the plan
is called the _______ principle
a. liquidating
b. zero-sum-game
c. pay-as-you-go
d. self-funding
TOP: Application
40. All of the following are typical performance measures in gainsharing plans EXCEPT
a. overhead cost.
b. labor costs.
c. overtime hours.
d. quality levels.
TOP: Conceptual
41. The purpose of organizational-level incentives is to

a. reward each employee for the performance of the entire company.
b. aid in recruiting individualistic and entrepreneurial employees.
c. motivate functional competition among employees to increase total performance.
d. create an organizational culture of ethical behavior.
TOP: Conceptual
42. Gainsharing plans are designed to elicit __________ effort from employees.
a. minimum acceptable
b. sustainable
c. satisfactory
d. maximum possible
ANS: D PTS: 1 DIF: Easy REF: p. 402
TOP: Conceptual
43. To be effective, an organizational incentive program should

a. give higher rewards to employees whose individual efforts are outstanding.
b. include everyone from non-exempt employees to managers and executives.
c. pay out every year regardless of whether the organization is profitable.
d. reward the shareholders for investing in the business.
TOP: Conceptual
44. The primary objectives of organizational incentive systems includes all of the following EXCEPT
a. to enhance employee innovation.
b. to attract and retain employees.
c. to increase productivity.
d. to improve employee morale.
TOP: Conceptual
45. A medium-sized law firm every year distributes a bonus to its employees, from clerks to partners,
based on the fees it has earned on the cases it has won. Even though every employee has not worked
on every case, the senior partners of the law firm feel that such a bonus motivates employees to
cooperate with one another and assist each other in times of high work loads. This is a type of
________ incentive.
a. group
b. team
c. individual
d. organizational
TOP: Application
46. For a profit-sharing plan to be effective, management must

a. increase innovative solutions to technical problems.
b. not have high expectations of performance impact in the first year of the program.
c. be willing to disclose financial and profit information to employees.
d. stabilize profits so that the annual payoff is consistent.
ANS: C PTS: 1 DIF: Moderate REF: pp. 403-404
TOP: Conceptual
47. All of the following are drawbacks of profit-sharing plans EXCEPT

a. profits of the organization are not entirely under employees’ control.
b. they are not self-funding.
c. employees’ rewards come a long time after their improved performance.
d. management may resist disclosing financial and profit information.
ANS: B PTS: 1 DIF: Challenging REF: pp. 404-405
TOP: Conceptual
48. Melanie has worked for 20 years for a manufacturer of specialized paint for the auto industry. Melanie
stayed with the company rather than taking other job offers because of the generous ESOP. Which of
the following statements is FALSE?
a. ESOPs are a low-risk way for employees like Melanie to be “capitalists.”
b. The ESOP probably has made Melanie more focused on the company’s performance than
she would have been otherwise.
c. If the company goes bankrupt, Melanie may lose some of her anticipated retirement.
d. The ESOP was a successful retention tool in Melanie’s situation.
ANS: A PTS: 1 DIF: Moderate REF: 404
TOP: Application
49. Andrew is excited about the new program at work. He will be allowed to purchase 20 shares of stock
at $45 per share for a limited period of time. Andrew is planning to take advantage of this
___________ plan because he expects that the market price of the stock will far exceed $45 in a
couple years.
a. windfall incentive
b. gainsharing
c. stock option
d. employee stock ownership (ESOP)
TOP: Application
50. The main advantage for an employer in setting up an employee stock ownership plan is
a. increased protection against union organizing attempts.
b. reduction of financial risk for employees and consequent reduction in employee turnover
rate.
c. increased employee productivity.
d. favorable tax treatment on earnings earmarked for use in the ESOP.
TOP: Conceptual
51. The _____________ type of pay-for-performance system is most likely to induce employees to behave
unethically.
a. commission
b. ESOP
c. performance awards
d. gainsharing
OBJ: 3 NAT: AACSB Reflective Thinking LOC: Ethical Responsibilities
TOP: Conceptual
52. A _____ approach for compensating sales staff is useful when serving and retaining existing client
accounts is significantly more important than generating new sales and accounts.
a. straight commission
b. salary-only
c. salary plus commission
d. salary draw
TOP: Conceptual
53. Arnold sells oil field equipment. He is paid 10 percent of the dollar amount of the sales he has
completed each quarter. This is Arnold’s only compensation. He is on the _______ system.
a. retainer
b. pay-as-you-go
c. deferred compensation
d. straight commission
ANS: D PTS: 1 DIF: Easy REF: p. 405
TOP: Application
54. The most frequently used form of sales compensation is the

