Compensation. TB.

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Chapter 1 - A Road Map to Effective Compensation

True / False
1. There is no one best compensation system that fits all firms.

a. True
b. Fals
e
ANSWER: True
2. An effective compensation system is important to most organizations because it can mean the difference between
company success and failure.
a. True
b. Fals
e
ANSWER: True
3. The main similarity between extrinsic rewards and intrinsic rewards is that they both satisfy so-called higher order
needs such as survival and security.
a. True
b. Fals
e
ANSWER: Fals
e
4. A reward strategy is the plan for the mix of rewards to be provided to organization members along with the means
through which they will be provided.
a. True
b. Fals
e
ANSWER: True
5. Compensation strategy includes the “how” and “how much” in terms of compensation to be paid.
a. True
b. Fals
e
ANSWER: True
6. The main difference between a reward system and a compensation system is that a reward system rewards only good
performance while a compensation system provides pay to all employees.
a. True
b. Fals
e
ANSWER: Fals
e
7. A compensation system has two components: base pay and performance pay.
a. True
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b. Fals
e
ANSWER: Fals
e
8. The optimal compensation system is one that adds the most value to the organization, after considering all its costs.
a. True
b. Fals
e
ANSWER: True
9. There is often one so-called best compensation system that applies to a broad spectrum of organizations.
a. True
b. Fals
e
ANSWER: Fals
e
10. According to the “Road Map to Effective Compensation,” the first step is formulating your reward and compensation
strategy.
a. True
b. Fals
e
ANSWER: Fals
e
Multiple Choice
11. Which of the following statements is supported by evidence in the textbook?

a. Canadian firms spend 40 to 70 percent of their capital budgets on compensation.
b. Properly designed compensation systems usually promote unproductive behaviour.
c. Reward systems should be static and rarely reviewed.
d. Canadian firms spend 40 to 70 percent of their operating budgets on
compensation.
ANSWER: d
12. Which of the following statements most accurately describes extrinsic rewards?
a. They focus on factors inherent in the work itself—the job content.
b. They satisfy higher-order human needs.
c. They include monetary and nonmonetary rewards and come from the job context.
d. They involve skill variety, task identity, task significance, autonomy, and feedback.
ANSWER: c
13. Joe, a service manager, loves his job. He particularly appreciates the level of autonomy his job provides. From a
rewards perspective, which kind of reward appears to be motivating Joe?

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a. Extrinsic
b. Incentives
c. Intrinsic
d. Compensatio
n
ANSWER: c
14. Compensation means different things to different stakeholders. For shareholders, what is an important consideration?
a. take-home pay of employees
b. effectiveness of the compensation system in attracting employees
c. financial value of the compensation system to the firm’s bottom line
d. fairness of the compensation system
ANSWER: c
15. As a small business owner committed to the total rewards approach to compensation, what do you need to establish
before you start to develop your compensation system?
a. a reward system
b. an incentive program
c. a compensation
strategy
d. a reward strategy
ANSWER: d
16. Which item is considered part of a compensation system?

a. performance pay
b. flexible work schedules
c. positive organizational culture
d. work/life programs
ANSWER: a
17. Which of the following best describes the term “reward strategy”?
a. the means through which performance bonuses are paid
b. the mix of rewards provided to organization members
c. the means for recognizing outstanding achievement
d. the means for identifying the key contextual variables for an organization
ANSWER: b
18. An owner of an enterprise asks you to describe the major components of a compensation system. What would you
exclude in your description?
a. base salary
b. performance pay
c. employee benefits
d. flexible work schedules and some element of job autonomy

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ANSWER: d
19. Which of the following best explains intrinsic rewards?

a. Intrinsic rewards focus on increasing an employee’s financial position.
b. Intrinsic rewards are provided by job content.
c. Intrinsic rewards provide security and employee services.
d. Intrinsic rewards relate to bonuses based on performance.
ANSWER: b
20. The compensation system typically refers to which aspect of the reward system?
a. the mix of intrinsic and extrinsic rewards
b. the economic or monetary part
c. the entire spectrum of rewards
d. incentives
ANSWER: b
21. You have offered to your sales associate an all-expenses-paid trip for two to Australia if she doubles her annual sales
volume from last year. What type of inducement are you offering?
a. intrinsic reward
b. extrinsic
reward
c. incentive
d. job enrichment
ANSWER: c
22. Which of the following would be an example of an extrinsic reward?

a. interesting and meaningful work
b. pay for performance based on the number of units produced per hour
c. being able to see the company’s product being used by a satisfied customer
d. work that allows for enhanced personal development
ANSWER: b
23. According to Maslow’s theory, what is the most basic need?

a. safety needs
b. self-actualization needs
c. respect and self-esteem
needs
d. physiological needs
ANSWER: d
24. Your company is experiencing high turnover and poor work quality. Exit interviews indicate that a large percentage of
employees indicate boredom as the primary cause for quitting your company. Almost 100 percent were satisfied with their
compensation packages. Which action may reduce your high turnover rate?
a. providing a pension option and offering a retirement planning service

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b. introducing pay-for-performance plans
c. trying to enrich the jobs to make them more interesting
d. offering dental and medical coverage
ANSWER: c
25. Which statement best describes the key aspect of Maslow’s theory of needs?
a. Extrinsic rewards are more important than intrinsic rewards.
b. Intrinsic rewards are more important than extrinsic rewards.
c. Humans tend to first satisfy their basic needs before higher order needs.
d. Self-esteem needs are more closely tied to rewards than the other
needs.
ANSWER: c
26. Which statement is most accurate regarding the reward strategy?

a. The reward system is the blueprint for creating the reward strategy.
b.Intrinsic awards alone will not motivate the needed behaviour.
c. Determining the mix of rewards to be provided is an easy process.
d.Various combinations of intrinsic and extrinsic rewards need to be considered for
developing the optimal reward strategy.
ANSWER: d
27. Which of the following items is a component of the compensation strategy?

a. employee benefits
b. employment
security
c. promotion criteria
d. job enrichment
ANSWER: a
28. A group of unionized employees negotiating a new contract is holding out for a better indirect pay plan. What should
management offer the group in order to reach an agreement?
a. better services and benefits
b. better training and development opportunities
c. pay for performance
d. a more competitive base pay
ANSWER: a
29. As head of the human resources department for a new company, you have been asked to formulate a compensation
strategy. What do you need to determine first?
a. the role that compensation will play in the reward system
b. the correct mix of performance and base pay
c. the total amount of compensation to be provided
d. the role the reward system will play in the compensation
strategy

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ANSWER: a
30. You are a newly hired director of human resources for a new software company. Your CEO has asked you to provide
the board of directors with recommendations relating to the company’s yet-to-be-established reward system. What should
you tell the board?
a. The various combinations of intrinsic and extrinsic rewards need to be considered.
b. The optimal strategy is the least expensive.
c. Like most companies in Canada, we should adopt a total compensation approach.
d. The plan for creating the compensation system is the most important aspect of the
strategy.
ANSWER: a
31. Which of the following would be the best choice for a compensation system?
a. A competitive base pay and incentives are offered.
b. Employees share in the organization’s profits.
c. Compensation is linked to knowledge.
d. The system is cost effective and achieves company goals.
ANSWER: d
32. Which statement most accurately describes the optimal reward system?
a. It adds the most value to the organization after considering all its costs.
b. It maximizes opportunities for learning and development.
c. It identifies best practices.
d. It provides whatever will satisfy the employee’s needs.
ANSWER: a
33. According to the textbook, what is a key argument about compensation systems in Canada?
a. Organizations should keep wages low.
b. There is one best compensation system that can be applied to organizations.
c. Compensation systems are more important than all other management systems in
organizations.
d. An equitable compensation system offers a competitive advantage for organizations.
ANSWER: d
34. You have been given the responsibility to develop an effective compensation system for your company. Which of the
following should serve as your first focus?
a. understanding your organization and your people
b. formulating and determining budgets
c. designing your performance pay and indirect pay plans
d. implementing, managing, evaluating, and adapting the
system
ANSWER: a
35. Which statement best describes current compensation practices and expectations related to the key criteria for

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evaluating the success of a compensation system?
a. It is realistic to expect that a reward system will achieve all eight of the effectiveness
criteria.
b.Continuing evaluation of the effectiveness of the reward and compensation system is
crucial for most organizations.
c. Successful organizations all have equitable reward systems.
d.Most firms have found the right answers to the compensation puzzle.
ANSWER: b
36. What is the last step to effective compensation according to the “Road Map to Effective Compensation”?
a. developing new job descriptions and performance evaluation criteria
b. implementing, managing, and evaluating the compensation system as circumstances
change
c. securing senior management approval and implementing the compensation system
d. determining the compensation mix to be used in the compensation system
ANSWER: b
37. According to the textbook, what is the primary reason for the increased usage of compensation consultants by
organizations?
a. Corporations are contracting out most human resource functions.
b.Given greater standardization associated with compensation systems, it makes sense to
use dedicated outside consultants.
c. The level of complexity of compensation systems has increased.
d.It is often cheaper to use to use consultants.
ANSWER: c
38. Which statement best describes the context of compensation management within a firm?
a. All organizations need a human resources department to deal with compensation
issues.
b. The larger the firm, the greater the need for compensation specialists.
c. In smaller organizations, compensation consulting firms are responsible for
compensation strategy.
d. Within a large firm, all managers require extensive knowledge of compensation.
ANSWER: b
39. In small organizations, who is typically responsible for compensation strategy?

a. Vice-President of Human Resources
b. owner or chief executive officer
c. Board of Directors
d. government
ANSWER: b
40. After graduation, you were offered a position as a job analyst with a local bank. Which of the following would best
describe your new job?

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a. designing and implementing compensation policies
b. formulating compensation strategy and ensuring congruency with corporate
objectives
c. evaluating market data from organizations of similar size and scope
d. developing job descriptions and conducting job evaluations
ANSWER: d
Subjective Short Answer
41. Explain the difference between “extrinsic” and “intrinsic” rewards. Provide examples for each type of reward.
ANSWER Extrinsic rewards satisfy our basic needs for survival, security, social requirements, and
: recognition. They are derived from the context of the job in the workplace. They
include the financial returns, tangible services, and benefits employees receive as part
of the employment relationship. Intrinsic rewards satisfy higher-level needs for self-
esteem, achievement, and growth. They are derived from job content rather than job
context. They focus on job design and building more opportunities for challenge and
achievement into jobs through job enrichment. Intrinsic rewards provide skill variety,
task identity, task significance, autonomy, and feedback.
42. Explain the difference between a “reward strategy” and a “compensation strategy.”
ANSWER A reward strategy is the plan for the mix of all of the financial and nonfinancial
: rewards of work (i.e., the mix of extrinsic and intrinsic rewards) the organization plans
to provide to its employees, along with the means through which they will be provided.
Used to create the reward system, this design plan needs to be determined before the
compensation strategy. The compensation strategy is one part of the reward strategy
and is used to create the compensation system (which is the economic or monetary part
of the reward system). The compensation strategy is the plan for mix and total amount
of financial returns, tangible services, and benefits employees receive as part of the
employment relationship.
43. Explain the ways in which “direct” and “indirect” pay are similar and different to each other.
ANSWER Combined, both are tangible financial extrinsic rewards that make up the compensation
: system—the economic or monetary part of the reward system used to help create a
willingness among qualified persons to join the organization and to perform the tasks
needed by the organization. Direct pay (sometimes known as “cash compensation”)
represents monetary rewards. Types of cash compensation include the following: base
pay or money—the foundation pay for most employees based on hourly pay or wage or
as salary; performance pay—cash recognition based on individual, group or
organizational performance; and cost of living adjustments (COLA). Indirect pay
(sometimes known as “employee benefits”) represents nonmonetary rewards. It
consists of the noncash items or services that put money in employees’ pockets—things
that would have required the expenditure of money had they not been provided by the
employer. Used in lieu of money, goods and services are made available and paid
totally, or by percentage, by the employer. These items satisfy a variety of specific
employee needs such as pay for time not worked, protection programs, and employee
services.
44. What are the goals of an organization’s reward and compensation system?

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ANSWER All organizations have a compensation plan, written or unwritten, formal or informal.
: For some organizations, the purpose of the plan may be merely to meet compliance
requirements. For other organizations, the goal of the compensation plan may be to
attract qualified employees, to retain those employees, and to motivate employees to
direct their efforts towards achieving the goals of the organization.
The goals of reward and compensation system are to:

1. Promote achievement of organizational goals. (The plan must be strongly tied to the
objectives of the organization.)
2. Fit with and support the organization’s strategy and structure. (If the business
strategy or plans are not considered, then it would be very easy to pay for activities that
do not actually help the organization be more successful.)
3. Attract and retain qualified employees.
4. Promote desired task behaviour. (Links rewards directly to performance through a
strong performance management system.)
5. Be seen as being equitable and communicating openly. (Transparency encourages
honesty and straightforward discussions of how the program works. Employees tend to
overestimate others’ income level, so be as open as possible with summary data that
will not breach individual confidentiality.)
6. Comply with the law.
7. Be within the financial means of the organization.
8. Achieve all of the above goals in the most cost effective manner.
45. Identify the steps in developing an effective compensation strategy.

ANSWER Now that we have some basic ideas on compensation, rewards, employee needs, and
: goals of an effective compensation system, we need to look at the process for creating
an effective compensation system. These steps are:
1. Understand your organization and your people.
2. Formulate your reward and compensation strategy.
3. Determine your compensation values.
4. Design your performance pay and indirect pay plans.
5. Implement, manage, evaluate, and adapt the compensation system.
46. Why would a large organization require approval by senior management and/or the board of directors for initiating
strategic changes to an organization’s compensation strategy?
ANSWER Answers will vary from student to student. Students should identify identical variables
: as question 4 above.

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Chapter 2 - A Strategic Framework for Compensation

True / False
1. If a particular compensation system has been successful in one organization, it is very likely that replicating that
compensation system will bring success in another organization.
a. True
b. Fals
e
ANSWER: Fals
e
2. The strategic framework for compensation helps to identify the corporate strategy that will best suit a firm’s
compensation strategy.
a. True
b. Fals
e
ANSWER: Fals
e
3. An organization’s vision refers to its long-term, optimal desired state.

a. True
b. Fals
e
ANSWER: True
4. Horizontal fit refers to the alignment between an organization’s mission, vision and values, and the various supportive
strategies that cascade down an organization.
a. True
b. Fals
e
ANSWER: Fals
e
5. An organization’s domain is simply another term for managerial strategy or plan.

a. True
b. Fals
e
ANSWER: Fals
e
6. The three main managerial strategies described in the textbook are: the classical strategy, the human relations strategy,
and the high involvement strategy.
a. True
b. Fals
e
ANSWER: True
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7. The classical managerial approach to management assume employees are inherently lazy and require constant
vigilance.
a. True
b. Fals
e
ANSWER: True
8. Narrow jobs characterize high involvement systems.

a. True
b. Fals
e
ANSWER: Fals
e
9. Group and organizational pay systems characterize firms that use a classical managerial strategy.
a. True
b. Fals
e
ANSWER: Fals
e
10. Porter offers the notion that business strategies may be divided into two broad dimensions: cost and differentiation.
a. True
b. Fals
e
ANSWER: True
Multiple Choice
11. 3M and Apple have organizational strategies that encourage innovation. As a result, their compensation strategies
support innovative behaviours by employees. Which term refers to this alignment of strategies?
a. tight fit
b. loose fit
c. horizontal
fit
d. vertical fit
ANSWER: d
12. The training, compensation, and performance management functions at ABC Inc. are all focused on helping the
organization achieve its goals. What is this alignment of strategies called?
a. cross fit
b. functional
fit
c. horizontal
fit

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d. vertical fit
ANSWER: c
13. You recently transferred from a smaller manufacturing firm to a larger one and discovered that, although entirely
different, both compensation systems are effective. How is this possible?
a. Both companies have well-trained managers.
b. Both companies do similar work and hire the same kinds of
employees.
c. Both systems fit the organization and its strategy.
d. Both provide compensation packages that lead the marketplace.
ANSWER: c
14. What can you determine by examining a firm’s contextual variables?

a. the managerial strategy that a firm is actually using
b. the type of structure the organization should be using
c. the firm’s competitive advantage and required resources
d. organizational goals, mission, and vision
ANSWER: b
15. Which term refers to the vehicle used by an organization for executing its business strategy?
a. its structure
b. its culture
c. horizontal
fit
d. vertical fit
ANSWER: a
16. As a human resources consultant, you decided to recommend to a business owner that she should use a contingency
view to organizational design. In order to support your recommendation, what would you look at first from a business
structure perspective?
a. structural variables
b. job design variables
c. financial variables
d. contextual
variables
ANSWER: d
17. Which of the following is a structural variable interrelated with compensation?

a. business
strategy
b. job design
c. organization size
d. technology
ANSWER: b

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18. What should an effective organizational structure provide an organization?

a. It identifies sources of required inputs for an organization.
b. It reduces internal uncertainty while increasing external uncertainty for an
organization.
c. It increases internal uncertainty while decreasing external uncertainty for an
organization.
d. It decreases both internal and external uncertainty for an organization.
ANSWER: d
19. What can you determine by examining a firm’s structural variables?

a. the managerial strategy a firm is actually
using
b. the managerial strategy a firm should be using
c. a firm’s corporate strategy
d. the corporate strategy a firm should be using
ANSWER: a
20. Which of the following is classified as a “main” managerial strategy?

