Topic 9

Question 1

Commission-based

Answer 1

Commission-based reward systems are most often used for jobs with a sales component and provide employees a set percentage of the sales that they make. They are used to provide a strong incentive to create sales and also to maximize the size of those sales. In a pure Commission system, the full risk of low performance is borne by the employees. For this reason many organizations pair a commission-based system with some other form of base pay (such as salary) to more evenly distribute that risk.

Question 2

Control Costs

Answer 2

Without a variable pay component, labor costs remain the same even when revenues, sales, or profits drop. Performance-based pay helps ensure that when performance is low, the company’s cost structure is also reduced.

Question 3

Cost of Living Adjustment (COLA)

Answer 3

A periodic salary or wage increase to compensate for inflation.

Question 4

Differential Piece Rate

Answer 4

A system in which a lower rate is paid for the first 10 units assembled, and then a higher rate is paid for each unit over 10 assembled.

Question 5

Fixed Rewards

Answer 5

Remain constant independent of changes in the criteria.

Question 6

Gain Sharing

Answer 6

Is a system of establishing a baseline of unit-level results and sharing improvements above that baseline with employees in that unit.

Question 7

Group-based Variable Pay

Answer 7

Ties rewards to the collective actions and results achieved by teams, groups and units in the organization.

Question 8

Incentive Stock Options

Answer 8

Specify an exercise price that is above the current market price to take into account that the organization expects the employees to outperform expected market returns.

Question 9

Individual Bonus

Answer 9

First, it is a monetary reward given to a single employee based upon that employee’s performance. It is an individual-level reward. Second, bonuses do not accumulate into base pay. That is, receiving a year-end bonus one year does not affect the employees’ wages or salary for the next year.

Question 10

Merit Pay

Answer 10

An annual increase in future compensation based on past performance.

Question 11

Merit Pay Matrix

Answer 11

Allows organizations to simultaneously reward past performance but also support its Integrated Reward Structure.

Question 12

Motivation

Answer 12

Refers to the focus, effort and persistence that employees demonstrate.

Question 13

Pay Compression

Answer 13

New employees and long-tenured employees are paid very similar amounts.

Question 14

Pay Inversion

Answer 14

New employees are paid more than those employees with substantial experience in the organization.

Question 15

Performance Appraisal

Answer 15

Obtaining ratings of an employee’s past performance.

Question 16

Performance Assessment

Answer 16

Refers to the process of defining and measuring the performance of individuals, teams, units, and organizations.

Question 17

Performance Management System

Answer 17

Involves creating performance plans, providing support and resources, appraising performance, and providing feedback and coaching.

Question 18

Performance-based Pay

Answer 18

Rewards with distributions dependent upon performance levels.

Question 19

Piece Rate

Answer 19

A system that rewards employees with a fixed amount of compensation for each unit of work they produce.

Question 20

Profit Sharing

Answer 20

Designed to distribute a portion of the firm’s annual profits back to the firm’s employees. The goal of these systems is to align both the incentives for employees and the variable labor costs with the interests of the organization.

Question 21

Risk and Uncertainty

Answer 21

A situation in which unforeseen or uncontrollable circumstances result in changes in profitability.

Question 22

Rucker Plans

Answer 22

Have a broader base of metrics.

Question 23

Scanlon Plans

Answer 23

Focus on improvements in labor costs.

Question 24

Spot Awards

Answer 24

Cash bonuses given out based on weekly or daily behavior, to recognize extra effort.

Question 25

Stock Options

Answer 25

Provide employees the right to purchase a set amount of shares of stock for a set price.

Question 26

Team-based Bonuses

Answer 26

Are like Individual-based bonuses in that they provide a lump sum reward that does not get added into future base pay, but the bonus is based on some measure of team performance instead of individual performance. That is, in order for an employee to receive a team-based bonus, it is not sufficient for the employee to perform well; the employee also has to ensure that the team collectively performs well.

Question 27

Variable Pay

Answer 27

Rewards that vary as performance varies.

Question 28

Variable Rewards

Answer 28

Variable rewards are forms of compensation that increase or decrease based upon a criterion such as employee performance, unit performance, market performance, or even stock price.