a. draw.
b. straight commission.
c. salary plus commission.
d. differential commission.
TOP: Conceptual
55. Poseidon Oceanic Supply has introduced a new sales compensation system that rewards sales staff
based on a combination of individual goals and group sales goals. In implementing this program, the
management of Poseidon hopes to
a. motivate sales staff on the basis of individual entrepreneurialism.
b. increase the amount of service to existing Poseidon customers.
c. reduce opportunities for unethical behavior by sales staff.
d. encourage teamwork among the sales staff.
TOP: Application
56. A major factor in making global incentive systems workable is

a. the spread of U.S.-style individualism among workers in other countries.
b. the development of Internet-based management software.
c. the development of a large group of “global workers” who hold management and sales
jobs in numerous countries throughout their careers.
d. technology improvements that allow employees to telecommute worldwide.
OBJ: 3 NAT: AACSB Technology LOC: Information Technologies
TOP: Conceptual
57. Gainsharing and goalsharing plans are ____________ -level incentives

a. individual
b. group
c. organizational
d. industrial
TOP: Conceptual
58. What is a "draw?"

a. an amount advanced to a sales employee and repaid from future commissions
b. a system by which sales employees “draw down” their sales quotas
c. a type of income equalization for tax purposes in which sales representatives can draw
down their earnings from a high-income year and transfer them to a low-income year
d. a lump-sum payment or bonus at the end of the month
TOP: Definitional
59. At the heart of most executive compensation plans is the idea that
a. at the executive level, status and image are as important as actual compensation.
b. executives should be rewarded if the organization grows in profitability and value over a
period of years.
c. executive compensation should be based on the organization’s current performance in the
stock market.
d. executives are more focused on their base compensation than they are on the variable pay.
TOP: Conceptual
60. Which of the following statements is TRUE about sales incentive plans?
a. Most companies are satisfied with their sales incentive plans.
b. Sales incentives are effective in generating sales productivity over targets in most cases.
c. Most firms frequently change sales incentive plans.
d. Sales staff are most satisfied when they are paid on straight commission plans because
they are simple to calculate and result in high payouts.
TOP: Conceptual
61. James is a sales representative for a large international import/export firm. For the past three years
James has received an annual bonus, the maximum possible, between $37,000 and $42,000 because he
met his sales targets. This year, James is planning on using his bonus to buy a new car, so he and his
wife have been test driving cars. Which of the following statements is most likely to be TRUE?
a. We can be fairly certain that James has exerted intense discretionary effort in the last four
years.
b. The actual dollar amount of the bonus is less important to James than its “prestige” effect.
c. The bonus system in this company does not pay out a sufficiently large bonus to motivate
maximum effort.
d. James probably feels entitled to his anticipated bonus.
TOP: Application
62. All of the following are common measures of sales effectiveness EXCEPT
a. sales relative to quota.
b. sales staff satisfaction.
c. new product sales.
d. account retention.
ANS: B PTS: 1 DIF: Easy REF: p. 407, Figure 13-7
TOP: Conceptual
63. Jessica works for one of the largest corporations in the U.S.. She makes the average pay of workers in
this organization, $30,000. It would be a good guess that the CEO of Jessica’s company makes
a. $300,000.
b. $1,500,000
c. $3,000,000.
d. $11,000,000.
TOP: Application
64. In large for-profit organizations, the CEO’s base salary is

a. typically the largest part of his/her total compensation.
b. often deferred until after the CEO retires.
c. likely to be less than half of his/her total compensation.
d. typically 20 times larger than the salary of the average worker in the organization.
TOP: Conceptual
65. The main reason for giving CEOs large incentive payments is to
a. motivate high performance resulting in improved financial performance of the company.
b. make it easier to attract and keep top executives.
c. prevent top executives from taking unethical actions to increase their pay.
d. satisfy the financial needs of top executives.
TOP: Conceptual
66. Regarding benefits, executives

a. typically have the same health benefits plans that other employees have.
b. typically pay higher deductibles on their health care plans than do other employees.
c. usually “self-insure” for their health care.
d. often have health plans with no co-payments and no limitations on physician choice.
TOP: Conceptual
67. Organizations offer deferred compensation to executives in order to

a. emphasize long-term performance of the organization.
b. help executives with tax liabilities caused by incentive plans.
c. place "golden handcuffs" on key executives to prevent their leaving prematurely.
d. hide excessive one-time bonuses earned by executives.
TOP: Conceptual
68. Which of the following statements is FALSE?