a. job design management strategy
b. laissez-faire management strategy
c. transformational management
strategy
d. human relations management strategy
ANSWER: d
21. You have been asked to explain to a manager the notion of structural variables within the context of a strategic
framework for compensation. Which variable would you elaborate on?
a. how work is divided into subtasks
b. the market the company serves
c. the level of differentiation in the products and services offered by the company
d. the company’s products’ life cycle
ANSWER: a
22. Which of the following is a contextual variable to consider when deciding on the managerial strategy to be used?
a. business
strategy
b. job design
c. reward system
d. control system
ANSWER: a
23. Which variable indicates to management the most appropriate managerial strategy to use in an organization?
a. organizational processes

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b. factors of production
c. contextual variables
d. structural variables
ANSWER: c
24. What are the two main categories of organizational variables?

a. contextual and structural
b. horizontal and vertical
c. classical and human
relations
d. miles and snow
ANSWER: a
25. You have recently been hired by a manufacturing company in Vancouver, British Columbia. You conclude that the
company is using a high-involvement management strategy. What would you review to support your aforementioned
conclusion?
a. structural variables
b. organizational policies and procedures
c. contextual variables
d. behaviours of managers
ANSWER: a
26. Which set of strategies reflects different assumptions about employees and how they should be managed?
a. classical, human relations, and high-involvement
b. low-cost, differentiator, and focused differentiator
c. corporate, competitive, and business
d. defender, prospector, and analyzer
ANSWER: a
27. Which term best describes the scope of business operations undertaken by an organization?
a. integration
b. differentiation
c. craft
d. domain
ANSWER: d
28. Which characteristics are common in a classical organization?

a. joint employee–management planning and goal setting
b. intrinsic rewards often being used as a reward system
c. loyal employees who are dedicated to the norms of the organization
d. strong management control over employees
ANSWER: d

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29. Which rewards are normally associated with a high-involvement managerial strategy?
a. high levels of pay and benefits
b. providing employees with the opportunity to grow professionally
c. providing employees with a pleasant team environment
d. promotions based on a high level of production
ANSWER: b
30. Which reward strategy is appropriate for companies using a human relations approach to management?
a. Rewards are mainly extrinsic and focus on loyalty to the organization.
b. A wide variety of both intrinsic and extrinsic rewards are used.
c. Only extrinsic rewards are offered.
d. Only intrinsic rewards are offered.
ANSWER: a
31. Richard, a new employee, is told by a more experienced employee to do only the minimum and not attempt to be a
“superstar.” What variable best describes what Richard is experiencing?
a. engagement
b. commitmen
t
c. structure
d. culture
ANSWER: d
32. Which key cultural value would be detrimental to a high-involvement organization?

a. honesty
b. trustworthiness
c. doing things the way they have always been
done
d. open communication
ANSWER: c
33. Which organizational variable would complement a classical management strategy?

a. strong policies and procedures dictating work
processes
b. high level of horizontal communication
c. significant autonomy given to employees
d. employee-focused organizational culture
ANSWER: a
34. Marie is the new owner of a large apple farm in British Columbia. She hires seasonal workers to pick apples during
the months of October and November each year. Historically, there has been an abundance of labour supply. Which
managerial strategy would best fit this farm’s situation?
a. human relations
b. classical

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c. hybrid
d. high-
involvement
ANSWER: b
35. Which term describes an organization’s core values and understandings shared by its members?
a. organizational structure
b. organizational culture
c. organizational domain
d. organizational strategy
ANSWER: b
36. Which managerial strategy most highly values an organization’s culture?

a. classical
b. human relations
c. high
involvement
d. hybrid
ANSWER: c
37. A prospector strategy, short life cycle products, a highly skilled work force, and a relatively small organization would
be a good combination of variables for which managerial strategy?
a. classical
b. human relations
c. high-
involvement
d. mechanical
ANSWER: c
38. According to the textbook, which term would best describe an analyzer business strategy?
a. speed
b. slow
c. balance
d. classica
l
ANSWER: c
39. Which condition has NOT made it increasingly difficult for Canadian firms to make the classical managerial strategy
work for them?
a. Educational levels have increased.
b. Globalization has allowed work to be outsourced to a variety of developing
countries.
c. Economic security and social security have improved.
d. Social values have become more democratic and egalitarian.

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ANSWER: b
40. You have been asked to provide some element of rationale why some companies using a human relations strategy
sometimes attempt to change to a more classical framework. Which statement would best describe the most important
issue associated with your explanation?
a. It is simply very hard on management to pursue a human relations strategy.
b. There is pressure from owners to increase profitability.
c. Companies fail to react fast enough to changes in the environment.
d. Greater worker mobility makes a human relations strategy obsolete.
ANSWER: c
41. Explain the concept of fit.

ANSWER Fit is an important concept in strategic management. It refers to the alignment of
: strategies at various levels in an organization. There are two related concepts: vertical
and horizontal fit, or vertical and horizontal integration. Vertical fit refers to the
alignment between an organization’s mission, vision and/or values, and the various
supportive strategies that cascade down an organization. Horizontal fit refers to the
alignment between and among strategies at the same level; for instance, HRM
strategies such as performance management and compensation are aligned or support
each other.
42. What is the purpose of the strategic framework for compensation?

ANSWER There is no such thing as “one best” compensation system that fits all organizations.
: The most appropriate compensation system for an organization is one that fits the key
characteristics of that organization. The strategic framework for compensation provides
a model to help us understand the context variables, managerial strategy, and structural
variables of an organization and build an effective compensation system.
43. Identify the six structural variables that make up the organization structure and explain why they are so important.
ANSWER The six structural variables (or dimensions) are job design, coordination and
: departmentation, decision-making and leadership structure, communication and
information structure, control structure, and the reward system. These variables act as
levers to produce the behaviour desired by the organization. All of these structural
variables are interrelated and must fit together for an organization to be effective. To
identify the managerial strategy that a firm is actually using, it is necessary to examine
the structural variables.
44. Briefly explain the difference between the three managerial strategies described in the textbook.
ANSWER Although the six structural variables can be designed and combined in a number of
: ways, the following three main patterns of structural variables, known as “managerial
strategies,” have formed. The classical approach to management assumes that people
are lazy, dislike work, and need to be motivated to work by financial rewards or the
threat of removal of these rewards. Jobs are narrowly designed and employees closely
supervised. The human relations approach assumes most employees dislike work but
can be induced to work in order to satisfy their social needs, which results in a different
approach to leadership, communication, control, and rewards from the classical

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approach. Supervisors are controlling but employee-oriented, using a paternalistic
style. High-involvement management assumes that people are motivated by the
intrinsic rewards flowing from interesting and challenging work, and it differs from the
other two managerial strategies in all six structural variables.
45. What are the five contextual variables and why are they important?
ANSWER Determined by organizational goals, the five contextual variables are the organization’s
: task environment and domain, corporate strategy, technology, organization size, and
work force. These factors in the firm’s context determine the most appropriate
managerial strategy and structure for the organization (which includes the reward
system). A change in any factor may trigger a need to change the managerial strategy
and the structural variables.

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Chapter 3 - A Behavioural Framework for Compensation

True / False
1. A sales organization rewards employees for the number of client contacts made via telephone. A review of client
contact quality determines that most of these contacts will never convert into sales. As it relates to reward problems, this
exemplifies a lack of congruency between rewards and behaviour.
a. True
b. Fals
e
ANSWER: True
2. The three key employee behaviours that may be desired by employers are membership, task, and citizenship.
a. True
b. Fals
e
ANSWER: True
3. The key employee attitudes are flexibility, citizenship, and individual goal commitment.
a. True
b. Fals
e
ANSWER: Fals
e
4. Reward dissatisfaction can result from perceived inequity.

a. True
b. Fals
e
ANSWER: True
5. Equity theory partially explains the basic notion of perceived inequity between one’s view of his or her contribution and
the contribution of others in similar contexts.
a. True
b. Fals
e
ANSWER: True
6. Job satisfaction is a key employee behaviour.

a. True
b. Fals
e
ANSWER: Fals
e
7. Distributive justice refers to the fairness of the process in giving rewards.

a. True

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b. Fals
e
ANSWER: Fals
e
8. The principal source of citizenship behaviour is organizational identification.

a. True
b. Fals
e
ANSWER: True
9. Classical management strategies generally require a reward system that focuses on task behaviour.
a. True
b. Fals
e
ANSWER: True
10. The first step in designing a reward system that will produce the behaviour the organization needs is to develop
rewards that address salient employee needs.
a. True
b. Fals
e
ANSWER: Fals
e
Multiple Choice
11. At a unionized firm, workers went on strike even after management offered them a two percent increase in pay. The
union representing the workers said that the proposed increase did not match the workers’ contributions to the firm. What
type of reward problem is evident in this situation?
a. failure to produce the desired behaviour
b. production of the desired behaviour and undesirable
consequences
c. production of reward dissatisfaction
d. lack of task behaviour
ANSWER: c
12. You operate an inbound call centre serving the various needs of your customers. Over the last several months, you
notice that customers are waiting on hold for several minutes before being served. To motivate operators, you introduce an
incentive program that rewards those operators that answer over 200 calls per 8-hour shift. Shortly thereafter, wait times
drop but service complaints escalate. What kind of reward problem does this vignette describe?
a. failure to produce desired behaviour
b. production of desired behaviour and undesirable
consequences
c. production of reward dissatisfaction

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d. unfair compensation practices
ANSWER: b
13. Which short scenario best describes organizational citizenship behaviour?

a. Joe, a shop mechanic, approaches management with an initiative that will improve
customer service.
b.Duane, a faculty member, starts and finishes his lectures on time as per his syllabus.
c. Mary, a university graduate, was so impressed with company ABC that she decided to
join the company. Ten years later she was still working for ABC.
d.Carlos “volunteers” for special community events on behalf of his company only when
he is paid overtime.
ANSWER: a
14. You are extremely happy with your job and would not hesitate to recommend your company as a good place to work.
Which key employee attitude are you expressing?
a. organizational identification
b. motivation
c. job satisfaction
d. commitment
ANSWER: c
15. What is the definition of membership behaviour?

a. paying ones dues on time
b. being polite with others
c. a decision to join and stay with a firm
d. the attitude one holds toward one’s job and the workplace
ANSWER: c
16. You have been asked to explain to a client the notion of work motivation. Which of the following would best
characterize an employee’s work motivation?
a. someone that is happy with his job
b. someone that puts forward great effort to perform a task well
c. someone that shares the organization’s goals and aspirations
d. someone that is happy and satisfied with the job content and his/her performance
ANSWER: b
17. Which of the following is associated with job satisfaction?

a. increased job effort
b. lower employee
turnover
c. higher training costs
d. job security
ANSWER: b

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18. Which of the following is NOT a key employee attitude?
a. job satisfaction
b. work motivation
c. organizational identification
d. organizational citizenship
ANSWER: d
19. An employee survey at a particular company indicated very strong employee job satisfaction levels. Management was
elated with the outcome of the survey. What is a likely consequence of having satisfied employees?
a. decreased grievances
b. employees who are more innovative
c. employees who are more cooperative
d. improved interdepartmental integration and
communication
ANSWER: a
20. When a potential employee joins an organization, there is often an implied contract between the employee and the
organization, based on expectations of rewards and contributions. Which of the following best describes this contract?
a. provincial labour code
b. deprivation contract
c. psychological
contract
d. perceived equity
ANSWER: c
21. Your employer has not kept his promises in relation to pay, benefits, and ongoing training and development
opportunities. Which of the following best describes your situation?
a. unethical behaviour
b. lack of organizational justice
c. perceived inequity
d. violation of the psychological
contract
ANSWER: d
22. Which theory is most applicable in explaining why a hockey player who earns $10 million per year is dissatisfied with
his pay?
a. equity
b. relative deprivation
c. psychological
contract
d. reinforcement
ANSWER: a
23. You think your salary is unfair compared to others in your department, and you threaten to quit your job. Which theory

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best explains your actions?
a. psychological
contract
b. expectancy theory
c. procedural justice
d. equity theory
ANSWER: d
24. Organizational justice has two key dimensions. Which pair of variables best captures these two dimensions?
a. distributive and integrative justice
b. distributive and procedural justice
c. psychological and tenure-based
justice
d. psychological and task justice
ANSWER: b
25. Which of the following would be an example of distributive justice?

a. Based on your performance, you believe you were given the pay raise you deserved.
b. You have the opportunity to appeal your pay raise.
c. Your managers openly share the reward decision-making process with all employees.
d. Reward decisions are based on job-related performance and free of bias.
ANSWER: a
26. Which scenario is reflective of an organization displaying procedural justice in their reward system?
a. Pay is not similar for employees performing at the same general level.
b. Pay is attached to increases in consumer price indexes regardless of actual
performance.
c. Employees are able to appeal pay increase decisions using a transparent appeal
process.
d. Employees are not able to articulate when and how pay increases are provided.
ANSWER: c
27. A particular employee becomes dissatisfied with a decision by an organization to decrease pay. Which of the following
could be considered an attempt by the employee to increase rewards?
a. taking longer coffee breaks
b. increased absenteeism
c. padding their expense accounts
d. seeking a less demanding job in a different company
ANSWER: c
28. In an effort to improve the relationships with employees, management at ABC recently implemented policies to make
their pay more consistent across jobs that were similar. What would this change help with?
a. improving the psychological contract
b. improving perceptions of procedural justice

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c. improving perceptions of distributive justice
d. decreasing perceptions of relative
deprivation
ANSWER: b
29. Ashton is committed to his organization out of a sense of belongingness and loyalty. What type of commitment is
Ashton displaying?
a. affective
b. continuance
c. task
d. moral
ANSWER: a
30. Which of the following refers to content theories of motivation?

a. theories based on reinforcement theories
b. theories that focus on managerial strategies
c. theories that focus on understanding the means by which people make
choices
d. theories that focus on human needs
ANSWER: d
31. In what way is there congruency between Maslow’s theory and Herzberg’s theory?
a. The higher-order needs correspond to motivators, and lower-order needs correspond to
the hygienes factors.
b. Both Maslow and Herzberg assume that a satisfied need no longer motivates.
c. Both Maslow’s and Herzberg’s theories could be classified as “process theories.”
d. Both Maslow and Herzberg explicitly describe the distinction between job satisfaction
and work motivation.
ANSWER: a
32. Which term is used to describe the degree of urgency an individual attaches to the satisfaction of a particular need?
a. hierarchy of
needs
b. need deprivation
c. needs analysis
d. need salience
ANSWER: d
33. Terry was generously rewarded by his parents when he received excellent grades. His parents are hoping that the
rewards will help Terry get similar grades in the future. Which theory helps to explain this scenario?
a. Maslow’s theory
b. Herzberg’s theory
c. expectancy theory
d. reinforcement

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theory
ANSWER: d
34. According to reinforcement theory, what happens when organization-controlled rewards stop?
a. Employees are motivated to work on their
own.
b. Intrinsic motivation disappears.
c. Desired behaviours eventually disappear.
d. There is no change in behaviour.
ANSWER: c
35. Which scenario best describes the notion of expectancy, according to the expectancy theory of motivation?
a. Paul believes he can complete the project in five days.
b.Paul is under the impression that even if he finishes the project in five days, the
company will not provide him with the promised promotion.
c. Paul does not value the promised promotion.
d.Paul would like to be recognized as a valued employee by being given a large pay
increase.
ANSWER: a
36. According to expectancy theory, which of the following would be an example of negative instrumentality?
a. You believe that no matter how hard you work your performance will not be
recognized.
b. You do not have confidence in your ability to perform the required task.
c. You do not value the reward.
d. You are not motivated to exert any effort.
ANSWER: a
37. Which term refers to the individual’s perception of how likely it is that the effort they give will lead to the successful
performance of the desired behaviour?
a. valence
b. expectancy
c. instrumentalit
y
d. salience
ANSWER: b
38. You are the human resource manager for a non-profit organization focusing on cleaning local parks. The vast majority
of staff are volunteers from the local community. You are so pleased with their commitment that you approach a
consultant looking for advice on what kinds of additional rewards you should provide. Which of the following would be
an appropriate recommendation, according to the attribution theory of motivation?
a. Offer to pay the attendance fee to any volunteer willing to attend a conference dealing
with the value of green space in cities.
b.Offer to pay $100.00 per month if volunteers show up for all their shifts.

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c. Offer to pay volunteers $.50 for every pound of garbage collected from local parks.
d.Offer to pay a nominal fee for members that find other volunteers willing to join the
organization.
ANSWER: a
39. Economic theory of motivation is closely aligned with which management strategy?
a. differentiation management strategy
b. high-involvement management strategy
c. human relations management strategy
d. classical management strategy
ANSWER: d
40. Zara would typically go “well beyond the call of duty” in the workplace to help her organization achieve its goals.
What is Zara displaying?
a. membership behaviour
b. organizational citizenship behaviour
c. task behaviour
d. proactive behaviour
ANSWER: b
41. Briefly explain the purpose of the behavioural framework for compensation.
ANSWER Rewards have a powerful effect on behaviour. It is crucial to understand what specific
: attitudes and behaviours are needed by your organization and the role that the reward
system can play in producing these behaviours. The behavioural framework can be
used as a conceptual tool to help us understand the process through which
compensation affects employee behaviour. Knowing the behaviour that various
compensation plans will likely produce will help us to design the compensation system
most likely to produce the behaviour that we want.
42. Identify the three key job attitudes and explain their roles in determining employee behaviour.
ANSWER Job attitudes drive employee behaviour and are derived from the feelings that one has
: about one’s work. The three key attitudes that have an impact on employee behaviour
are job satisfaction, work motivation, and organizational identification. Job satisfaction
can be defined as the attitude one holds toward one’s job and workplace, either positive
or negative; work motivation can be defined as the attitude one holds toward good job
performance and effort, either positive or negative; and organizational identification
consists of a sense of shared goals, belonging, and desire to remain a member of the
organization. Each of these attitudes can lead to behaviour that is beneficial to the
organization in different ways. Job satisfaction helps generate membership behaviour,
motivation generates task behaviour, and organizational identification is needed to
generate citizenship behaviour as well as the other two behaviours. The importance of
each of these job attitudes and the corresponding behaviour it generates varies by
organization. You must consider the context of the organization. Different managerial
strategies require different attitudes and behaviours.

