Topic 9 - Performance-Based Pay: System Types Flashcards
What is the key distinction of Performance-based Pay compared to job-based or hourly pay systems?
Performance-based Pay is contingent upon performance levels of the employee, team, or organization, whereas job-based or hourly pay is based on holding a job or time spent working.
What is another term often used to describe Performance-based Pay?
Performance-based Pay is also referred to as Variable Pay.
On what levels can performance be evaluated for Performance-based Pay systems?
Performance-based Pay can be based on individual, team, or organizational performance.
How does the reward structure of Performance-based Pay differ from hourly wages?
Performance-based rewards vary with performance, while hourly wages depend solely on the amount of time worked.
What makes Performance-based Pay systems “contingent”?
These systems tie the distribution of rewards directly to varying performance levels, ensuring that better performance results in greater rewards.
The definition of performance-based pay is:
Rewards with distributions independent of performance levels
Rewards with distributions dependent upon performance levels
Rewards with distributions reliant on market trends
None of the above
Rewards with distributions dependent upon performance levels
Define variable pay:
Rewards earned independently
Rewards that are dependent on performance.
Rewards that move in and out depending on market trends
Rewards that grow based on government regulations
Rewards that are dependent on performance.
True or False. Hourly pay, or wages, are also contingent in the sense that the amount received depends upon the amount of time that an employee spends on the job.
True
True or False. Variable pay is always better than performance-based pay.
False
What is one primary reason organizations use Performance-based Pay?
To increase employee motivation by linking valued rewards to performance-related behaviors or results.
How does Performance-based Pay help focus organizational action?
It signals the importance of company, unit, or individual objectives and allows for quick adaptation to changing strategic needs.
Why is Performance-based Pay considered more flexible than Job-based or Individual-based pay systems?
It can quickly adapt to changing strategic needs and align rewards with specific objectives.
How does Performance-based Pay help organizations manage risk and uncertainty?
It passes some of the risk onto employees by adjusting rewards based on performance, helping mitigate costs during downturns.
What is a key cost-control advantage of Performance-based Pay?
Labor costs decrease when performance is low, aligning costs with company performance.
How do Variable Rewards differ from Fixed Rewards?
Variable Rewards fluctuate based on criteria such as performance, while Fixed Rewards remain constant regardless of performance or company outcomes.
What are some examples of Variable Rewards in Performance-based Pay systems?
Bonuses, gain-sharing, and stock options.
Why might organizations prefer Variable Rewards during unprofitable periods?
Variable pay systems reduce labor costs during periods of poor performance or financial downturns.
What is the impact of Fixed Rewards like salaries on organizational costs?
Salaries remain constant, increasing costs even when employee performance or company profitability declines.
What is one example of how Performance-based Pay aligns company costs with outcomes?
Labor costs are reduced during low performance periods, protecting the company’s financial structure.
Motivation refers to:
Focus, effort, and persistence that employees demonstrate
Ability to do a great job in the workplace
Rewards that allow employees to perform better
None of the above
Focus, effort, and persistence that employees demonstrate
Which of the following is not a reason to use performance-based pay?
Focus
Motivation
Risk & uncertainty
Market trends
Control costs
Market trends
True or False. Incentive systems are more flexible than job-based and individual-based pay systems.
True
Environments of risk and uncertainty create unforeseen or controllable circumstances, resulting in changes in:
Profitability
Variable pay
Goals
Results
Profitability
Without a variable pay component, ________________remain the same even when revenues, sales, or profits drop.
Fixed costs
Utility costs
Variable costs
Labor costs
Labor costs
True or False. Performance-based pay helps ensure that when performance is low, the company’s cost structure is also reduced.
True
What is Performance Assessment?
The process of defining and measuring the performance of individuals, teams, units, and organizations.
Why is measuring performance critical for Performance-based Pay systems?
The success of these systems depends on how accurately an organization can assess performance.
What is typically part of a larger Performance Management System?
Assessing the performance of individuals.
What are the key components of a Performance Management System?