a. Research has not shown a strong relationship between CEO stock options and firm
performance.
b. The Sarbanes-Oxley Act was motivated by abuse of stock options by top executives.
c. Even at the level of CEO, it is necessary to have formal, measurable performance targets
in order for a discretionary bonus system to be effective.
d. Perquisites are becoming less-widely used because most of them are now taxed as income
to the executive.
ANS: A PTS: 1 DIF: Moderate REF: pp. 409-411
TOP: Conceptual
69. Use of the company helicopter, country club memberships, first class air travel, and a chauffeured
limousine are examples of
a. executive mandates.
b. perquisites.
c. golden handcuffs.
d. performance incentives.
TOP: Definitional
70. Executives value perks for all of the following reasons EXCEPT
a. perks are status symbols.
b. perks are continued after the executive retires.
c. perks are often not taxed as income.
d. perks are generally low cost to the company.
TOP: Conceptual
71. The executive compensation scandals at Enron, WorldCom, Tyco and others mainly involved abuse of
a. ESOPs.
b. stock options.
c. executive perks.
d. deferred compensation.
OBJ: 6 NAT: AACSB Analytic LOC: Legal Responsibilities
TOP: Application
72. The most widely used long-term incentives for executives is/are
a. generous perquisites.
b. ESOPs.
c. stock options.
d. annual cash incentives.
TOP: Conceptual
73. The Board of Directors of Clementine Minerals and Mining has been challenged by shareholders about
the total compensation of the CEO. In order to examine whether the CEO’s pay is reasonable, the
Board of Directors is addressing all of the following questions EXCEPT
a. Would another company hire this CEO?
b. How does the CEO’s compensation compare with that of CEOs in other companies in the
mining industry?
c. Has the CEO’s pay decreased in years when CMM lost money?
d. What would an investor pay for the CEO’s level of performance?
OBJ: 6 NAT: AACSB Analytic LOC: Ethical Responsibilities
TOP: Application
74. The CEO of a major corporation is being interviewed by a reporter from a TV news show. The CEO
makes over $50 million a year, and the reporter asks, “Are you really worth $50 million a year to your
company, especially when most of your employees make minimum wage?” All of the following are
plausible responses to the reporter’s question EXCEPT
a. “I have to make major decisions, and I work endless hours under great pressure.”
b. “I am in charge of the company, and I am responsible for the results.”
c. “Like a professional athlete, the top earning years of corporate executives are very
limited.”
d. “All George Clooney and Brad Pitt have to do is look handsome to make huge acting fees.
I have the responsibility for a major corporation.”
ANS: C PTS: 1 DIF: Challenging REF: p. 411, Figure 13-8
TOP: Application
75. Financial measures that can be used to judge executive performance include all of the following
EXCEPT
a. earnings per share.
b. net income before taxes.
c. market share.
d. return on equity.
TOP: Conceptual
76. What is the usual composition of the compensation committee?

a. a subgroup of the Board of Directors including officers of the firm
b. a subgroup of the Board of Directors who are not officers of the firm
c. executives from other companies who serve on a committee that is separate from the
Board of Directors, but which reports to it
d. compensation consultants without executive management involvement
TOP: Conceptual
77. OnionDome Manufacturing has suffered major losses in the last few years. Last year the board of
directors fired the CEO and hired Simon Simple from one of its major competitors. Simple has laid
off 20 percent of the hourly employees and 15 percent of the managers and professional staff in the
company. He has sold off two unprofitable subsidiaries, and for the first time in five years the
company has posted a small profit. This year the board of directors has given Simple a multi-million
dollar bonus. Which of the following statements is TRUE?
a. It is unusual for a company that has experienced mass layoffs to give executives large
bonuses.
b. Simple should not receive a performance bonus this year because the profits are due to
manipulation.
c. The Sarbanes-Oxley Act prohibits this type of bonus.
d. The employees at OnionDome may feel that it is unethical for Simple to have received this
bonus.
TOP: Application
78. What is the role of a compensation committee of the Board of Directors?