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43. Summarize the consequences of each job attitude.
ANSWER Job satisfaction can lead to decreased work stress, decreased grievances, decreased
: absenteeism, decreased turnover, and positive group norms. Work motivation leads to
job effort, which should lead to task performance. Organizational identification leads to
positive group norms, cooperative behaviour, innovative behaviour, increased job
effort, and decreased grievances, absenteeism, and turnover. All of these attitudes are
desirable, but how important they are to a given firm depends on the nature of the firm
and the managerial strategy.
44. Briefly explain the difference between content theories of motivation and process theories of motivation, and provide
examples of each.
ANSWER Content (or needs) theories of motivation focus on identifying and understanding the
: types of needs that drive behaviour and that could be used to motivate individuals.
Examples of content theories used to identify the various employees’ needs (which if
unsatisfied will result in motivation) include Maslow’s Needs Hierarchy, Herzberg’s
Two-Factor Theory, and Hackman Oldham’s Job Characteristics Theory. Although
many people have the same need, different individuals may choose different paths or
behaviours to satisfy this need. Process theories, therefore, attempt to explain the
process or actual ways in which individuals can be motivated. Examples of process
theories of motivation include Reinforcement Theory of Motivation, Expectancy
Theory, Attribution Theory, and Economic Theory.
45. From an employee behavioural perspective, what steps need to be followed to design an effective reward system?
ANSWER An effective reward system generates the types of employee behaviour that an
: organization needs. The following steps will help create an effective reward system.
1. Define the employee behaviour that is really needed.
2. Determine the employee attributes and qualifications necessary to perform the
needed behaviour.
3. Identify the needs that individuals possessing these qualifications are likely to find
salient.
4. Ensure a positive valence for needed behaviour by providing rewards that address
salient needs and by reducing the costs to the employee of performing the behaviour.
5. Make it clear that performance of the behaviour will lead to the promised rewards.
6. Provide conditions that make it likely that employee effort will actually lead to the
desired behaviour.
46. A particular employee is provided with a very aggressive sales goal for next year. Management proposes that if sales
double, the employee will receive a 50 percent increase to his/her base pay in addition to his/her sales-based commissions.
This represents a substantial increase in compensation, and management is confident the employee will be motivated to
increase task behaviour.
Two months into the program, management notices the employee is actually less motivated.
Using expectancy theory, explain possible rationales that may justify the decreased level in motivation and associated task
behaviour. (You may make any additional assumptions)
ANSWER The expectation is that students make assumptions about issues associated with
: expectancy theory of motivation as it applies to this vignette—valence, instrumentality,
and expectancy. This question serves as a good class discussion and requires that
students make assumptions about the following issues:
∙ employee confidence

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∙ trust
∙ historical pattern of behaviour (has the company lived up to their commitment in the
past?)
∙ value of reward to the employee, etc.

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Chapter 4 - Components of Compensation Strategy

True / False
1. The two key questions that must be addressed in designing any compensation system are: a) What role should each of
the three compensation components play in the compensation mix? and b) What total level of compensation should be
provided?
a. True
b. Fals
e
ANSWER: True
2. An advantage of base pay is that it directly links pay with output or performance.
a. True
b. Fals
e
ANSWER: Fals
e
3. Generally, research supports the notion that employees prefer compensation strategies that have performance pay as the
key compensation mechanism.
a. True
b. Fals
e
ANSWER: Fals
e
4. The main types of individual performance pay are piece rates, commissions, merit pay, and goal-sharing plans.
a. True
b. Fals
e
ANSWER: Fals
e
5. Research cited in the textbook suggests that performance pay plans have relatively high discontinuation rates.
a. True
b. Fals
e
ANSWER: True
6. An advantage of indirect pay is that benefits receive more favourable income tax treatment than direct pay.
a. True
b. Fals
e
ANSWER: True
7. Competitive pressure may force some firms to provide indirect pay.

a. True

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b. Fals
e
ANSWER: True
8. One major advantage of job evaluation programs is that they require the use of comprehensive job descriptions.
a. True
b. Fals
e
ANSWER: Fals
e
9. Pay for knowledge systems are beneficial for organizations that require great task flexibility from their labour force.
a. True
b. Fals
e
ANSWER: True
10. Competency-based pay is usually applied at the managerial and professional levels.
a. True
b. Fals
e
ANSWER: True
Multiple Choice
11. Which of the following steps is NOT considered in designing a compensation system?
a. determining actual dollar values for jobs and individual
employees
b. determining the total level of compensation to provide
c. determining how each of the mix choices should be structured
d. determining the mix of compensation components
ANSWER: a
12. For the majority of employees in Canada, what is the largest component of the pay package?
a. benefits
b. performance pay
c. indirect pay
d. base pay
ANSWER: d
13. Johnny is compensated based on a rate of $25.00 per hour worked. Which term best describes the manner in which
Johnny is compensated?
a. commissio
n
b. wage

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c. piece rate
d. salary
ANSWER: b
14. Why might employees prefer base pay over performance pay?
a. Performance pay is more predictable.
b. Base pay is directly related to their performance
level.
c. They dislike uncertainty about their compensation.
d. Market conditions are always changing.
ANSWER: c
15. As a human resource consultant, you have been asked to provide some rationale on why an organization may decide to
use base pay as a cornerstone for a compensation scheme. Which of the following should you advance in supporting your
argument?
a. It provides an organization with more labour flexibility in the allocation of tasks.
b.It guarantees employee performance and aligns salaries to performance.
c. It encourages team work.
d.Unions are most likely to agree with management’s approach, given this scheme
encourages individual performance.
ANSWER: a
16. Which condition make it impractical to use output-related pay?

a. Output is easy to measure.
b. Output is very stable.
c. Output cannot be controlled by the individual employee.
d. Output is easy to price in terms of its value to the employer.
ANSWER: c
17. As an employer, you believe it is always a good idea to pay people for their contributions to organizational results.
Which plan would likely be the key component of the compensation plan?
a. indirect pay
b. base pay
c. pay for
knowledge
d. performance pay
ANSWER: d
18. A particular organization wants to include in their compensation system some element of organizational performance
linkage, while at the same time it wants to encourage employee commitment. In addition to base pay, what would most
likely be included in this compensation mix?
a. merit pay
b. piece rates
c. profit sharing

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d. targeted incentives
ANSWER: c
19. As the CEO of a small start-up firm, you would like to reward employees based, in part, on organizational
performance. However, cash flow is low. Which pay plan should you consider using?
a. employee stock
plans
b. high base pay
c. extensive benefits
d. commissions
ANSWER: a
20. Which of the following is a group performance pay plan?

a. gain sharing
b. profit
sharing
c. stock options
d. piece rates
ANSWER: a
21. Which pay type usually makes up a small proportion of total compensation, and may not be used at all by some
employers?
a. mandatory
benefits
b. wages
c. merit pay
d. salaries
ANSWER: c
22. In Canada approximately what percentage of an employer’s total compensation costs are employee benefits?
a. 10-
20
b. 20-
30
c. 30-
40
d. 40-
50
ANSWER: a
23. Which of the following is an example of mandatory indirect pay?

a. major health benefits such as medical coverage
b. registered retirement savings plans (RRSPs)
benefits

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c. employee services
d. workers’ compensation benefits
ANSWER: d
24. Your company offers you pay for time not worked, disability benefits, supplemental medical coverage, and a full
range of free employee services. Which component of the compensation mix includes these items?
a. direct pay
b. base pay
c. indirect pay
d. performance pay
ANSWER: c
25. As a consultant, you have been asked by an organization to provide a menu of indirect benefits that the employer
doesn’t have to provide by law. Which of the following would you NOT include in your menu?
a. employment insurance
b. company pension plan
c. psychological counselling
d. supplemental medical
coverage
ANSWER: a
26. Why can medical and dental coverage can be purchased more cheaply by the employer than the employee?
a. indexation
b. economies of
scale
c. utility
d. dividends
ANSWER: b
27. Which statement best explains the reason for the decrease in popularity of “defined benefit plans” by employers in
Canada?
a. There has been increased longevity of employees.
b. Defined benefit plans are simply not popular among employees.
c. They help organizations plan more accurately; hence, they make it easier to fund these
liabilities.
d. Employers believe defined contribution plans are much more unpredictable from a
funding perspective.
ANSWER: a
28. Which of the following is NOT a method used to determine employee base pay?
a. profit sharing
b. pay-for-knowledge
c. job evaluation
d. market pricing

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ANSWER: a
29. As a general rule, organizations using a high-involvement managerial strategy use indirect pay as a way to encourage
which of the following relationships?
a. employer–
community
b. employee–task
c. employer–employee
d. employer–union
ANSWER: c
30. Which methods are used to establish base pay?

a. market pricing, job evaluation, and pay for
knowledge
b. job analysis, competency testing, and demographics
c. tenure, job preview, and environmental analysis
d. knowledge, education, and market pricing
ANSWER: a
31. Which of the following refers to job evaluation?

a. determining how well a job is performed
b. surveying the market
c. ranking all jobs according to their value to the
firm
d. establishing the skill level of each employee
ANSWER: c
32. ABC Inc. is a very small firm. It has decided to pay its employees at rates that are similar to other small firms in its
geographic area. What method of pay is ABC Inc. using?
a. job evaluation
b. market pricing
c. competency-based pay
d. geographic-based pay
ANSWER: b
33. What are two key advantages of market pricing?

a. simplicity and cost
b. equity and fairness
c. equity and efficiency
d. range and depth
ANSWER: a
34. Which statement best describes the difference between pay for knowledge systems (PKS) and job-based pay systems?
a. Pay for knowledge systems involve basing pay on the capabilities of individuals, and

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job-based pay is based on the characteristics of the job.
b.Pay for knowledge systems are applied to managerial employees, and job-based pay is
applied to operational-level employees.
c. Pay for knowledge systems are more widely used by Canadian firms than job-based
pay systems,
d.Pay for knowledge systems involve low training costs and are easier to administer than
job-based pay systems,
ANSWER: a
35. Which statement best describes the notion of pay for knowledge systems?
a. There is little empirical evidence supporting the validity of competency-based pay
models.
b. Competency-based pay models are usually associated with operational level roles.
c. Pay for knowledge requires very detailed job descriptions for every role in an
organization.
d. Pay for knowledge fits well with classical management styles, requiring employee
flexibility in skill sets.
ANSWER: a
36. As the owner of a large hotel, you expect your employees to be flexible, learn a variety of skills, and shift around from
one job to another as needed. Which plan will best fit your needs?
a. stock options
b. skill-based pay
c. team-based
pay
d. piece rates
ANSWER: b
37. Which base pay method best supports behaviours needed by high-involvement firms?
a. market pricing
b. pay for
knowledge
c. job evaluation
d. broad banding
ANSWER: b
38. Peter, a manager at a local manufacturing firm, is perplexed that employees tend to respond to management’s request
by evoking the dreaded “That is not on my job description,” or “That is above my pay grade.” From a compensating
perspective, which base pay method is normally associated with the aforementioned responses?
a. market pricing
b. job evaluation
c. competency-based pay
d. skill-based pay
ANSWER: b

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39. Your executive vice president has asked you to explain the basic notion of “skill blocks” within the context of skill-
based pay systems design. What two variables would you emphasize?
a. different skills and depth of each skill
b. skill certification and criterion
c. key competencies and training
requirements
d. broad banding and market value
ANSWER: a
40. Which of the following is NOT a key issue in competency-based pay systems?
a. identifying competencies that demonstrably affect performance
b. devising methods to measure achievement of each competency
c. providing learning opportunities
d. developing the merit pay grid
ANSWER: d
41. According to the textbook, what are the key conditions for using output-related pay?
ANSWER Necessary conditions include:
: a) The job output is easily measurable.
b) The output is easily calculable in value to the employer.
c) The output is easily attributable to specific employees.
d) The output is controllable by the individual employee.
e) It is not highly unstable.
42. Briefly describe the three main categories of performance pay, and provide examples for each category.
ANSWER Performance pay may be geared to the performance of the individual employee, the
: work group or team, or the organization as a whole. Individual performance pay plans
include piece rates, commissions, merit pay, and special incentives. Group performance
pay plans include gain-sharing plans, goal-sharing plans, and other group plans.
Organizational performance pay plans include profit-sharing plans, employee stock
plans, and other organization performance pay plans.
43. Briefly discuss the advantages and disadvantages of using indirect pay.
ANSWER The possible advantages of indirect pay are that it can help attract employees, can
: match conditions at unionized firms, receives favourable tax treatment, has economies
of scale in purchasing, can provide valued rewards for little or no cash outlay, can
provide employee peace of mind, can help the employer deal humanely with
employees, may help promote company products, and may support managerial
strategy. The possible disadvantages are benefits costs, rigidity of costs, difficulty in
developing an efficient package, costly communication and administration, inability to
motivate task behaviour, the possibility of causing excessive employee stability, and
poorly designed plans may cause undesirable employee behaviour.
44. Briefly explain the three methods for establishing base pay.
ANSWER The three main methods for establishing base pay are market pricing, job evaluation,

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: and pay for knowledge systems. Market pricing establishes base pay by determining
the minimum amount of pay necessary to attract qualified individuals from the labour
market. Job evaluation establishes base pay by ranking all jobs in the firm according to
their value to that firm. Pay for knowledge systems establish base pay according to the
total value of the skills and competencies an employee has acquired.
45. Identify and briefly describe the issues in developing a skill-based pay system.
ANSWER There are five main issues in the design of a skill-based pay system:
: 1. deciding whom to include
2. designing the skill blocks
3. linking skill blocks to pay
4. providing learning opportunities
5. certifying skill achievement
Skill-based pay systems are suitable for organizations that need employee flexibility,
and high-level and diverse employee skills. Skill blocks are set out in a grid defined by
skill types and levels. Skill block difficulty, length of time for skill mastery, and the
value of each skill block determine the relative amount of increase for each skill block.
The high–low method determines entry level and skill block pay amounts. Training
needs to be provided since pay is tied to skill development. A valid and fair system for
determining when an employee has mastered a skill block is needed.
46. Explain why organizations pursuing a high-involvement management strategy may find the notion of offering indirect
pay to employees somewhat problematic and at odds with the principles of high involvement?
ANSWER This question should begin with a detailed explanation of high-involvement
: management strategy, particularly focusing on the notion that extrinsic rewards should
be geared towards driving strong performance, and not towards controlling poor
performance/output. Then, students need to link or identify that by its very nature,
indirect pay does not perfectly fit a high-involvement management strategy; indirect
pay is not necessarily linked to corporate or enterprise performance, while at the same
time, high-involvement organizations value their employees and do not want valuable
employees to leave the organization as a result of a poor indirect pay packages. Notions
of motivation theory may also be part of this answer, i.e., organizations need to be able
to satisfy lower order needs (safety), etc., before higher order needs can be satisfied.

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Chapter 5 - Performance Pay Choices

True / False
1. The central issue associated with attendance incentives is the notion that these programs treat only the symptoms while
ignoring the underlying issues that cause absenteeism in the first place.
a. True
b. Fals
e
ANSWER: True
2. Piece rates have experienced high discontinuation rates.

a. True
b. Fals
e
ANSWER: True
3. Sales commissions are usually appropriate in situations where individual sales people exercise significant
independence.
a. True
b. Fals
e
ANSWER: True
4. All things being equal, goal-sharing programs are thought to be less motivational than gain-sharing programs.
a. True
b. Fals
e
ANSWER: Fals
e
5. One of the problems with gain-sharing plans is that they do not encourage employee participation.
a. True
b. Fals
e
ANSWER: Fals
e
6. Unions generally oppose profit-sharing plans on the basis of potential manipulation of profits by management and the
uncertainty associated with profit sharing when compared with base pay.
a. True
b. Fals
e
ANSWER: True
7. The three main types of employee stock plans are: stock bonus plans, stock purchase plans, and stock option plans.
a. True

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b. Fals
e
ANSWER: True
8. Employee stock plans are often used by companies using a classical management strategy
a. True
b. Fals
e
ANSWER: Fals
e
9. Profit-sharing plans can reduce the need for employee supervision.

a. True
b. Fals
e
ANSWER: True
10. The current distribution profit-sharing plan is sometimes called a “cash plan.”
a. True
b. Fals
e
ANSWER: True
Multiple Choice
11. Which of the following is an organizational-level pay performance plan?

a. goal-sharing plans
b. merit-pay plans
c. special-purpose incentive pay plans
d. profit-sharing plans
ANSWER: d
12. What is the most common form of performance pay used by medium to large Canadian firms?
a. merit raises
b. profit sharing
c. merit bonuses
d. commissions
ANSWER: a
13. You work for a company that assembles plastic toys. Generally speaking, employees working at similar assembly
plants receive $15.00 per hour. Internal corporate data indicate that the average worker should be able to assemble 20 toys
per hour. Your organization has made a strategic decision to pay assembly line workers on the basis of their output. What
is the piece rate you are contemplating paying your assembly line workers?
a. $300.00 per day
b. $1.33 per toy

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c. $0.75 per toy
d. $150.00 per day
ANSWER: c
14. What is a key advantage of piece rate pay systems?

a. They reduce the need for external control of employees through
supervision.
b. They create team work.
c. They link pay to group effort.
d. They encourage “rate busters.”
ANSWER: a
15. Which statement best explains why, despite their motivational potential, piece rate systems often do not motivate
maximum effort?
a. Work group norms define acceptable rates of production.
b. Piece rates are used in conjunction with base pay.
c. Workers may be tempted to cut corners on quality.
d. Workers are more concerned with production than safety.
ANSWER: a
16. Which of the following would NOT be an ideal scenario in which to consider using a piece rate plan?
a. Quality standards can be monitored effectively.
b. Significant teamwork is needed to complete a particular
task.
c. Each unit of production can be easily measured.
d. Tasks tend to be fairly static over time.
ANSWER: b
17. John works for an aerospace company selling satellites to communication companies. He receives a set percentage of
the overall sale price of the satellite in the form of compensation. He does not receive a fixed salary or benefits. Which
term best describes John’s compensation plan?
a. hybrid commission plan
b. leverage commission plan
c. percentage commission
plan
d. straight commission plan
ANSWER: d
18. In what way are piece rates and commissions similar to each other?
a. Employees don’t have to worry about working themselves out of a job.
b. They reduce the need for external control of employees through
supervision.
c. Both types are commonly used in conjunction with base pay.
d. Both are popular systems widely used in the service sector.