Creating performance plans, providing support and resources, appraising performance, and providing feedback and coaching.
How does Performance-based Pay draw from the Performance Management System?
It uses the Performance Appraisal step to obtain ratings of an employee’s past performance.
What is the basic approach to Performance Appraisal?
Defining performance-related behaviors and results for each employee and numerically assessing the extent to which they were demonstrated or achieved.
Why are Performance Appraisal ratings important?
They form the basis for administering many individual-based performance rewards.
Performance assessment refers to:
The process of understanding goals made from end-of-year evaluations
The process of developing a training system that will allow the organization to perform better
The process of benchmarking a new performance based on market trends
The process of defining and measuring the performance of individuals, teams, units, and organizations.
The process of defining and measuring the performance of individuals, teams, units, and organizations.
The performance management system refers to all of the following except:
Appraising performance
Creating performance plans
Providing feedback and coaching
Analyzing trends in the market
Providing support and resources
Analyzing trends in the market
Performance appraisals look at the process to obtain ratings of an employee’s:
Past performance
Performance
Expectations
Goals
Past performance
True or False. The basic approach is to define the performance-related behaviors and results for each employee and then to numerically assess the extent to which those behaviors were demonstrated or the results were achieved.
True
True or False. Performance Appraisal ratings are not critical because they are the basis for administering many individual-based performance rewards.
False
What is Individual-based Pay?
A type of performance-based pay where rewards are contingent upon the performance-related behaviors or results of individual employees.
What is Merit Pay?
An annual increase in future compensation based on past performance, added to base pay, reflecting a long-term cost commitment.
How does Merit Pay differ from other performance-based pay systems?
It pays for future performance before it occurs, assuming past performance predicts future performance.
What is a Merit Pay Matrix?
A tool that combines performance levels and pay grade positions to determine appropriate pay increases for employees.
What problem can Merit Pay face according to Tournament Theory?
Small pay differentials between top and middle performers can reduce motivation.
What is Pay Compression?
When new employees and long-tenured employees are paid very similar amounts.
What is Pay Inversion?
When new employees are paid more than long-tenured employees with substantial experience.
What is an Individual Bonus?
A monetary reward for individual performance that does not accumulate into base pay and is typically a one-time payment.
What is a key advantage of Individual Bonuses?
They do not increase labor costs beyond the period in which they are earned.
What are Spot Awards?
Instant monetary recognition for high performance, often given weekly or daily, based on Reinforcement Theory.
What is a critical consideration for Spot Awards?
Ensuring awards are distributed fairly to avoid perceptions of favoritism.
What is a Commission-based reward system?
A system where employees earn a set percentage of the sales they make, commonly used for sales roles.
Why do organizations often pair commissions with base pay?
To evenly distribute the risk of low performance.
What is a Piece Rate system?
A system where employees are compensated based on the number of units they produce.
What is a Differential Piece Rate system?
A system where a lower rate is paid for initial units and a higher rate for units produced beyond a certain threshold.
How does Tournament Theory apply to Piece Rate systems?
Higher rewards for higher performance motivate employees to increase their output.
What unintended consequence might arise from a Piece Rate system?
Incentives for high quantity can lead to lower quality output.
How can quality issues in a Piece Rate system be mitigated?
By incorporating quality-based contingencies alongside quantity-based rewards.
What is the Integrated Reward Structure’s broad goal?
To align internal valuation of work with labor market valuation while controlling costs.
Why should organizations include a correction mechanism in reward systems?
To address pay compression or inversion before it leads to dissatisfaction or turnover.
Pay compression is when:
Long-tenured employees and senior management employees are paid very similar amounts
New employees and long-tenured employees have large gaps in pay
New employees and senior management employees are paid very similar amounts
New employees and long-tenured employees are paid very similar amounts
New employees and long-tenured employees are paid very similar amounts
Pay inversion occurs when:
New employees are paid as much as senior management
New employees are paid more than those employees with substantial experience in the organization
Senior management is paid less than new employees
New employees are paid the same as those employees with substantial experience in the organization
New employees are paid more than those employees with substantial experience in the organization
One of the most common forms of performance-based pay is the:
Individual bonus
Intangible rewards
Compensated perks
None of the above
Individual bonus
True or False. In a Spot Award system, managers are given a cash budget from which they can immediately draw to provide employees with instant recognition of a high performance.