a. To assist the HR unit in developing overall pay and benefit programs for the organization.
b. To develop a compensation package that ties the organization’s overall compensation
system to the organization’s goals and objectives..
c. To make recommendations to the shareholders on the compensation formula for members
of the board of directors.
d. To make recommendations to the Board of Directors on overall pay policies, salaries for
top officers, stock options, and additional perks for executives.
TOP: Conceptual
TRUE/FALSE
1. Unless incentives are monetary, employees are not motivated to exert discretionary effort.
ANS: F PTS: 1 DIF: Moderate REF: p. 392

TOP: Conceptual
2. Some form of pay for performance program is appropriate for every organization.

OBJ: 1 NAT: AACSB Reflective Thinking LOC: Strategy
TOP: Conceptual
3. If a sewing machine operator is paid mainly for the number of jeans he hems, he will sew as many
hems as he can with little concern for the quality of the work.
ANS: T PTS: 1 DIF: Easy REF: p. 394

TOP: Application
4. It is the dollar amount of incentives that motivates employee performance, not their “trophy” value.

TOP: Conceptual
5. Team harmony is enhanced when team members decide as a group how to distribute performance
bonuses to each team member.

TOP: Conceptual
6. A manager at your firm has recruited an individual who is individualistic and has a strong will to
“win.” As the HR director, you think this individual will be a good match with the company because
you are about to roll out an organizational level pay-for-performance system.
ANS: F PTS: 1 DIF: Challenging REF: p. 401

TOP: Application
7. If a gainsharing plan is successful, it will generate financial gains for the company over and above the
extra pay that it is providing employees.
ANS: T PTS: 1 DIF: Moderate REF: p. 402

TOP: Conceptual
8. Gainsharing is an example of an incentive system that is “self-funding.”

TOP: Conceptual
9. Gainsharing encourages employees to increase their discretionary effort because the extra effort will
produce financial gains.

TOP: Conceptual
10. An organization should not attempt to implement a profit-sharing plan if employees are distrustful of
management.
ANS: T PTS: 1 DIF: Moderate REF: pp. 403-404

TOP: Conceptual
11. Unions sometimes oppose profit-sharing plans because the level of profits can be influenced by such
things as accounting decisions made by management rather than employees’ efforts.

TOP: Conceptual
12. Stock option plans are restricted to employees who are managers or who are classified as exempt.

TOP: Conceptual
13. Technically, ESOPs are not employee incentive systems because the funds are not available to
employees until they retire.

TOP: Conceptual
14. ESOPs are very popular among employees because they reliably provide increased financial security
in retirement.

OBJ: 5 NAT: Reflective Thinking LOC: HRM
TOP: Conceptual
15. For profit-sharing to work, management must be willing to disclose financial and profit information to
the employees.

TOP: Conceptual
16. Straight sales commission systems are not an appropriate compensation system when ethical concerns
are paramount.

TOP: Conceptual
17. The traditional sales performance measure is individual sales revenue against established quotas.

TOP: Conceptual
18. A straight-commission approach is best it is extremely important for the firm to retain existing clients
as well as to lure new clients to the firm.

OBJ: 4 TOP: Conceptual
19. The ratio of executive pay to average employee pay in the U.S. is comparable to that of executives in
other developed nations.
ANS: F PTS: 1 DIF: Easy REF: p. 408

OBJ: 6 NAT: AACSB Reflective Thinking LOC: Environmental Influence
TOP: Conceptual
20. Perquisites may offer substantial tax savings for executives because some perks are not taxed as
income.

TOP: Conceptual
21. The most widely used long term executive performance incentive is the ESOP.
ANS: F PTS: 1 DIF: Easy REF: p. 410

TOP: Conceptual
22. The Sarbanes-Oxley Act of 2002 regulates certain aspects of executive compensation.