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ANSWER: b
19. John’s employer decides to provide him with regular advances against his future commissions as a way to smooth out
John’s income. Which term best describes the pay plan used by John’s employer?
a. sales stipend system
b. draw system
c. pay advance system
d. security income
ANSWER: b
20. Which type of selling requires the most initiative on the part of the sales representative?
a. maintenance
b. conversion
c. leverage
d. new market
ANSWER: d
21. In the public sector, what is one factor that should be considered when designing merit pay?
a. role of consultants
b. role of unions
c. pay mix with profit
sharing
d. pay mix with stock options
ANSWER: b
22. Which statement best describes how North American employees view merit raises?
a. They are viewed as not promoting employee–employer relationships.
b. They are viewed with significant scepticism by employees.
c. They are not viewed in a positive light because of the objective nature of performance
reviews.
d. They are viewed in a positive light by unionized employees.
ANSWER: b
23. One of the problems with merit raises is the risk of providing a long-term future reward for a short-term past
performance. What is one way to address this problem while maintaining the performance appraisal system?
a. Replace merit raises with merit bonuses.
b. Use stock options instead of merit
raises.
c. Use a team to assess performance.
d. Outsource merit systems.
ANSWER: a
24. Your employer is considering tying the bonus pool to the firm’s profitability and then allocating this amount to
employees based on individual merit. With reference to expectancy theory, which component of the merit system will be

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weakened and thus make it less motivational for you as an employee?
a. valence
b. expectancy
c. instrumentalit
y
d. effort
ANSWER: c
25. As a human resource specialist, you have been asked by your organization to lead a discussion on the merits of using
internal promotions as a main reward mechanism. Which point would you most likely NOT raise?
a. They are an expensive process, as promotions are typically associated with pay
increases.
b. They often carry both intrinsic and extrinsic rewards.
c. They recognize contributions made by strong performers.
d. They are often seen as a key motivation tool for employees.
ANSWER: a
26. Which of the following is NOT a suitable condition for merit pay?
a. Individual performance varies.
b. Performance is not controllable by the
individual.
c. Individual performance can be separated out.
d. Undesirable side effects are readily manageable.
ANSWER: b
27. An automotive shop wants to reward employees for demonstrating creative customer service that leads to repeat
business. A particular employee received a 10 percent bonus for suggesting that the company contact customers 24 hours
after repairs to ensure customers are satisfied. What type of incentive would be the most appropriate in this scenario?
a. merit-raise plans
b. goal-sharing plans
c. gain-sharing plans
d. special-purpose
plans
ANSWER: d
28. Which of the following is a group level organizational pay performance system?
a. gain sharing
b. piece rates
c. merit raises
d. commission
s
ANSWER: a
29. According to the textbook, what is the main drawback associated with attendance plans?

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a. There are costs associated with administering the program.
b. Both intended and unintended behaviours are not easy to
observe.
c. It is difficult to deal with the so-called “legitimate” absences.
d. They do not deal with the underlying cause of the issue.
ANSWER: d
30. From an employer’s point of view, what is the most attractive feature of properly designed gain-sharing plans?
a. The plans are self-funding.
b. Positive work group norms develop.
c. The need for supervisory control is reduced.
d. Employees monitor each other’s performance.
ANSWER: a
31. What is a key difference between gain-sharing and organizational performance pay plans?
a. Unlike organizational level plans, gain sharing can be applied to not-for-profit and
government organizations.
b. Gain sharing results in more pay for employees.
c. Unions support organizational level pay plans but not gain sharing.
d. There are more free riders in gain-sharing plans.
ANSWER: a
32. As the owner of a real estate firm with multi-office operations, you provide a bonus to all sales personnel in the
highest-producing office each month. What type of performance pay plan are you using?
a. goal-sharing
b. competitive bonus
c. pooled
performance
d. group commissions
ANSWER: b
33. Which are the main types of profit sharing plans?

a. current assessment plan, deferred plan, and blended plan
b. deferred plan, cash plan, and group plan
c. combination plan, deferred plan, and current distribution plan
d. current distribution plan, combination plan, and employee
plan
ANSWER: c
34. Your CEO is concerned that employees are not saving enough for their retirement. At the same, the CEO wants to
have some of the company’s profits shared with all employees. To address these issues, your CEO asks you, a human
resource compensation specialist, to recommend the most appropriate profit-sharing plan to address this retirement issue.
Which profit-sharing plan would you recommend?
a. deferred

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b. combination
c. current
distribution
d. cash plan
ANSWER: a
35. Which characteristic of profit-sharing plans may be viewed as negative from the perspective of an employer?
a. They align employee and employer interests.
b. They eliminate the “free rider” principle by holding everyone accountable.
c. They are more complex than gain-sharing plans.
d. They require the sharing of potentially confidential information with
employees.
ANSWER: d
36. What do employees receive under an employee stock bonus plan?

a. shares at no cost to themselves
b. cash value of phantom shares
c. a bonus equivalent to the increase in their share
value
d. free financial advice on stocks
ANSWER: a
37. A publicly traded Canadian corporation provides employees with one year of continuous service and the opportunity
to place 6% of their pre-tax income in a plan that may be invested in the company’s stock. Furthermore, the company
matches the shares by 50% up to a limit of 4% of the employees’ pre-tax income. From the perspective of the employee,
what are the potential drawbacks of participating in this program?
a. Administrative costs associated with these plans are normally very high.
b. It is extremely difficult for an employee to determine the performance of their stock.
c. They pose too much of a tax burden.
d. If the company does poorly, your job and savings may be at risk.
ANSWER: d
38. Martin, the HR Manager, bought 1000 shares in his company at a price that was a little less than market prices. What
type of stock plan is this?
a. stock option
b. stock bonus
c. share
purchase
d. market share
ANSWER: c
39. Which plans are set up so that a payout is contingent on the achievement of three- to five-year performance goals?
a. pension plans
b. long-term incentives

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c. deferred profit-sharing
plans
d. goal-sharing plans
ANSWER: b
40. Which of the following is normally seen as an advantage associated with long-term incentives plans?
a. They may encourage a better understanding of the business.
b. They tie rewards to the company’s ability to pay.
c. They usually dilute shareholder equity for existing
shareholders.
d. Goals are easy to determine, particularly in dynamic industries.
ANSWER: a
41. Identify and briefly explain the nature of individual performance pay plans.
ANSWER Individual performance pay plans—piece rates, sales commissions, merit pay, and
: special-purpose incentives—generally focus on promoting task behaviour. Under piece
rates, an employee receives a specified sum of money for each unit of output produced
or processed. They are commonly used in manufacturing and service sectors. Sales
commissions are used to compensate sales personnel in a variety of industries. Sales
associates receive a certain percentage of their gross sales. The commission rate often
varies, depending on the products or services sold. Merit pay is used to recognize and
encourage continuing good performance, and unlike the other types of performance
pay, is based on appraisals of overall employee performance. Special-purpose incentive
programs (sometimes referred to as “targeted incentive programs”) are intended to
promote and reward certain behaviours that are of special importance to an
organization, or to counteract behaviours that are causing problems. Such incentives
are most appropriate in circumstances where intrinsic motivation does not already
exist, where both intended and unintended behaviours are easy to observe, and where
no other alternatives for inducing the desired behaviour are feasible.
42. Discuss the nature of suggestion systems and some of the problems you need to be aware of.
ANSWER Suggestion systems are intended to promote and reward innovative thinking by
: employees. Employees are encouraged to submit suggestions that may improve
organizational effectiveness in exchange for cash bonuses. The components of such a
system are as follows: a system through which suggestions are channelled, a systematic
process for evaluating them, and an incentive for submitting usable ideas. Problematic
issues include the following: non-accepted ideas cause resentment and a reluctance to
contribute further suggestions; employees may feel that the amount of the award is not
equitable compared to the cost savings realized by the company; supervisors resent
employees who make suggestions, feeling this is a negative reflection of managers’
performance; co-workers resent suggestions that disrupt existing work practices; and
who receives credit for the idea if developed by several individuals.
43. Explain the difference between goal-sharing and gain-sharing plans.

ANSWER The core of goal sharing is that work groups or teams receive a bonus when certain
: prespecified performance goals are met, while under gain sharing, cost savings are

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quantified and then shared between the company and the group. Under goal sharing,
goals on one or more performance indicators are set for each group or team, goals are
to be met within a specified timeframe, and a bonus is paid to all team members if the
goal is achieved. Under gain sharing, there are no set goals other than to simply
improve as much as possible relative to the historical baseline. Employee involvement
is considered to be a fundamental aspect of most gain-sharing plans. Goal-sharing
plans can be much more arbitrary, with management making most of the decisions.
44. There are three types of profit-sharing plans discussed in the textbook. Identify and briefly explain each of them.
ANSWER Profit sharing may take one of the following three forms: the current distribution plan,
: the deferred profit-sharing plan, and the combination plan. The current distribution
plan is a profit-sharing plan that distributes the profit-sharing bonus to employees at
least annually in the form of cash or shares. The deferred profit-sharing plan is a plan
in which bonuses are allocated to employee accounts but not actually paid out until a
later date, usually on termination or retirement. A combination plan is a plan that
combines the current distribution and deferred profit-sharing plans by paying some of
the profit-sharing bonus on a current (cash) basis and deferring the remainder.
45. Identify and briefly define each of the three types of employee stock plans.
ANSWER An employee stock plan is any type of plan through which employees acquire shares in
: the firm that employs them. An employee stock bonus plan is a plan through which
employees receive shares in their employing firm at no cost to the employee. An
employee stock purchase plan is a plan through which employees may purchase shares
in their employing firm. An employee stock option plan provides options to employees
to purchase company shares at some point in the future at a fixed price.
46. What is the rationale that makes employee stock plans such a “natural fit” with organizations using a high-
involvement management strategy?
ANSWER The notion of unity and common purpose (goals) fits well with providing employees
: with a so-called stake in the company via share ownership. This could be further
expanded by including elements of power, transparency, and accountability. In a sense,
employees become owners with “skin in the game,” so to speak.

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Chapter 6 - Formulating the Reward and Compensation Strategy

True / False
1. In developing a compensation strategy, the two key questions that must be addressed are: “How much is to be paid?”
and “When should it be paid?”
a. True
b. Fals
e
ANSWER: Fals
e
2. Pay equity legislation falls under employment standards in all Canadian provinces.
a. True
b. Fals
e
ANSWER: Fals
e
3. Jurisdiction over labour markets is primarily within the realm of the federal government of Canada.
a. True
b. Fals
e
ANSWER: Fals
e
4. The process of formulating a compensation strategy includes five distinct yet interrelated steps.
a. True
b. Fals
e
ANSWER: True
5. Salaries are the major component of total compensation for the highest paid executives in Canada.
a. True
b. Fals
e
ANSWER: Fals
e
6. A “lead-the-market” compensation policy should be deployed only in situations when organizations face very tight
labour markets.
a. True
b. Fals
e
ANSWER: Fals
e
7. Company ABC Inc. tends to offer compensation packages below market for entry-level positions, while compensating

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significantly above market for more highly skilled senior positions in the company. ABC Inc. is utilizing a hybrid
compensation policy.
a. True
b. Fals
e
ANSWER: True
8. Before adopting a compensation strategy, it must be able to pass through three screens: affordability, legality, and
employee attraction.
a. True
b. Fals
e
ANSWER: True
9. Golden parachutes generally assure large severance payments for dismissed executives.
a. True
b. Fals
e
ANSWER: True
10. The key reason that executives earn so much more than other employees is because their base pay is so much higher.
a. True
b. Fals
e
ANSWER: Fals
e
Multiple Choice
11. In Canada, organizations face numerous legislated constraints creating so-called “boundaries” to their compensation
systems. Which of the following is NOT categorized as a legislated constraint or boundary?
a. Employment Standards Act or the Canada Labour Code
b. Human Rights Act
c. management strategy constraints
d. income tax, both individual and corporate
ANSWER: c
12. Which of the following is NOT covered by employment standards legislation in Canada?
a. minimum wages
b. minimum age for
employment
c. pay equity
d. hours of work
ANSWER: c

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13. Trucks Are Us Ltd. is a British-Columbia–based trucking company providing long-haul services across Canada.
Which level of government has the primary responsibility for passing labour-related legislation covering employees of
Trucks Are Us Ltd.?
a. British Columbia and other provinces in which Trucks Are Us Ltd. operates
b. British Columbia government
c. municipalities and provincial governments in which Trucks Are Us Ltd. operates
d. federal government
ANSWER: d
14. A particular organization wants to explore the potential for converting many of their employees into contractors.
Which characteristic would potentially lead the Canada Revenue Agency to reject this change in classification?
a. The worker has the ability to refuse or accept work from the organization.
b. The company directs how and where the work should be completed.
c. The worker has control over who actually completes the work.
d. The worker can choose the manner in which the work is completed.
ANSWER: b
15. Which type of legislation covers issues such as overtime pay rates, paid time off, and minimum wage levels?
a. human rights
b. employment
standards
c. trade union
d. tax
ANSWER: b
16. Which statement best explains the legal difference between an employee and a contractor?
a. Only employees are allowed on the work site.
b. Contractors cannot hire another person to complete the work.
c. Contractors are exempt from employment standards
legislation.
d. Employees can be forced to work overtime.
ANSWER: c
17. Which of the following workers are NOT covered under minimum wage legislation in some jurisdictions?
a. students
b. employees working from
home
c. domestic servants
d. commissioned salespeople
ANSWER: c
18. All Canadian jurisdictions have passed human rights legislation prohibiting employment discrimination based on
specific employee factors. What is NOT covered under these broad human rights legislation?
a. marital

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status
b. race
c. gender
d. education
ANSWER: d
19. Tommy Jones, a male forklift operator, thinks that his employer is discriminating against him with respect to his pay
because of his age. Which legislation would be applicable in this case?
a. labour standards
legislation
b. pay equity legislation
c. human rights legislation
d. trade union legislation
ANSWER: c
20. When we discuss labour market constraints, what are we specifically referring to?
a. union constraints on labour allocation
b. availability of employees versus demand
c. cost-of-living constraints on pay demands
d. managerial strategy in recruitment
methods
ANSWER: b
21. The demand for carpenters far outstrips the supply in British Columbia. In fact, many of the construction companies
are relying on the international market to fill vacancies. Which term best describes the labour market for carpenters in
British Columbia?
a. tight
b. loose
c. contingent
d. contractua
l
ANSWER: a
22. Your organization is facing significant competition, putting pressure on your profit margins. Labour costs account for
a significant percentage of your cost structure, and you are concerned with your profitability, moving forward.
Furthermore, you are finding that it is extremely difficult to find production workers willing to work for minimum wage
in Canada. As a result, you decide to move operations to Vietnam so you can take advantage of lower labour costs. Which
type of key constraint has caused you to make this decision?
a. tax
b. financial
c. legislated
d. service
market
ANSWER: b

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23. What should be your first step when you formulate the compensation strategy?
a. Define the required behaviour.
b. Determine the compensation mix.
c. Evaluate the proposed strategy.
d. Determine the compensation level.
ANSWER: a
24. In which organization would compensation have a low role?

a. UNICEF store
b. chicken-processing
plant
c. tree-planting firm
d. used car dealership
ANSWER: a
25. Which pair of job characteristics is likely associated with a high-involvement managerial strategy?
a. individual and low customer contact jobs
b. low task interdependence and narrow-in-scope
jobs
c. simple and repetitious jobs
d. broad and creative jobs
ANSWER: d
26. To keep work interesting and provide higher compensation opportunities for your design engineers, you have created a
compensation system that allows them to move from an entry level to an expert specialist level. What term is used to
describe this system?
a. management
pathing
b. technical ladder
c. competency-based
d. leader development
ANSWER: b
27. You are attempting to define the role compensation will play in your reward strategy. What is a key factor that needs to
be examined?
a. the nature of intrinsic and other extrinsic rewards offered
b. the compensation level strategy
c. the indicators of goal achievement
d. the compensation system behavioural objectives
ANSWER: a
28. In which circumstance does the compensation system need to be relied on less heavily to motivate behaviour?
a. food processing plant
b. shelter helping the