True
____________________ systems reward employees with a fixed amount of compensation with each unit of work they produce.
Team-based bonus
Piece rate
Profit-sharing
Gain sharing
Piece rate
What is Group-based Variable Pay?
A rewards system that ties incentives to the collective actions and results achieved by teams, groups, or units in an organization
What is a Team-based Bonus?
A lump sum reward based on team performance, encouraging teamwork, leadership, and collective problem-solving.
How is a Team-based Bonus different from an Individual Bonus?
It rewards team-level performance, requiring individuals to ensure collective success, rather than individual effort alone.
What is Gain Sharing?
A system that shares improvements in unit-level results, such as cost savings or productivity gains, with employees in that unit.
How does Gain Sharing align employee and organizational interests?
By creating incentives for employees to improve productivity and reduce costs, benefiting both employees and the organization.
What is an example of a Gain Sharing improvement?
Reducing labor and material costs below a baseline, with a portion of the savings distributed to employees.
What are some examples of Gain Sharing plans?
The Scanlon Plan, focusing on labor cost improvements, and the Rucker Plan, which uses broader metrics.
How does Gain Sharing differ from Team-based Bonuses?
Gain Sharing is typically applied at the unit level and involves a larger group of employees, while team bonuses focus on smaller teams.
What is Profit Sharing?
A system that distributes a portion of a firm’s annual profits to employees, aligning incentives with organizational performance.
How are Profit Sharing distributions typically calculated?
Based on employees’ base-pay levels or pay grades, with higher-level employees receiving a larger portion.
What challenge does Profit Sharing face for lower-level employees?
Weak expectancy links, as they may not believe their individual actions significantly impact the firm’s performance.
What are Stock Options?
A reward that gives employees the right to purchase shares of stock at a set price, incentivizing performance to increase stock value.
How do Stock Options reward employees?
Employees can buy stock at a lower price and sell it at a higher market value, profiting from the difference.
What are Incentive Stock Options?
Stock options with an exercise price above the current market price, rewarding employees for exceeding expected market returns.
Why are Stock Options often reserved for executives?
Due to their greater influence on organizational performance and concerns about diluting voting shares.
What are Employee Stock Ownership Plans (ESOPs)?
Plans that involve employees in stock ownership, aligning their interests with organizational performance.
What are Broad-Based Option Plans (BBOP)?
Stock option plans that systematically include many or most employees in stock ownership.
What are Phantom Stock Options?
Bonuses tied to stock price values that avoid granting actual voting shares of stock.
How do Phantom Stock Options address voting rights concerns?
By providing financial rewards tied to stock performance without diluting voting shares.
What is the main goal of Group-based Variable Pay systems?
To encourage collaboration, teamwork, and alignment of employee efforts with organizational goals.
A _________________________ is based on some measure of team performance instead of individual performance.
Profit sharing plan
Team-based bonus
Stock option
Gain sharing
Team-based bonus
Team-based bonuses 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.
__________________________ is a system of establishing a baseline of unit-level results and sharing improvements above that baseline with employees in that unit.
Profit-sharing plans
Team-based plans
Stock options
Gain sharing
Gain sharing
__________________________are designed to distribute a portion of the firm’s annual profits back to the firm’s employees.
Team-based plans
Profit-sharing plans
Stock options
Gain sharing
Profit-sharing plans
Profit sharing plans typically distribute portions of the profit based upon employees’ base-pay levels or pay grades.
__________________________ provide employees the right to purchase a set amount of shares of stock for a set price.
Gain sharing
Team-based plans
Stock options
Profit-sharing plans
Stock options
Stock options provide employees the right to purchase a set amount of shares of stock for a set price.
_______________________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.
Team-based plans
Gain sharing tests
Incentive stock options
Profit-sharing plans
Incentive stock options
Some organizations choose to use incentive stock options that 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.