TOP: Conceptual
23. CEO performance is meaningfully measured only if financial objectives such as return on investment
are considered. Non-financial measures are too easily manipulated to accurately reflect CEO
performance.
ANS: F PTS: 1 DIF: Moderate REF: pp. 411-412

TOP: Conceptual
24. Members of the board of directors who are also officers of the firm are barring by some firms from
serving on the compensation committee.

TOP: Conceptual
25. Amanda, a CEO of a large marketing firm, has been asked to serve on the compensation committee of
another large marketing firm. If Amanda agrees to serve, she can except to be paid a large fee.
ANS: T PTS: 1 DIF: Moderate REF: p 412

TOP: Application
ESSAY
1. What factors will contribute to a successful variable pay plan?
ANS:
A variable pay plan will be successful if it includes the following factors. (1) The variable pay plan is
clear and understandable, and it is communicated to employees continually. (2) The employees see
incentives as desirable. (3) The plan is appropriate for the organization’s culture. (4) It uses realistic
performance measures. (5) The plan is kept current. (6) it is linked to organizational objectives. (7)
The performance results are clearly linked to payouts that truly recognize performance differences.
Finally, (8) variable pay incentives are separate from employees’ base pay.
PTS: 1 DIF: Moderate REF: pp. 392-395 OBJ: 1

NAT: AACSB Reflective Thinking LOC: HRM TOP: Conceptual
2. Should performance incentives for teams be equal for all team members or based on individual
performance?
ANS:
If a team performs exceptionally well and is given an incentive, the incentive can either be awarded
equally to all team members or it can be distributed in different amounts to different team members on
some “equitable” arrangement. If all team members get the same reward regardless of salary level,
seniority, performance or other factor, there may be less overall conflict among team members, but the
high-performing members may be resentful. Research shows that there is more overall satisfaction
with rewards that are based on individual performance than those that are equal for all. If incentives
for team performance are allocated differentially among team members, those who receive smaller
awards may be resentful. Consequently, there is no clear answer to this question, as the
appropriateness of equality or equity depends on the individuals involved and the organizational
circumstances.

NAT: AACSB Reflective Thinking LOC: Motivation Concepts
TOP: Conceptual
3. Describe the various methods of compensating sales employees.
ANS:
Compensation paid to sales employees is typically partly or entirely tied to sales performance. Plans
include salary-only, straight commission, draw system, salary-plus-commission or bonuses. Although
all plans are supposed to encourage the employee to sell more products or services, the plans have
different effects. Salary-only encourages the least selling effort and focuses effort on servicing
existing clients. Straight commission forces the employee to sell in order to have any compensation.
A draw against straight commission still forces the employee to sell, but allows the employee to
borrow against future (potential) sales and relieves him/her of some of the insecurity of working on
commission. Salary-plus-commission or bonuses gives the stability of a salary with the sales
motivation of a commission.

4. Give two examples of organizational level incentives and explain how they link individual and firm
performance.
ANS:
Profit-sharing plans and ESOPs are two types of organizational level incentives. Both reward the
employee if the organization as a whole performs well. Every employee in the program benefits if the
organization is profitable (and, in the case of ESOPs, is successful in the long term). The purpose is to
encourage cooperation and a sense of ownership among the employees. Profit-sharing distributes a
percentage of profits to employees at the end of the year. Employees have to trust that management is
being truthful about the level of profits, especially in years when payouts are low. ESOPs transfer
stock ownership to the employee. If the stock has grown in value when the employee retires, the
employee will benefit financially. Of course, if the firm does not prosper, neither do the ESOPs or the
employees who rely on them for retirement funds.

5. How does executive compensation differ from the compensation packages provided for other
employees in the organization? Describe some of the incentives available for executives.
ANS:
At the heart of most executive compensation plans is the idea that executives should be rewarded if the
organization grows in profitability and value over a period of years. Therefore, variable pay is a much
larger proportion of executive pay than of pay for other employees. Although executive salaries can be
high, they may be less than 30 percent of the executive’s total compensation. Executives receive
special benefits in addition to regular benefits available to non-executives, including more generous
health insurance plans. Since executive pay is so high, tax consequences are significant. This has led
to the use of deferred compensation plans as well as estate-planning and tax guidance services for
executives. Stock options are the most common method of rewarding executives for long run
performance of the firm, but past unscrupulous manipulation of stock options led to the passage of the
Sarbanes-Oxley Act that places more restrictions on these plans. Executives also receive various
perks, such as club memberships, first class plane travel, chauffeurs, and cars. Finally, executives
receive financial incentives and bonuses that may (or may not) be tied to the financial or non-financial
performance of the firm. Ideally, the executive would be rewarded for the firm’s performance over a
number of years, but in practice many incentives are based on shorter term objectives and have
sometimes been manipulated by unethical executives. The link between executive performance and
firm performance is sometimes tenuous.