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homeless
c. underground coal mine
d. tire manufacturer
ANSWER: b
29. In which situation would a “lag the market compensation strategy” be applicable?
a. Turnover costs are low.
b. Turnover costs are high.
c. Recruitment costs are high.
d. The demand for labour is
high.
ANSWER: a
30. As a human resource compensation specialist, you are recommending that your company compensate entry-level
factory workers 10 percent below market, while paying 10 percent above market for engineers. What type of
compensation policy are you recommending to your organization?
a. lag
b. lead
c. match
d. hybri
d
ANSWER: d
31. Lag strategies are cost-effective for which type of firms?

a. firms that are labour-intensive
b. firms needing to attract top-quality applicants
c. firms that value employee stability
d. firms that invest heavily in training and development
ANSWER: a
32. A particular company operates several food processing plants across Canada. An internal audit of the company
determined that several plants were paying above-market wages while other plants were paying below-market wages.
What systemic issue could be causing this situation?
a. The company most likely uses one pay scale across Canada.
b. Workers in some of the plants appear to be negotiating higher wages.
c. Different management strategies are being used in each plant.
d. The compensation mix is likely the cause.
ANSWER: a
33. Which method involves using a “what if” scenario to determine which compensation-level strategy is most efficient
for your organization?
a. cost-benefit analysis
b. market share
analysis

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c. trial analysis
d. utility analysis
ANSWER: d
34. Who is primarily responsible for the employee compensation strategy for most Canadian organizations?
a. government and chambers of commerce
b. top leadership, human resources professionals, and compensation
specialists
c. compensation survey firms and human resource managers
d. government and human resource managers
ANSWER: b
35. As the owner of a medium-sized engineering consulting firm, you decide to implement a compensation level policy
that compensates your employees based on market rates. Which type of compensation policy have you adopted?
a. lead
b. match
c. hybri
d
d. lag
ANSWER: b
36. A hybrid compensation-level strategy is one that varies across which of the following?
a. employee groups
b. managerial
strategies
c. business segments
d. industrial sectors
ANSWER: a
37. Before implementing a compensation strategy, human resources professionals must ensure the appropriate screens are
in place to evaluate the strategy’s appropriateness. Which screen is NOT considered one of the so-called “must pass
screens”?
a. Costs are within the financial means of the organization.
b. The new compensation strategy meets the minimum standards under employment
standards legislation.
c. The new compensation strategy attracts potential employees with the required skill
sets.
d. Current employees will be happy with the new compensation strategy.
ANSWER: d
38. Which of the following is generally NOT one of the reasons why firms use contingent workers?
a. to address the shortage of qualified full-time
employees
b. to cut on labour costs

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c. to screen candidates for future employment
d. to improve employee productivity and job satisfaction
ANSWER: c
39. Which variable in executive compensation packages accounts for the majority of the value associated with executive
pay in Canada?
a. annual bonuses
b. base pay
c. stock grants and stock
options
d. perks
ANSWER: c
40. What is the most important factor driving executive compensation?

a. firm size
b. firm performance
c. fraud
d. political connections on
boards
ANSWER: a
41. Briefly discuss the four key understandings necessary for successful formulation of compensation strategy.
ANSWER The four key understandings are: understanding your organization; understanding your
: people; understanding your compensation options; and understanding your
compensation constraints. The foundation for the first understanding is the strategic
framework described in Chapter 2; for the second understanding is the behavioural
framework described in Chapter 3; for the third understanding is the components of
compensations strategy described in Chapter 4; and for the fourth understanding is the
first section of Chapter 5.
42. Briefly summarize the legislative framework that compensation must comply with.
ANSWER In Canada, the federal jurisdiction and each province have employment standards
: legislation that defines the minimum wage, vacations, leaves of absence, statutory
holidays, etc., that employees are entitled to. There is also human rights legislation that
addresses issues of equity in the workplace, labour laws that govern the relationships
between employers and unions, and tax legislation that affects many aspects of
compensation—especially indirect pay.
43. Briefly describe the five main steps in the formulation of compensation strategy.
ANSWER The five main steps in the formulation of this strategy are:
: 1. Define the behaviour that the organization requires.
2. Define the role the compensation system will play in eliciting that behaviour.
3. Determine the best mix of compensation components.
4. Determine policies for compensation level.

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Conduct a pre-implementation evaluation of the proposed strategy to verify that it

meets criteria for success.
44. What are a firm’s choices for compensation-level strategy and how can it decide between them?
ANSWER An organization’s compensation strategy may be to lead, lag, or match the market. It
: may have the same policy across the board, or it may have different compensation
levels for different employee groups (this is known as a hybrid compensation-level
strategy). Major factors in setting the compensation level for a given employee group
are the importance of this group to the firm’s success and its scarcity in the labour
market. Utility analysis can be used to determine the relative efficiency of various
compensation-level policies.
45. For the special employee groups discussed in the textbook (contingent employees, executives, and international
employees), what are some the implications for compensation?
ANSWER A key issue for contingent employees is whether to compensate them differently from
: regular employees performing the same work. A key issue for executives is how create
a compensation system that motivates desired behaviour but is not excessively costly. A
key issue for expatriate and foreign employees is the extent to which they are
compensated consistent with home country standards.
46. You have been asked to provide recommendations to a compensation committee in their attempts to shift the CEO’s
compensation into a mix of rewards that facilitates and encourages a long-term view of business performance. What foci
should your recommendations take?
ANSWER Responses to this question will vary greatly. That said, elements of rewards associated
: with the proposed package should include variables such as: moving to a restricted
stock option plan versus stock options; profitability and market growth targets (three to
five years); employee and customer engagement scores (value of service provided to
customers, and growth and development opportunities within the company); product
development (particularly in industries with fast product cycles); efficiency metrics
(productivity) and effectiveness (product penetration per customer); meeting corporate
three- and five-year business targets (which may include many of the aforementioned
variables).

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Chapter 7 - Evaluating Jobs: The Job Evaluation Process

True / False
1. The job evaluation process focuses on how to evaluate individual employee performance to produce a solid foundation for a merit
pay system.
a. True
b. Fals
e
ANSWER: Fals
e
2. Job analysis is derived from job specifications, which in turn are the foundation of all job evaluation systems.
a. True
b. Fals
e
ANSWER: Fals
e
3. A job description serves several purposes, including providing guidance in the selection and recruitment process.
a. True
b. Fals
e
ANSWER: True
4. There are four main methods of conducting job analysis: interviews, observation, questionnaires, and functional job analysis.
a. True
b. Fals
e
ANSWER: True
5. Of the four main methods used to conduct job analysis, interviews and questionnaires are by far the most effective when dealing
with organizations that do not currently have examples of jobs to be reviewed.
a. True
b. Fals
e
ANSWER: Fals
e
6. The Position Analysis Questionnaire focuses on behaviours that make up a job.

a. True
b. Fals
e
ANSWER: True
7. Two methods of job evaluation are ranking/paired comparison and classification/grading.

a. True
b. Fals

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e
ANSWER: True
8. Red-circling applies to employees who are below the pay range for their jobs.
a. True
b. Fals
e
ANSWER: Fals
e
9. Under Ontario pay equity legislation, going through the pay equity process is unnecessary if your firm has no female job classes.
a. True
b. Fals
e
ANSWER: True
10. The Ontario Pay Equity Act covers all employers in the province.
a. True
b. Fals
e
ANSWER: Fals
e
Multiple Choice
11. Which process is used to determine the relative importance of the employee’s job to the organization and the placing of those jobs
in the same hierarchy level?
a. job analysis
b. market analysis
c. performance
appraisal
d. job evaluation
ANSWER: d
12. Which process is looked upon as the process of gathering data and information about the characteristics required for specific jobs?
a. job analysis
b. job evaluation
c. job description
d. job
specifications
ANSWER: a
13. Which job analysis method is used for organizations that are being created or when new jobs are introduced?
a. observation
b. interviews

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c. questionnaires
d. functional job analysis
ANSWER: d
14. As a human resource professional, you have been asked by your organization to develop a job description for the heavy-duty
mechanic role. What are you likely NOT to include in the job description?
a. some statement describing the conditions under which the mechanic will work under
b. the appropriate pay grades, ranges, and future pay increase scales
c. the level of skill and certification required for the role
d. the fact that the mechanic will be working under the supervision of a senior
technician
ANSWER: b
15. What is the term generally used to describe employees who are below the pay ranges for their jobs?
a. green-circled
b. red-circled
c. targeted for promotion
d. discriminated
ANSWER: a
16. Which of the following is NOT a valid purpose for conducting job evaluation?
a. to control employee performance
b. to control wage costs
c. to create an equitable pay structure
d. to create perceptions of equitable pay among those covered by the
system
ANSWER: a
17. Which statement would NOT describe an appropriate usage of job descriptions?
a. determining necessary employee qualifications
b. creating questions in the interview process
c. supporting the development of business level
strategies
d. developing training plans
ANSWER: c
18. What do job specifications focus on?

a. job activities
b. reporting structure
c. employee qualifications
d. performance
ANSWER: c
19. Which statement provides the best example of a job specification?


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a. arranging meetings and scheduling out-of-town
travel
b. possessing a valid driver’s licence
c. answering telephones and personal inquiries
d. reporting to the head of the department
ANSWER: b
20. The textbook introduces four main approaches to conducting job analysis. Which approach would you NOT likely use to collect
information on the teller role at an existing Canadian bank?
a. Observe several bank tellers performing their
jobs.
b. Perform a functional job analysis.
c. Interview several tellers at a local branch.
d. Provide questionnaires to several tellers.
ANSWER: b
21. Because your company is newly created, you do not have any job descriptions. Which method of job analysis will you need to
use?
a. interviews
b. questionnaire
s
c. functional
d. observation
ANSWER: c
22. Carlos decides to use a time-and-motion study to gather information about a particular job. What kind of job analysis method is
Carlos using?
a. observations
b. interviews
c. questionnaires
d. functional job analysis
ANSWER: a
23. XYZ. Inc. uses a group of judges to examine its job descriptions and determine the value of these jobs to the organization. What
job evaluation method is XYZ Inc. using?
a. point method
b. functional job analysis
c. ranking method
d. policy capturing method
ANSWER: c
24. Which job evaluation method has historically been popular with government civil service organizations?
a. ranking
b. classification/grading
c. factor comparison

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d. paired comparison
ANSWER: b
25. You have been asked to present to management potential drawbacks associated with using a job analysis process at your company.
Which of the following would likely NOT be included in your list of drawbacks?
a. analyzing the jobholder rather than the job
b. gender bias
c. use of technical language
d. use of incorrect benchmark jobs
ANSWER: d
26. One of the shortcomings associated with job analysis in dynamic work environments is the potential for obsolete data to be used
for a variety of human resource decisions. What proactive steps would you recommend to an organization facing this issue?
a. Update job descriptions systematically.
b. Stop conducting job analysis.
c. Contract out most of your human resource functions.
d. Allow each manager in the organization to create actual job descriptions.
ANSWER: a
27. Which of the following is NOT one of the methods of job evaluation discussed in the textbook?
a. ranking method
b. forced distribution method
c. factor comparison method
d. statistical/policy capturing method
ANSWER: b
28. Which job evaluation method is intended mainly for management and executive jobs?
a. ranking
b. job classification
c. Hay Plan
d. expert method
ANSWER: c
29. An Ontario-based organization asks you to recommend a job evaluation method that may meet pay equity legislation. What job
evaluation method are you likely NOT to recommend?
a. point
b. factor
comparison
c. ranking
d. classification
ANSWER: c
30. Which job evaluation method is like sorting books among a series of carefully labelled shelves in a bookcase?
a. ranking

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b. paired comparison
c. classification
d. factor comparison
ANSWER: c
31. Which evaluation method uses questionnaires to capture time spent on certain activities and the importance of those activities to
the successful completion of the job?
a. point
b. factor comparison
c. classification
d. statistical/policy capturing
ANSWER: d
32. Which term is used to describe key characteristics of jobs that are valued by organizations and differentiate jobs from one another?
a. core job dimensions
b. job facts
c. compensable
factors
d. benchmarks
ANSWER: c
33. Organizations need to answer a series of questions in order to conduct job evaluations effectively. What question would a job
evaluation process NOT address?
a. Who conducts the job evaluations?
b. Which jobs should be changed?
c. What appeal mechanisms are to be established?
d. How should the job evaluation results be applied?
ANSWER: b
34. Joel, whose pay was above the pay range, was forced to take a substantial pay cut. He has decided to challenge his employers in
the courts. What will he likely claim?
a. discrimination
b. constructive dismissal
c. demotion
d. red-circling
ANSWER: b
35. Mario performs his job at a very high standard. Unfortunately, a job evaluation process determined that he is currently being paid
at a level below the minimum in a new pay scale. Which statement best describes Mario’s current position in the new pay scale?
a. Mario would be classified as a “constructive employee.”
b. Mario would be classified as an “exception-to-the-pay-scale”
employee.
c. Mario would be classified as a “green-circled employee.”
d. Mario would be classified as a “red-circled employee.”

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ANSWER: c
36. Which of the following is NOT a valid reason to re-evaluate jobs?

a. Labour market conditions change significantly.
b. The strategy of the organization changes.
c. A new performance system is implemented.
d. There is a high level of appeals.
ANSWER: c
37. Which procedure is NOT required under the Ontario Pay Equity Act?
a. identifying job classes by gender
b. collecting job information
c. comparing jobs using gender neutral
system
d. checking for performance appraisal biases
ANSWER: d
38. The textbook identifies several methods that may be used when comparing female and male job classes. Which method would you
consider to be inappropriate?
a. proxy
b. job-to-job
c. equality
d. proportional value
ANSWER: c
39. In Ontario, once completed, pay equity plans should be shared with employees, including both process and outcomes. Which of
the following organizations would be exempt from posting their pay equity plans?
a. a global manufacturer in Ottawa employing 250 workers
b. a car manufacturer employing 1,000 workers at its Toronto plant
c. a food processing factory employing 200 full-time employees
d. a farming operation in Ontario employing 25 employees
annually
ANSWER: d
40. Which of the following practices can NOT be used to achieve pay equity?
a. Pay levels for male comparator jobs will be lowered.
b. All positions in a job class will receive adjustments in dollar terms.
c. Each female job class must receive a yearly adjustment until pay equity is achieved.
d. Inequitable female job classes with the lowest job rate must receive a greater
adjustment.
ANSWER: a
41. Briefly explain the purpose of job evaluation and the nature of “relative worth.”

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ANSWER Job evaluation is a systematic process used to determine the relative worth of jobs within the
: organization. The key objectives in conducting job evaluations are as follows: control wage
costs, create an equitable pay structure showing what is valued by the company, and create
perceptions of equitable pay among those covered by the system—one that is seen as being fair
to employees and provides justification for compensation practices. The end result of job
evaluation is a hierarchy of jobs, where all jobs determined to be similar in value to the
organization are located at the same level in the hierarchy. This hierarchy shows the internal
alignment of jobs and provides the foundation for the development of pay grades and ranges.
The worth of jobs evaluated is relative to the specific organization. The value added by the same
work may be more (or less) in one organization than in another. For example, the value added
by a compensation specialist to a clothing retail company whose profits are generated through
clothing sales is less than the value added by that same specialist to a pay equity consulting firm
whose clients pay for compensation knowledge.
42. What should a job description contain if it is to be useful for job evaluation?
ANSWER The following elements are important components of a job description: (a) job title, department
: or location, reporting relationships, and date when job analysis was originally completed or
updated; (b) a brief statement of job purpose or objectives; (c) a list of the major duties of the
job, in order of priority or importance; (d) an indication of responsibilities for people, results
and organizational assets, including cash, tools, equipment, and facilities, along with budget
allocations; (e) the mental and physical effort demanded by the job; (f) the conditions under
which the work is performed, including hazards and quality of work environment; and (g) a
specification of the qualifications needed to perform the job, including skills, training,
education, and abilities, as well as any certificates or licences required.
43. Identify and briefly explain the main methods used to obtain the information necessary for effective job evaluation.
ANSWER The four main methods are: (a) observation, (b) interviews, (c) questionnaires, and (d)
: functional job analysis. Used in conjunction with other methods, observation involves watching
the employee as the job is performed and noting all of the necessary information needed for
evaluating jobs. Although time-consuming interviews can be conducted with either a sample of
employees, their supervisors, or preferably both, a structured interview format provides more
consistent information. An open-ended or closed-ended questionnaire can be used to gather job-
related data. Because care needs to be taken to develop a reliable and valid questionnaire, most
organizations use questionnaires developed by outside specialists. A commonly used tool, the
Position Analysis Questionnaire (PAQ) focuses on the behaviours that make up a job and
utilizes job elements to describe work activities. Based on a common set of job functions,
functional job analysis produces a series of task statements to describe the job. Managers can
then analyze these statements to draw conclusions about the nature of the job.
44. What key procedures need to be worked out to ensure the job evaluation process is effectively conducted and managed?
ANSWER If the job evaluation system is to be effective, the process for conducting and managing job
: evaluation is crucial. Organizations need to work out procedures for who will conduct the job
evaluation process, how it will be communicated, how results will be applied, how procedural
justice can be established, and how job evaluations will be updated.
45. With reference to Ontario pay equity legislation, briefly discuss the job comparison methods that can be used for comparing
female and male job classes.
ANSWER The three main methods are (a) the job-to-job method, where a female job class is compared to
: a male class comparable in terms of job evaluation criteria; (b) the proportional value method,
used when no comparator male job class exists; and (c) the proxy comparison method, which
can be applied only in public sector organizations and only when the job-to-job and proportional
value methods cannot be applied.