_____________________ provide employees the right to purchase a set amount of shares of stock for a set price.
Stock price
Benefit options
Stock options
Stock benefits
Stock options
True or False. Stock options are often reserved for executive compensation plans.
True
Because of the disconnect between most levels of employees and concerns about diluting voting shares of stock, stock options are often reserved for executive compensation plans.
A _______________ is designed to distribute a portion of the firm’s annual profits back to the firm’s employees.
Profit plan
Profit sharing plan
Profit loss plan
None of the above
Profit sharing plan
Because of profit sharing plans, when an _______________ is profitable, the employees receive a portion.
Employee
Organization
Employer
Government
Organization
When the organization is profitable, employees receive a portion of the profit.
True or False. One disadvantage to a profit sharing plan is that when the organization has a profit loss, employees owe a certain percentage of their income to the organization.
False. When the organization is losing money, no additional labor cost is required.
Rucker plans have a ___________ base on metrics.
Broader
Wider
Larger
Smaller
Broader
Scanlon plans focus on __________________.
Improvements in product costs
Improvements in all costs
Improvements in labor costs
Improvements in capital costs
Improvements in labor costs
Rucker plans provides incentives for:
Senior management
Collaboration
Exempt employees
Hourly workers
Collaboration
Gain sharing plans typically are at the ___________that would include a significant number of the employees in a particular location.
Unit-level
Floor
Ceiling
Main level
Unit-level
Gain sharing plans typically are at the unit-level that would include a significant number of the employees in a particular location.
Gain sharing attempts to align the interests of the __________with the interests of the ______________.
Organization, employees
Government, senior management
Organization, government
Employer, organization
Organization, employees
As gain sharing is intended to align interests, it will do so by doing all of the following except:
Service improvements
Productivity gains
Cost savings
Productivity losses
Productivity losses
Gain sharing attempts to align the interests of the organization with the interests of the employees by creating a system in which they both benefit from productivity gains, service improvements, or cost saving
________________________ ties rewards to the collective actions and results achieved by teams, groups and units in the organization.
Group-based variable pay
Individual-based variable pay
Variable pay
Single pay
Group-based variable pay
What industry is commonly known for using the piece rate system?
Hospitality
Technology
Manufacturing
Biomedical
Manufacturing
Commonly used in manufacturing companies, these systems might pay employees $1.25 for each unit they assemble.
True or False. Merit pay budget and cost of living adjustment pay increases for all employees to account for inflation.
False.
These are often thought of as part of the solution to this problem.
Similar to the piece rate, the ________________ is where an organization will pay $xx per unit and then pay more per unit after a certain number are produced.
Sequential piece rate
Differential piece rate
Differential pay rate
Sequential pay rate
Differential piece rate
_____________________ reward systems are most often used for jobs with a sales component and provide employees a set percentage of the sales that they make.
Salaried
Commission-based pay
Hourly
None of the above
Commission-based pay
They are used to provide a strong incentive to create sales and also to maximize the size of those sales.
In a ____________________, managers are given a cash budget from which they can immediately draw to provide employees with instant recognition of a high performance.
Filtered award system
Dark award system
Spot award system
Scattered award system
Spot award system
Spot awards draw upon __________________in that they allow for very short gaps between the demonstrated performance and the reception of the reward.
Contingency theory
Spot theory
Reinforcement theory
Expectancy theory
Reinforcement theory
Spot awards draw upon reinforcement theory in that they allow for very short gaps between the demonstrated performance and the reception of the reward.
True or False. Care must be taken to ensure that the distribution of spot awards is based upon legitimate performance behaviors, guarding against a perception that the spot awards are only given to the managers’ preferred employees.
True
There are three distinctions that define an individual bonus. Which of the following are correct?
It is a monetary reward given to a single employee based upon that employee’s performance
Bonuses do not accumulate into base pay
Individual bonuses provided as a lump sum to employees generally make it easier for employees to perceive the value of the reward.
All of the above
All of the above