TOP: Conceptual

Chapter 13-Variable Pay and Executive Compensation: Multiple Choice

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Chapter 13-Variable Pay and Executive Compensation: Multiple Choice

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Chapter 13—Variable Pay and Executive Compensation

2. What are variable pay plans?

4. Which of the following is an assumption of variable-pay systems?

6. Performance incentives include all the following EXCEPT

13. Which of the following statements is TRUE?

19. An individual incentive system will be counterproductive when

20. Which of the following statements is TRUE?

21. Which of the following is classified as an individual variable pay plan?

24. __________ is an example of a group or team variable pay system.

26. A differential piece-rate system pays employees

28. The downside of bonuses is that

31. The disadvantage of “employee of the month” type awards is that

34. Distributing team incentives equitably means that

41. The purpose of organizational-level incentives is to

43. To be effective, an organizational incentive program should

46. For a profit-sharing plan to be effective, management must

47. All of the following are drawbacks of profit-sharing plans EXCEPT

54. The most frequently used form of sales compensation is the

56. A major factor in making global incentive systems workable is

57. Gainsharing and goalsharing plans are ____________ -level incentives

58. What is a "draw?"

64. In large for-profit organizations, the CEO’s base salary is

66. Regarding benefits, executives

67. Organizations offer deferred compensation to executives in order to

68. Which of the following statements is FALSE?

76. What is the usual composition of the compensation committee?

78. What is the role of a compensation committee of the Board of Directors?

ANS: F PTS: 1 DIF: Moderate REF: p. 392

ANS: F PTS: 1 DIF: Moderate REF: p. 393

ANS: T PTS: 1 DIF: Easy REF: p. 394

ANS: F PTS: 1 DIF: Moderate REF: p. 398

ANS: F PTS: 1 DIF: Moderate REF: p. 400

ANS: F PTS: 1 DIF: Challenging REF: p. 401

ANS: T PTS: 1 DIF: Moderate REF: p. 402

8. Gainsharing is an example of an incentive system that is “self-funding.”

ANS: T PTS: 1 DIF: Moderate REF: p. 402

ANS: T PTS: 1 DIF: Moderate REF: p. 402

ANS: T PTS: 1 DIF: Moderate REF: pp. 403-404

ANS: T PTS: 1 DIF: Moderate REF: p. 403

ANS: F PTS: 1 DIF: Moderate REF: p. 404

ANS: F PTS: 1 DIF: Challenging REF: p. 404

ANS: F PTS: 1 DIF: Challenging REF: p. 404

ANS: T PTS: 1 DIF: Moderate REF: p. 404

ANS: T PTS: 1 DIF: Easy REF: p. 405

ANS: T PTS: 1 DIF: Easy REF: p. 406

ANS: F PTS: 1 DIF: Moderate REF: p. 407

ANS: F PTS: 1 DIF: Easy REF: p. 408

ANS: T PTS: 1 DIF: Moderate REF: p. 409

ANS: F PTS: 1 DIF: Easy REF: p. 410

ANS: T PTS: 1 DIF: Easy REF: p. 410

ANS: F PTS: 1 DIF: Moderate REF: pp. 411-412

ANS: T PTS: 1 DIF: Moderate REF: p. 412

ANS: T PTS: 1 DIF: Moderate REF: p 412

1. What factors will contribute to a successful variable pay plan?

PTS: 1 DIF: Moderate REF: pp. 392-395 OBJ: 1

PTS: 1 DIF: Moderate REF: pp. 400-401 OBJ: 4

3. Describe the various methods of compensating sales employees.

PTS: 1 DIF: Moderate REF: pp. 405-406 OBJ: 3

PTS: 1 DIF: Moderate REF: pp. 403-404 OBJ: 5

PTS: 1 DIF: Moderate REF: pp. 415-420 OBJ: 6

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