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Chapter 8 - Evaluating Jobs: The Point Method of Job Evaluation

True / False
1. The final step in developing a job evaluation system using a point method requires that the job hierarchy scheme meet
certain criteria, including validity and market fit.
a. True
b. Fals
e
ANSWER: True
2. Job evaluations help to establish internal equity.

a. True
b. Fals
e
ANSWER: True
3. Under pay equity legislation, organizations need to evaluate three out of the four main categories of compensable
factors in evaluating jobs.
a. True
b. Fals
e
ANSWER: Fals
e
4. The two methods for deriving factor weightings are statistical analysis and expert judgment.
a. True
b. Fals
e
ANSWER: True
5. Reliability of the job evaluation system means that the system will produce the same results even if different evaluators
are used.
a. True
b. Fals
e
ANSWER: True
6. The primary drawback associated with using the point method of job evaluation is that it provides an illusion of a
scientific process when in fact the method relies significantly on the judgment of evaluators in selecting appropriate
weights
a. True
b. Fals
e
ANSWER: True
7. Broad banding results in fewer jobs in a pay grade.

a. True

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b. Fals
e
ANSWER: Fals
e
8. A pay grade is the same as a pay range.

a. True
b. Fals
e
ANSWER: Fals
e
9. A living wage is the same as the minimum wage.

a. True
b. Fals
e
ANSWER: Fals
e
10. One possible solution to excessive pay scale overlaps is to ensure that the maximum pay in a lower scale is less than
the midpoint of the next higher pay scale
a. True
b. Fals
e
ANSWER: True
Multiple Choice
11. Which of the following is NOT a component of the point method of job evaluation?
a. compensable factors
b. total points
c. factor degrees
d. competencies
ANSWER: d
12. What is generally NOT considered an advantage of the point method of job evaluation?
a. It gives the relative value of jobs.
b. It helps to establish internal equity among
jobs.
c. It helps to establish market rates for jobs.
d. It has a high degree of precision.
ANSWER: c
13. Four main categories of compensable factors are used widely in industry. Which of the following could be included in
the skill category?

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a. John is often exposed to chemicals.
b. Marie needs to solve a variety of problems at
work.
c. Dwayne is held accountable for error rates.
d. Dolores often has to be able to lift 25 kg boxes.
ANSWER: b
14. Under the point method scheme of job evaluation, what is the main characteristic that distinguishes one job from
another thereby making a job more valuable to an organization?
a. market comparators
b. regression analysis
c. base pay structure
d. point scores of the
jobs
ANSWER: d
15. Which of the following is NOT a job evaluation compensable factor required by pay equity legislation in Ontario?
a. skill
b. effort
c. working conditions
d. market comparability
ANSWER: d
16. Which statement best describes the use of job evaluations and pay equity in Ontario?
a. Multiple plans can be used for a bargaining unit in unionized organizations.
b.A single plan is required for a bargaining unit in unionized organizations.
c. The job evaluation system must use between 8-12 compensable factors.
d.If the organization is not unionized, Ontario legislation requires the use of different
plans for blue-collar and white-collar jobs.
ANSWER: b
17. Which compensable factor would you include under the main category of “working conditions”?
a. requirements associated with being exposed to health hazards
b. requirements associated with educational levels
c. requirements associated being responsible for the safety of coworkers
d. requirements associated with having to produce certain levels of
output
ANSWER: a
18. Assume that options (a), (b), (c), and (d) below represent degree 1, 2, 3, and 4, respectively, for the formal education
factor on your summary rating chart for the point method of job evaluation. Based on the degree definitions, which of the
following degrees is arranged out of place on the chart?
a. degree 1: completion of high school
b. degree 2: one year of post-secondary education

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c. degree 3: three year college diploma or university
degree
d. degree 4: completion of grade 9
ANSWER: d
19. Two thousand points are distributed between compensable factors, based on the following: education 750 points, time
pressure 350 points, customer contact 500 points, and communication skills 400 points. Which step in developing a job
evaluation system using the point method recognizes these variations in importance?
a. defining the factors
b. weighting the
factors
c. scaling the factors
d. testing the system
ANSWER: b
20. Which approach for deriving factor weights tends to be seen as being rather complex and difficult to understand?
a. the “a priori” method
b. the statistical analysis method
c. the testing and functional
method
d. the benchmark scallion method
ANSWER: b
21. After several evaluators apply the job evaluation system to a heavy-duty mechanic job, you find significant
discrepancies in the weights associated with each compensable factor. What is NOT likely to be a reason for the
discrepancies?
a. factor definition being used by the evaluators
b. job information provided to the evaluators
c. evaluators using the wrong benchmarks
d. degree of definition provided to the
evaluators
ANSWER: c
22. In calibrating job evaluation results with the market, we select “key” organizational jobs for market comparisons.
What are these “key” jobs called?
a. benchmark jobs
b. market
comparators
c. market calibrators
d. compensable jobs
ANSWER: a
23. After plotting a regression (market line), you determine that the slope is very steep. What possible conclusion can you
make from observing the slope of the regression line?
a. The correlation coefficient is approaching –1 (negative one).

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b. There is too much spread in job evaluation points between low-value and high-value
jobs.
c. There is not sufficient spread in job evaluation points between low-value and high-
value jobs.
d. Lower-value jobs appear to be compensated above market rates.
ANSWER: c
24. What does the market line determine?

a. whether the firm should lead, lag, or match the market
b. the relationship of job evaluation results to market pay rates
c. the relationship of job evaluation results to a firm’s pay grades
d. a pay rate based on a market survey
ANSWER: b
25. What does a –1 (negative one) correlation coefficient mean?

a. There is a positive relationship between job evaluation points score and pay levels.
b. There is an inverse relationship between job evaluation points score and pay
levels.
c. Your regression equation has a very steep upwards slope.
d. There is very little relationship between job evaluation points score and pay levels.
ANSWER: b
26. In exploring solutions to job evaluation problems, what is NOT one of the main steps?
a. Check that benchmark jobs are equivalent to market comparator jobs.
b. Determine if the wrong factors have been included in the job evaluation
system.
c. Adjust the point totals of the outlier jobs to improve the correlation coefficient.
d. Examine whether jobs have been badly evaluated.
ANSWER: c
27. The textbook identifies four possible pitfalls associated with the point method of job evaluation. Which category of
pitfalls would include a situation whereby the factor is poorly defined, creating a situation in which the evaluator is not
clear what the factor is designed to pick up?
a. hierarchical grounding
b. factor overlaps
c. gender bias
d. inconsistent construct
ANSWER: d
28. What does the correlation coefficient of the market pay line tell you?
a. “goodness of fit” between the job evaluation points and market
pay
b. pay equity adjustments to be made
c. degree of freedom in market rates

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d. accuracy of the market data
ANSWER: a
29. Which of the following is NOT a source of gender bias associated with developing a point method job evaluation
process?
a. excessive range in the degree statements
b. excluding factors often associated with female dominated
positions
c. biased job descriptions
d. separate job families
ANSWER: a
30. What type of gender bias problem is exemplified by the belief that “any of the skills needed to work with young
children should not be highly rated because care giving comes natural to women”?
a. ignoring factors found in female jobs
b. confusing job content with
stereotypes
c. biased job descriptions
d. differential evaluation of factors
ANSWER: b
31. The following are hypothetical points provided to the following jobs:
∙heavy-duty mechanic: 900
∙human resource specialist: 900
∙technician: 900
The organization sees these positions as having equal value from a base pay perspective; hence, there is no difference in
pay. What term best describes the grouping of these jobs?
a. pay grade
b. range
tightness
c. pay range
d. pay structure
ANSWER: a
32. You have been asked to provide rationale for clustering jobs into so-called pay grades. What is NOT likely to be
included in your rationale?
a. Clustering of organization tends to reduce labour costs.
b. It facilitates the administrative process; one pay range can cover several jobs.
c. Slight changes in job content do not necessarily trigger a review.
d. It accounts for the fact job evaluations are to a large degree subjective in nature.
ANSWER: a
33. Which term refers to the actual minimum and maximum pay rate, in dollar terms, for all the jobs that fall in a
particular pay grade?

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a. pay range
b. broad banding
c. market anchor
d. step progression
ANSWER: a
34. What is a negative consequence of clustering jobs into pay grades?

a. Pay grades make it difficult to justify and explain pay rates to employees.
b. Pay grades create less stability for the pay system.
c. There may be pressure to reclassify borderline jobs or to promote people to get more
money.
d. Similar jobs are grouped into the same grades.
ANSWER: c
35. Which of the following is an inevitable outcome of broad banding?

a. There are increased labour costs, as everyone is paid more for specific
jobs.
b. It decreases the level of flexibility within the pay grades.
c. It tends to lead to “skinny” pay grades.
d. Jobs with significantly different scores end up in the same “band.”
ANSWER: d
36. Which statement best explains how to establish pay grade sizes using the equal interval approach?
a. Look for natural breaks between clusters of jobs when setting up the grades.
b. Increase the grade widths for higher-value jobs but not necessarily by an equal
percentage.
c. Reduce the number of pay grades by creating large bands.
d. Make the point spreads equal for all pay grades.
ANSWER: d
37. The pay policy line is used to establish which pay structure component?
a. midpoint of the pay
range
b. range spreads
c. overlaps between ranges
d. pay grade size
ANSWER: a
38. Which statement best reflects the relationship between the minimum wage and a living wage?
a. They are the same.
b. A living wage tends to be higher than the minimum wage.
c. The minimum wage tends to be higher than a living
wage.

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d. A living wage is two times the minimum wage.
ANSWER: b
39. Which practice is a threat to the integrity of the job evaluation system?
a. wider pay grades as the system goes up
b.equal dollar differences between the range midpoint and the range minimum, and
between the range midpoint and the range maximum
c. wider range spreads for higher pay grades
d.excessive overlaps between pay ranges
ANSWER: d
40. After reviewing pay ranges for your organization, you realize a significant number of pay ranges do not overlap or do
not connect. For example, the maximum of the pay range for pay grade number 2 is $50,000 and the minimum range for
pay grade number 3 is $60,000.00. What is a potential root cause of this issue?
a. Ranges are too narrow and/or there are not enough pay
grades.
b. An equal approach method was used to establish pay grades.
c. An equal percentage method was used to establish pay grades.
d. Poor benchmark jobs were used to establish pay grades.
ANSWER: a
41. Identify and briefly describe the main steps in developing a job evaluation system using the point method.
ANSWER The main steps in developing a point method of job evaluation system are as follows:
: identify the compensable factors, scale the factors, weight the factors, and apply and
test the system. Appropriate compensable factors are those characteristics of jobs that
are valued by the organization and differentiate jobs from one another. The four main
categories of factors include: skill, effort, responsibility, and working conditions.
Scaling involves breaking down the factors into major categories (i.e., universal
factors, sub-factors, and degrees or levels). In “scaling the factors,” the objective is to
create a scale for each factor that reliably measures the extent to which that factor is
present in a given job. Determining the relative weight for each factor is based on how
the organization values each factor. Although it can be done statistically, this is very
rare, and it is generally a judgmental process. Once the weightings are determined,
points are assigned across factors, sub-factors, and degrees. The total point value of
each job is determined using the system. The resulting hierarchy of jobs is tested to
determine validity (i.e., if the system is actually a true measure of relative job worth)
and for reliability (i.e., if the results come out the same when the system is applied by
different evaluators). If so, the system must then be calibrated to the market, using
benchmark jobs and market comparator jobs. This provides the opportunity to test for
market fit, as well as testing for other potential problems.
42. Discuss the advantages and disadvantages of the point method of job evaluation.
ANSWER The advantages of this system include a high degree of precision in measuring jobs; it’s
: easy to apply with consistency; it provides an ordering of jobs and relative value of
each; and it allows jobs to be clustered in pay classes more easily. The disadvantages

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include the complexity and difficulty involved in developing this system, the fact that it
is basically a subjective process, and the possibility of flaws.
43. Briefly describe the main pitfalls in designing a point method system of job evaluation.
ANSWER The main pitfalls are inconsistent construct formation, factor overlaps, hierarchical
: grounding, and gender bias. Students should expand on this with material drawn from
the textbook.
44. What are the key considerations in establishing pay grades and pay ranges?
ANSWER Issues in establishing pay grades include how many grades and grade sizes. In the
: number of pay grades, important considerations include the total range of pay of jobs
covered by a particular job evaluation system and the width of the pay ranges to be
used. In setting pay grade size, four methods to consider are: the equal interval
approach, the equal increase approach, the equal percentage approach, and the
telescopic approach. Issues in establishing pay ranges include setting the range
midpoints and the range spreads. To set the range midpoints, a market line graph is
used. Considerations in setting range spreads include the extent to which the
organization wants to use compensation to recognize differences between employees
performing the same jobs, the existence of promotional opportunities, and how many
steps or increments the organization intends to have in the range.
45. What criteria are used to determine movement through the pay range?
ANSWER The three most common criteria used to determine movement through the pay range
: are experience, seniority, and performance. In some cases, all three are used. There are
many combination possibilities. Some firms, for example, use the midpoint of the
range as a control point. Employees are allowed to reach the midpoint of their range
based on seniority. Beyond the midpoint, pay increases are based on performance.
Most pay ranges have six or seven increments within a pay range. Some firms do not
use fixed steps or increments at all.

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Chapter 9 - Evaluating the Market

True / False
1. In broad terms, wages paid for a particular “labourer” depend on the relationship between supply and demand for
labour, and a specific company’s ability to pay.
a. True
b. Fals
e
ANSWER: True
2. Existing companies tend to lower wages when demand for labour exceeds supply.
a. True
b. Fals
e
ANSWER: Fals
e
3. For public sector organizations, the key factor determining wages is the employees’ ability to generate revenue.
a. True
b. Fals
e
ANSWER: Fals
e
4. It is easier to use third-party surveys and data than to design and conduct an in-house survey.
a. True
b. Fals
e
ANSWER: True
5. Informal surveys have poor reliability and validity.

a. True
b. Fals
e
ANSWER: True
6. In order to calibrate a compensation system, a sample of 25 to 45 percent of sample of jobs should be a minimum.
a. True
b. Fals
e
ANSWER: Fals
e
7. In conducting a compensation survey, the first step should be to identify the jobs to be surveyed.
a. True
b. Fals

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e
ANSWER: True
8. The compa-ratio is calculated by taking the average pay of all employees holding a particular job title and then dividing
this by the midpoint of the pay range for that job.
a. True
b. Fals
e
ANSWER: True
9. A very large interquartile quotient tends to indicate that all jobs in the sample are equivalent.
a. True
b. Fals
e
ANSWER: Fals
e
10. Compensation surveys reflect the value placed on jobs by the labour market, but this does not always mean that the
market values jobs fairly.
a. True
b. Fals
e
ANSWER: True
Multiple Choice
11. Which of the following best explains why current employers do not seem to reduce wages for existing employees in
the short term when the supply for a particular set of skills far outstrips the demand?
a. because of the wage compression phenomenon
b. because of the negative impact on performance and increased turnover
c. because labour budgets tend to be determined on an annual basis
d. because fewer potential employees tend to put upwards pressure on
wages
ANSWER: b
12. Which of the following is NOT considered a general pattern in compensation levels?
a. Union employees receive more compensation than comparable non-union employees.
b. Male employees earn more than female employees on average.
c. Resource sector employees earn more than those in the service sector.
d. The wage gap between public-sector organizations and private-sector firms is narrow
for top-level employees.
ANSWER: d
13. Which of the following is generally NOT a determinant of employees’ pay in the public sector?
a. collective bargaining

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b. employees’ ability to generate revenues
c. employers’ ability to pay
d. budget available for pay increases
ANSWER: b
14. Which condition tends to explain why jobs in the higher hierarchy positions of the public sector tend to be paid less
than similar positions in the private sector?
a. a strong union
b. publicly visible salaries
c. the levels of indirect pay provided to senior public sector
positions
d. a poor industry reputation
ANSWER: b
15. Which of the following identifies two crucial dimensions of the labour market?
a. occupational grouping and geographic scope
b. unemployment rate and turnover in the area
c. availability of labour and types of
legislation
d. education levels and experience ratings
ANSWER: a
16. As a human resource specialist, you recommend an international scope when defining the relevant labour market for a
nuclear physicist to be responsible for the safety of a Canadian nuclear reactor. Which variable is likely to be informing
your decision?
a. the level of job specialization
b. the international nature of the
industry
c. the highly visible nature of the role
d. the high profile nature of the role
ANSWER: a
17. Which characteristic is NOT typically considered in the selection of market comparator firms?
a. the type of product or service the firm
provides
b. whether the firm has achieved pay equity
c. whether the firm is union or non-union
d. the geographic area over which it operates
ANSWER: b
18. What is a potential drawback associated with using compensation consultants to gather labour market information?
a. The data is usually not presented in a “user-friendly manner”; hence, it is difficult to
use.
b. The data is usually old and not relevant.

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c. The data may be restricted to client firms; hence, it does not necessarily comprise an
appropriate sample.
d. The data tends to be more expensive compared to designing and administering your
own survey.
ANSWER: c
19. What are three of the main “third-party” sources of compensation data?
a. Statistics Canada, trade journals, and government agencies
b. private agencies, trade journals, and government agencies
c. government agencies, industry groups, and consulting
firms
d. consulting firms, boards of trade, and publishers
ANSWER: c
20. What is a key concern related to using data from free compensation data websites?
a. complexity of the
data
b. cost of the data
c. proprietary issues
d. validity of the data
ANSWER: d
21. Which survey source raises concerns among HR professionals about the validity of their data?
a. industry groups
b. formal in-
house
c. free websites
d. consultants
ANSWER: c
22. Which topic would typically NOT be included in survey questions asked by most consultants in the process of
populating their compensation databases?
a. number of employees
b. criteria associated with movements within the pay
range
c. base pay, performance pay, and indirect pay
d. turnover rates
ANSWER: d
23. Which of the following provides the best-quality compensation data?

a. personal interviews
b. questionnaires
c. telephone interviews
d. mail surveys

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ANSWER: a
24. An employer is contemplating conducting their own in-house compensation surveys. What would you caution them
about?
a. There is a lack of control over process.
b. There is no need to involve outside consultants.
c. Skills and abilities associated with survey methodology are
needed.
d. They are likely to sample the wrong jobs and/or industry.
ANSWER: c
25. What is NOT a main step in conducting a proper compensation survey?

a. identifying jobs to be surveyed
b. identifying employees to be surveyed
c. determining the information needed
d. determining how you will collect the data
ANSWER: b
26. The textbook identifies two in-house methods that may be used to collect compensation data. Which of the following
is classified as an “in-house” source?
a. formal surveys
b. government
agencies
c. consultants
d. industry groups
ANSWER: a
27. In analyzing compensation data that include extreme values, what would be an advisable measure of central tendency
to use?
a. compa-ratio
b. mean
c. median
d. inter-quartile range
ANSWER: c
28. Although very costly to use on a significant scale, which method of data collection provides the best quality of
information?
a. internet surveys
b. personal interviews
c. telephone interviews
d. questionnaires
ANSWER: b
29. Which method is used to measure dispersion of salary data across employers?

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a. percentiles
b. weighted mean
c. simple mean
d. median
ANSWER: a
30. Which of the following is NOT a procedure used to analyze and interpret survey data?
a. central tendency
b. dispersion
c. compa-ratio
d. data aging
ANSWER: d
31. Which of the following is generally NOT collected in compensation surveys?

a. base pay
b. performance appraisal
methods
c. performance pay
d. benefits
ANSWER: b
32. You have determined that the lowest-paying employer pays it secretaries a mean total compensation of $30,000, and
the highest-paying employer pays its secretaries a mean total compensation of $42,000. What is the dispersion in
secretarial compensation across firms?
a. 12
percent
b. 25
percent
c. 40
percent
d. 50
percent
ANSWER: c
33. Which measure can be used to assess the central tendency of pay?
a. dispersion
b. standard deviation
c. quartiles and deciles
d. mean
ANSWER: d
34. You determined that $65,000.00 in salary represents the 85th percentile of total compensation paid by employers for
the heavy-duty mechanic job in British Columbia. Which statement is most accurate, given the aforementioned statement?
a. 15% of employers compensate above $65,000.

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b. $65,000.00 represents the median.
c. 15% of employers compensate below
$65,000.
d. 85% of employers compensate above $55,250.
ANSWER: a
35. Which statement best describes the compa-ratio?

a. It is calculated by averaging the pay ranges in the quartiles.
b. It is a measure of pay dispersion across employers.
c. It is derived by dividing mean base pay by the midpoint of the pay
range.
d. It is a calculation based on average base pay for each job.
ANSWER: c
36. What does a compa-ratio of greater than 1 mean?

a. Employees, on average, are being paid above the midpoint in the pay
range.
b. The majority of employees are in the first pay quartile.
c. The firm is paying their employees in the bottom half of the pay range.
d. The firm has only a minority of their employees in the top pay bracket.
ANSWER: a
37. What term describes the process of adjusting survey results to account for the dated nature of compensation surveys,
while at the same time, taking into consideration potential market increases in the following year?
a. benchmarking the data
b. aging the data
c. data alignment
d. pay trending
ANSWER: b
38. Which compa-ratio suggests that, on average, employees are being paid above the mid-point of the range?
a. 0.01
b. 0.92
c. 1.00
d. 1.03
ANSWER: d
39. What critical assumption underpins labour market compensation surveys that may serve to illustrate the need for pay
equity legislation?
a. Usage of compensation surveys assumes that the market values jobs in a fair manner.
b. The market demand and supply of labour tends to operate at an equilibrium in the
short term.
c. Calibration of the pay system will insure a near-perfect labour price.
d. Targeting a compa-ratio of 1 eliminates the need for pay equity legislation.

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ANSWER: a
40. Which of the following is NOT a possible limitation of compensation surveys?

a. Free labour market data is not readily available.
b. We cannot surmise anything about compensation strategies practised by other firms.
c. They may misrepresent actual pay trends.
d. Markets may not value jobs fairly.
ANSWER: a
41. Briefly discuss the factors to be considered in defining the relevant labour market for a given firm.
ANSWER Two kinds of competitors are important to consider: competitors in the labour market
: and competitors in the product/service market. Two other dimensions are crucial: the
occupational grouping under consideration and the geographic scope of the market.
Besides these, relevant aspects include whether the firm is unionized or non-unionized,
and the size of the firm. All of these factors must be balanced when defining a market
sample.
42. Identify and briefly describe the four main steps in conducting a compensation survey.
ANSWER The first step is to identify the jobs to be surveyed. The rule of thumb is that surveying
: about 10 to 15 percent of jobs should be sufficient to calibrate the system. Key job
matching is a common method used to match an organization’s jobs to those being
surveyed. The second is to determine what information to collect. Collected
information should include base pay, performance pay, indirect pay, weekly hours of
work, and where most employees actually are in the pay range. The third step is to
determine who to survey. Employers are selected based on industry type, geographic
location, and size. The fourth step is to determine how to collect the data. Consider
using the following methods: personal interviews, questionnaires, telephone interviews,
and the Internet.
43. Discuss some of the advantages and disadvantages of in-house surveys.

ANSWER Advantages of in-house surveys include: allowing the organization to select the key
: jobs, the firm does its own job matching, and the firm has the option of selecting and
determining survey participants. Disadvantages include: (a) the fact that firms do not
necessarily have qualified researchers, (b) the organization may run up against a lack of
cooperation from certain participants because of the large number of surveys they face
or the confidential nature of some of the information requested, (c) the time
consumption of doing a survey, and (d) employees concerned may challenge the
credibility of the survey results because the organization is both referee and player.
Many of these disadvantages are eliminated when the organization turns to a consulting
firm.
44. Briefly describe the process for analyzing and interpreting survey data.
ANSWER In analyzing survey data, the first steps are to assess the central tendency of pay and the
: variation across employers. Such statistics as the mean, weighted mean, median,
quartiles or deciles, interquartile range, and compa-ratios are used. Inspection is often
used to interpret the data, and inferences are drawn from patterns of compensation.

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45. Briefly discuss some of the limitations of compensation surveys.

ANSWER Compensation surveys are essential tools for compensation planning within the
: organization. However, they are subject to numerous limitations. First, they may vary
dramatically in quality of job matches and methodology. Second, they may omit
important information. Third, unless survey data are available for individual
employers, we cannot surmise anything about the compensation strategies practised by
other firms. Fourth, compensation data may not fit all of the jobs an organization may
have. Fifth, surveys cannot capture the entire range of rewards—both extrinsic and
intrinsic—offered by organizations. Sixth, there could be bias in the sample of firms
selected. Seventh, markets may not value jobs fairly.

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Chapter 10 - Evaluating Individuals

True / False
1. The majority of medium to large Canadian firms use performance appraisals.

a. True
b. Fals
e
ANSWER: True
2. Three main categories capture the primary reasons why companies conduct performance appraisals: administrative,
symbolic, and supervisory.
a. True
b. Fals
e
ANSWER: Fals
e
3. Performance appraisals accurately reflect employees’ performance.

a. True
b. Fals
e
ANSWER: Fals
e
4. A major reason why performance appraisals may not work effectively is that they are applied in circumstances that are
not appropriate.
a. True
b. Fals
e
ANSWER: True
5. Evidence appears to support the notion that supervisors often have desired outcomes in mind before they start a
performance appraisal process.
a. True
b. Fals
e
ANSWER: True
6. Merit pay is one of the developmental reasons for performance appraisals.

a. True
b. Fals
e
ANSWER: Fals
e
7. The “beauty effect” is a rating error in performance appraisals.

a. True

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b. Fals
e
ANSWER: True
8. Including a self-appraisal component in the performance appraisal process encourages employees to reflect on the
performance of peers
a. True
b. Fals
e
ANSWER: Fals
e
9. The 360-degree feedback method usually gathers data/information from three sources: subordinates, supervisors, and at
times, customers.
a. True
b. Fals
e
ANSWER: Fals
e
10. In an effort to “provide something to everyone,” organizations may lump merit pay and cost of living increases
together. This action dilutes the relationship between merit pay increases and performance.
a. True
b. Fals
e
ANSWER: True
Multiple Choice
11. Which statement best summarizes the general sentiment expressed by stakeholders in describing performance
appraisals in Canada?
a. Managers find the process much more worthwhile than employees.
b. A great majority of companies tend to pick one process and stick with it over long
periods of time.
c. Managers and employees have little faith that the process leads to valid and reliable
results.
d. Employees are much more likely to embrace and find the process valuable.
ANSWER: c
12. From your perspective as a compensation officer, what is the most important category of reasons for doing
performance appraisals?
a. supervisory
b. administrative
c. developmenta
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d. symbolic
ANSWER: b
13. Karen’s performance appraisal provided almost identical results when six different managers evaluated her
performance. Which conclusion could you make about the performance appraisal process experienced by Karen?
a. It appears to be reliable; however, no conclusions can be made about its validity.
b. It appears to be reliable; hence, is it also valid.
c. Issues of central tendency need to be addressed.
d. It appears to be a very effective process.
ANSWER: a
14. John has fabulous interpersonal skills. This causes raters to ignore some of his weaknesses, which include time
management, technical, and leadership skills. Which perceptual error is likely impacting John’s rating?
a. central tendency
error
b. halo error
c. leniency effect
d. contrast effect
ANSWER: b
15. Which of the following is NOT an administrative reason for doing performance appraisals?
a. to identify employees for merit pay
b. to identify employees for promotion
c. to provide useful feedback to employees
d. to monitor the overall quality of performance of the
firm
ANSWER: c
16. As a supervisor you have a tendency to rate all employees as “average” in everything. You are guilty of using which
perceptual error?
a. halo error
b. contrast effect
c. central tendency
error
d. recency effect
ANSWER: c
17. Which performance appraisal method is congruent with a management approach that dictates that no more than 15
percent of employees are to be rated as excellent, commanding a top percentage increase in merit pay?
a. forced distribution
c. behaviourally anchored rating
scales
d. field review

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ANSWER: a
18. Which performance appraisal method could be described as “win–lose,” creating a situation whereby in order to
improve his/her standing, an employee has to displace another team or department member?
a. graphic rating scale
method
c. forced distribution
d. field review
ANSWER: c
19. ABC Inc. uses “mystery shoppers” to appraise staff at its departmental stores. What type of performance appraisal
method is ABC Inc. using?
a. graphic rating scales
b. field reviews
c. management by objectives
d. behavioural observation
scales
ANSWER: b
20. Which performance appraisal method builds on the behavioural anchored rating scales by requiring that management
provide a “frequency rating” associated with positive behaviour?
a. behaviourally anchored rating
scales
b. graphic rating scale
c. behavioural observation scale
d. ranking and forced distribution
ANSWER: c
21. John, a sales manager with a local coffee distributor, sits down with each salesperson at the beginning of the fiscal
year to determine performance targets for the year. Then, on a regular basis, John reviews each employee’s performance
against these jointly determined targets. What performance appraisal method is John likely using?
a. graphic rating scale
b. management by objectives
c. results anchored rating scales
d. behavioural observation
scales
ANSWER: b
22. XYZ Inc. appraises its employees on key traits such as “initiative”, on a scale of 1 to 6, with 1=inferior performance
and 6=outstanding. What method of performance appraisals is XYZ Inc. using?
a. graphic rating scales
b. management by objectives
c. behavioural anchored rating
scales

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d. behavioural observation scales
ANSWER: a
23. What two key elements make management by objectives a highly effective approach to employee motivation?
a. goals and feedback
b. trust and open communication
c. core competencies and engagement
d. involvement and business strategy
ANSWER: a
24. Which statement associated with Management by Objectives (MBO) is NOT accurate?
a. Goals should be determined jointly between a manager and an
employee.
b. To be effective, goals should be realistic.
c. Broad general goals are congruent with the MBO approach.
d. Regular evaluation and feedback against targets is critical.
ANSWER: c
25. What is NOT generally a source of employee performance appraisals?

a. supervisors
b. board of directors
c. subordinates
d. professional
raters
ANSWER: b
26. Which statement best describes peer evaluation ratings?

a. Peers tend to be more lenient than superiors.
b. Peers tend to be less lenient than superiors.
c. There is no difference between peer and superior ratings.
d. Peer ratings are the most valid of the sources of
appraisals.
ANSWER: a
27. According to research cited in the textbook, which source is used by the majority of Canadian employers?
a. supervisory and self-appraisals
b. only supervisory appraisals
c. 360-degree feedback
d. supervisory, self, and peer appraisals
ANSWER: b
28. A particular organization uses a forced ranking system to appraise employees. As a peer appraiser, why might an
employee be tempted to give colleagues a low rating?
a. Rating errors can be balanced out.

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b. A limited amount of merit pay is available.
c. Conflict and ill will among peers is reduced.
d. You can all benefit if you rate each other low.
ANSWER: b
29. Which statement best describes self-appraisals?

a. They tend to be deflated.
b. They tend to be inflated.
c. Poor performers tend to deflate their ratings the
most.
d. Self-appraisals are of high value for pay purposes.
ANSWER: b
30. Which source is much less accurate in assessing the performance of managers?
a. peers
b. professional
raters
c. subordinates
d. supervisors
ANSWER: c
31. Which source of appraisals can be expected to work well only in classical organizations?
a. peers
b. supervisors
c. self
d. subordinate
s
ANSWER: b
32. John tends to demonstrate behaviours that are counterproductive to strong work performance. Which appraisal method
would most likely provide the most inaccurate ratings?
a. peer
b. self
c. subordinat
e
d. supervisor
ANSWER: b
33. Which source uses many different rating groups to evaluate the employee’s performance?
a. professional raters
b. tiered supervisors
c. 360-degree
feedback
d. field review

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ANSWER: c
34. Which statement would you NOT associate with a multisource/360-degree feedback process?
a. They tend to be seen by recipients as fair.
b. They are more accurate than single-source processes.
c. They tend to be more effective when results are linked to merit pay.
d. They are more credible to the recipient.
ANSWER: c
35. What is NOT a key element of performance management?

a. goal setting
b. encouragement and
support
c. feedback
d. multisource input
ANSWER: d
36. Which statement does NOT accurately describe performance management?

a. Goal setting is central to its application.
b.Although 90 percent or more of Canadian companies use some performance
management process, only 10 percent find it “effective or very effective.”
c. It tends to work best in organizations using a high-involvement or human relations
strategies.
d.Development of benchmarks that are valid and reliable is critical.
ANSWER: b
37. Many organizations do not offer merit raises to employees who are at the top of their pay ranges. This can cause
morale problems for these employees. What is a potential solution to this issue?
a. Cut pay for employees who are below the top of the pay
range.
b. Give merit bonuses to the affected employees.
c. Re-evaluate the performance appraisal methods.
d. Increase minimum pay for all employees.
ANSWER: b
38. Senior management determines how much money will be available for merit pay against performance metrics
identified in the beginning of the fiscal year, and then distributes those funds across departments. Which approach has
senior management used to determine the total amount of money available for merit pay?
a. top-down
b. across the board
c. organizational performance indicators
d. bottom-up
ANSWER: a

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39. What is the first issue to decide when designing a merit pay system?
a. the objectives of the system
b. the amount of money to be distributed
c. how appraisals will be linked to pay
d. the methods to appraise employee
performance
ANSWER: a
40. There are several critical issues that need to be addressed in designing an effective merit system. What is NOT
identified as a critical issue in the textbook?
a. ultimate goal(s) of the merit system
b. process for training evaluators
c. manner in which feedback will be provided
d. process that ensures equal increases across employee job
ratings
ANSWER: d
41. Identify and briefly explain the main categories of reasons for doing appraisals.
ANSWER The rationale for having appraisals includes the following four main categories:
: (1) Administrative reasons: These include identifying individuals for whom corrective
action may be called for; identifying those who should be considered for a promotion
or merit increase; and monitoring overall quality of performance in the organization.
(2) Developmental reasons: These include using the system to better understand
employer expectations and the key performance dimensions of their jobs, assisting
employees to understand strengths and weaknesses in their performance, and
developing methods to improve this performance for the mutual benefit of the
individual and the firm.
(3)Supervisory reasons: These focus on enabling and helping supervisors think

systematically about employee performance and encouraging communication with
employees.
(4) Symbolic reasons: These centre around creating the perception that management
cares about good employee performance, and the appropriate conducting of appraisals
manifests this concern.
42. Identify and describe the various perceptual errors that can affect appraisal accuracy.
ANSWER Perceptual errors that can undermine appraisal accuracy include the following: (a)
: central tendency rating error, which occurs when appraisers rate all employees as
“average” in everything; (b) halo error, which occurs when appraisers rate an
individual either high or low on all characteristics because one characteristic is either
high or low; (c) recency effect, which is the tendency of appraisers to overweight
recent events when appraising employee performance; (d) contrast effect, which is the
tendency for a set of performance appraisals to be influenced upward by the presence

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of a very low performer, or influenced downward by the presence of a very high
performer; (e) similarity effect, which is the tendency of appraisers to inflate the
appraisals of appraisees they see as similar to themselves; (f) leniency effect, which is
the tendency of many appraisers to provide unduly high performance appraisals; and
(g) harshness effect, which is the tendency of some appraisers to provide unduly low
performance appraisals.
43. Identify the key characteristics and advantages of 360-degree feedback appraisal system.
ANSWER This is an appraisal system that utilizes feedback from superiors, peers, subordinates,
: and possibly customers to establish a balanced and objective input on specific
performance measures. These systems have several key characteristics. They use
standardized forms that provide numerical ratings of the ratee along numerous
dimensions. Individual raters, exclusive of the supervisor, are assured of anonymity so
that they feel free to be candid about their input to the ratings. The system also employs
several procedures to screen out invalid data. It is claimed that their advantages
include: (a) they are more accurate in having numerous raters, which results in
information from a variety of perspectives; (b) they are more credible to the recipient,
as the ratees may believe a single rater to be wrong or biased, but certainly not all of
them; (c) they may be more valuable for behavioural change, since work associates are
likely to more specific about behavioural feedback; and (d) they may be more
motivational, since peer pressure may motivate constructive behaviour changes.
44. Define and describe the key elements of performance management.

ANSWER Performance management is a method for improving employee performance, based on
: goal setting, feedback, encouragement and support, and rewards for success. When
used properly, performance management is more of a management system than an
appraisal system. Its elements are as follows: (a) goals are tied to the strategy and key
success factors of the business; (b) measures are the primary indicators of success; (c)
feedback is the data used to determine progress towards goals; (d) reinforcement is the
active encouragement and support for action; and (e) rewards are what the individual or
team receives for achieving desired results.
45. Describe the conditions under which recognizing individual contribution levels may be essential.
ANSWER Evaluating individual performance is necessary in the following instances: (a) to
: discourage free riding and assure contributing team members that their positive efforts
will be rewarded; (b) members do not have strong intrinsic motivation: (c) strong
positive norms do not exist; (d) group sanctions against poor performers are
ineffective; and (e) little member commitment to overall project goals is evident.
46. You have been tasked with developing an effective merit system for an organization. What critical issues would you
have to address to ensure the merit system is effective?
ANSWER Answers should draw on elements from the following:
: ∙what the objectives of the system should be
∙what the most appropriate measurement system is
∙how frequently appraisals should be conducted
∙how appraisals are to be linked to pay
∙how feedback should be provided
∙how procedural justice is to be achieved
∙how raters are to be trained and evaluated

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how the system is to be evaluated
∙

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Chapter 11 - Designing Performance Pay Plans

True / False
1. In order for the Scanlon plan to work, organizations must be able to predict future cost of inputs, particularly labour.
a. True
b. Fals
e
ANSWER: Fals
e
2. The Scanlon Plan helps in the development of a cooperative relationship among workers, unions, and management.
a. True
b. Fals
e
ANSWER: True
3. The Scanlon plan has changed over the years. A central reason for these changes is the notion that employees can
reduce labour input as a function of output by increasing other costs.
a. True
b. Fals
e
ANSWER: True
4. Gain sharing is not a viable plan to use if no valid historical benchmark can be set.
a. True
b. Fals
e
ANSWER: True
5. Goal-sharing plans have increased in popularity over the last decade.

a. True
b. Fals
e
ANSWER: Fals
e
6. Employee participation is not necessarily a component of goal-sharing plans.

a. True
b. Fals
e
ANSWER: True
7. Financially funded plans combine at least two criteria in establishing goal-sharing bonuses. Often, one of those
variables is organizational profitability, making such plans highly motivational to employees.
a. True
b. Fals

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e
ANSWER: Fals
e
8. Deferred profit-sharing plans are often used as quasi pension plans, particularly in medium-sized companies.
a. True
b. Fals
e
ANSWER: True
9. A phantom stock plan ties an employee’s bonus to the performance of company stock, but that employee never actually
receives any stock.
a. True
b. Fals
e
ANSWER: True
10. Research supports the notion that if adequate monetary compensation is in place, coupled with an open and supportive
management–employee environment, nonmonetary-based recognition tends to offer little value to stakeholders.
a. True
b. Fals
e
ANSWER: Fals
e
Multiple Choice
11. Which gain-sharing plan requires that management has access to historical data so as to be able to calculate a so-called
“normal labour cost”?
a. Rucker plan
b. family of measures
plan
c. Scanlon plan
d. Improshare plan
ANSWER: c
12. Working as a human resources compensation specialist for a manufacturing company, you become concerned
employees will attempt to reduce labour costs “by any means” so as to enhance available bonuses via the company’s gain-
sharing plan. This behaviour may potentially lead to more work-related accidents or dissatisfied customers. What would
you do to mitigate this reduction in labour costs due to “by any means” mentality?
a. Expand the pool.
b. Introduce a modifier.
c. Use a Scanlon plan.
d. Introduce a “top hat”
program.

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ANSWER: b
13. Which plan does NOT make employee involvement an important part of the system?
a. Rucker
b. Scanlon
c. Improshare
d. family of
measures
ANSWER: c
14. A management report identified the following labour usage ratios for a window manufacturer in Richmond, British
Columbia: 1.4 hours of labour per window in 2015; 1.25 hours of labour per window in 2016. Management makes the
arbitrary decision to set next year’s gain-sharing cutoff at 1.325 labour hours per window (the average of the 2015 and
2016 figures). Which gain-sharing plan is management using?
a. Scanlon plan
b. family of measures
plan
c. Rucker plan
d. Improshare plan
ANSWER: d
15. Which of the following is NOT an issue to be considered when designing a gain-sharing plan?
a. deciding on the split among employees
b. deciding on the share price
c. deciding on the frequency for payout
d. developing procedures for communicating
results
ANSWER: b
16. In designing gain-sharing plans, why is there a need to decide on the historical baseline against which to compare
productivity?
a. to determine whether real productivity gains actually
occurred
b. to satisfy the unions
c. to allow for flexibility
d. to increase employee participation
ANSWER: a
17. The authors identified eight major issues that should be considered when designing a gain-sharing plan. Which
potential issue is NOT identified by the authors of the textbook?
a. making a decision on the bonus plan
b. making a decision on frequency of payouts
c. making a decision to use a fixed or discretionary
plan

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d. making a decision on how to communicate results
ANSWER: c
18. Which condition makes a gain-sharing plan NOT viable and requires you to consider another option?
a. No valid historical benchmark can be set.
b. Employee involvement is not an integral part of the
system.
c. The plan involves large expenditures to implement.
d. Employees receive only 50 percent of the share.
ANSWER: a
19. Which of the following is NOT associated with gain-sharing plans?

a. cooperation between employees and
management
b. teamwork among employees
c. equality in gains
d. individual rewards
ANSWER: d
20. Which bonus allocation method best supports the philosophy of gain sharing?
a. Everyone receives an equal share after minor adjustments are made for time
worked.
b. Higher performers receive a greater share.
c. Higher-paid employees receive a greater share.
d. Part-time and newly hired employees receive nothing.
ANSWER: a
21. You have been tasked with providing management with a list of factors distinguishing goal-sharing plans from gain-
sharing plans. Which of the following should NOT be included in your list?
a. Both have lost popularity in recent years.
b.Goal-sharing plans typically include several levels of attainment.
c. Goal-sharing plans quantify cost savings and then share those benefits with both
employees and the company using a fixed formula.
d.Both require that management identify the group participating in the plan.
ANSWER: c
22. What is NOT a necessary component of goal-sharing plans?

a. employee
participation
b. performance goals
c. bonus payouts
d. achievement levels
ANSWER: a

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23. Human resource professionals have identified three types of goal-sharing plans. Which of the following is NOT one of
those types?
a. standard plus plans
b. single-goal plans
c. multi-goal plans
d. financially funded
plans
ANSWER: a
24. What is generally NOT considered in allocating the bonus in goal-sharing plans?
a. seniority
b. salary
c. organizational performance
d. individual performance
ANSWER: c
25. A group of farm workers normally pick 10,000 kilograms of cherries during a regular eight-hour shift. Joe, the
operations manager, decides he will provide each picker in the group with a meaningful monetary reward if the farm
workers are able to meet a new “stretch goal” of 12,500 kilograms per eight-hour shift? Which term best describes this
new “stretch goal”?
a. standard plus
b. goal plus
c. goal level
d. red circle
plus
ANSWER: b
26. Your company has decided to distribute a goal-sharing bonus according to the salary levels of employees. What is
likely to be a natural outcome of this decision?
a. It discourages free riding by some employees.
b. It is the most egalitarian distribution method.
c. It maintains the same proportion of goal-sharing compensation in the compensation
mix for all employees.
d. It adjusts for actual time worked during bonus period.
ANSWER: c
27. In which type of organization is profit-sharing the most common?

a. high-
involvement
b. human relations
c. defender
d. classical
ANSWER: a

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28. As a medium-sized company owner, you believe that it is morally just that employees receive a portion of the profits
they help generate, and you want to provide them with some form of pension plan. Which type of plans should you
consider using?
a. deferred profit sharing
b. share appreciation rights
c. registered retirement
savings
d. current distribution
ANSWER: a
29. ABC Ltd. generated one million Canadian dollars in profits this year. ABC Ltd. decides to place 200,000 Canadian
dollars (20 percent of pre-tax profits) in a bonus pool. In previous years, this figure has ranged from zero to 50 percent of
pre-tax profits. What type of formula is ABC Ltd. using to determine contributions into the pool?
a. fixed percentage
b. fixed threshold
c. discretionary
d. percentage
approach
ANSWER: c
30. According to research on Canadian firms, in the majority of cases, which employees are included in the profit-sharing
plan?
a. all full-time and part-time
employees
b. non-unionized employees only
c. designated employees only
d. all full-time employees
ANSWER: d
31. What is the least common basis for allocating profit-sharing bonuses across employees in Canadian firms?
a. seniority
b. individual performance
c. salary level
d. equal distribution across all
employees
ANSWER: d
32. Which statement does NOT accurately describe a profit-sharing plan?

a. For motivational reasons, fixed formula profit-sharing plans are recommended.
b. Stock bonus plans provide employees with the right to purchase shares in the future at
a fixed price.
c. Deciding the split is an important issue in gain-sharing plans.
d. A key issue in designing profit-sharing plans is the form of the bonus payout.
ANSWER: b

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33. Management decides to allocate 1,000 shares to a particular employee at a market value of $50.00 per share under a
share appreciation rights plan. One year later, the value of these shares has increased to $65.00. How many shares would
this employee actually receive as a bonus at the end of the year?
a. 15.4 shares
b. 20 shares
c. 230.8 shares
d. 1,000 shares
ANSWER: c
34. Historically, which group has received the most access to stock options?
a. top executives
b. human resource
managers
c. full-time employees
d. unionized employees
ANSWER: a
35. Which statement does NOT accurately describe employee share purchase plans?
a. Employees receive shares at no cost to themselves, usually as a bonus.
b. Employees provide a direct payment of some sort in exchange for the shares.
c. Often the price employees pay for the shares is less than market value.
d. Often employers will match the amount of shares purchased by the employee up to a
set limit.
ANSWER: a
36. Which statement best explains a phantom stock plan?

a. Although their bonus is tied to the performance of company stock, the employees
never receive any stock.
b. Rewards are based on the stock performance of client firms.
c. Employees are awarded stock at no cost to themselves.
d. Employees can purchase stock at a fixed price within a set period of time.
ANSWER: a
37. An employer issues Johnny 2,000 stock options in recognition of a very good year. These particular options vest after
24 months from the date of issuance with an exercise price of $21.00 per share. After 24 months, these shares trade in the
open market at $25.00 per share, and Johnny decides to exercise his 2,000 options, generating a gain of $8,000 (minus
transaction fees). Which statement best describes Johnny’s tax situation pursuant to these gains?
a. Because these options were a bonus provided by the employer, there are no tax
consequences attributable to Johnny.
b.Because these shares are “under water,” Johnny’s employer is responsible for any
taxes on the gains.
c. Johnny will have to pay taxes based on the corporate tax rate.
d.Johnny’s gain will be deemed as income, but taxes will be paid at the capital gains
rate.

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ANSWER: d
38. Full-time employees at ABC Company are given the opportunity to purchase company stock at a future time at a fixed
price. What type of performance-based pay is ABC Company using?
a. stock option plan
b. stock purchase
plan
c. stock bonus plan
d. phantom share plan
ANSWER: a
39. What is NOT the “best practice” when designing nonmonetary reward plans?
a. For large organizations, the usage of an elected committee of employees and managers
should be considered when providing significant rewards to employees.
b.A champion or group of champions should be considered to keep the program “alive.”
c. Whenever possible, reward only those employees in the top 10 percent.
d.Whenever possible, all deserving employees should be recognized.
ANSWER: c
40. Which of the following is NOT an example of a nonmonetary award?

a. stock bonuses
b. a pat on the back for a job well
done
c. a company picnic
d. an all-expenses-paid holiday
ANSWER: a
41. Briefly describe the Scanlon Plan.

ANSWER The Scanlon plan is based in the development of a cooperative relationship between
: workers, the union, and management in establishing a process for problem solving and
productivity improvement, which in turn will yield quantitative savings to the firm. It
has been modified over time and may include savings of costs beyond labour. Based on
improvements from a historical baseline, the savings are shared between the work
group and the organization.
42. Identify the fundamental ways in which gain-sharing and goal-sharing plans differ.
ANSWER Cost savings in gain sharing are quantified and shared between employees and the
: company, while in goal sharing, there is no systematic link between performance
improvements and the bonus pool. There are no set goals with gain sharing other than
to improve as much as possible relative to the historical baseline. In goal sharing, group
goals are set and a bonus is paid if the goal is achieved in a specific time period. In gain
sharing there is an expectation of continuity—the system will not be arbitrarily
changed, while goal-sharing plans are more flexible, and continuity is less assured. In
most gain-sharing plans, employees are expected to participate in suggesting

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productivity improvement ideas. In goal sharing, employee participation is not a
necessary component.
43. Identify and briefly comment on the key issues in designing profit-sharing plans.
ANSWER Profit-sharing plans have the following design issues: the form of bonus payout
: determination, the formula for bonus determination, employee eligibility, the basis for
allocating the profit-sharing bonus across employees, payout frequency, and
communicating financial results and profit sharing. The following bonus payout
options are available: deferred, cash, stock, or a combination of these. For motivational
reasons, fixed formula plans are recommended over using a discretionary approach to
bonus determination. In most cases, there is a time period for employee eligibility, and
the more inclusive the better, although casual, contract, and unionized employees are
often excluded. Allocation of profit-sharing bonuses is based on salary, seniority,
performance, a combination of these, or equal distribution. Payouts should occur no
more often than quarterly, and an annual basis is probably best. Most firms distribute
financial statements and profit-sharing newsletters on a regular basis.
44. Identify how design issues for stock plans differ for private corporations.
ANSWER Plans are more difficult to implement because there is no external market to place a
: value on company shares and to serve as a mechanism for purchase or sale of the
shares. Owners are reluctant to give up shares and try to prevent unrestrained sale of
the shares in order to maintain control of the firm. Having very little control or
influence over what goes on in the organization, there is no easy way for minority
shareholders to liquidate their holdings if they are unhappy with management or feel
their interests are not being taken care of.
45. Discuss the key issues in designing a nonmonetary reward plan.

ANSWER To have value, the recognition offered by a nonmonetary reward plan must be truly
: deserved, and awards should not simply be handed out because they are relatively
cheap. It is important to avoid singling out individuals for recognition if their
accomplishments have been achieved in a team context. Programs should be structured
to reward all deserving employees. Fair procedures need to be developed for
identifying worthy applicants.

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Chapter 12 - Designing Indirect Pay Plans

True / False
1. Life insurance is among the top three nonmandatory benefits offered by Canadian firms with at least 10 employees.
a. True
b. Fals
e
ANSWER: True
2. Deferred profit-sharing plans tend to be classified as “contributory benefits.”

a. True
b. Fals
e
ANSWER: Fals
e
3. Defined contribution plans ultimately transfer retirement income risk from the employer to the employee.
a. True
b. Fals
e
ANSWER: True
4. It is not cost effective having employers purchase dental coverage on behalf of their employees instead of the
employees themselves.
a. True
b. Fals
e
ANSWER: Fals
e
5. A force promoting flexible benefits plans is the increasing diversity of the work force.
a. True
b. Fals
e
ANSWER: True
6. A force hindering flexible benefits plans is loss of economies of scale in the purchase of benefits.
a. True
b. Fals
e
ANSWER: True
7. Defined contribution plans are riskier for employees versus defined benefit plans.
a. True
b. Fals
e

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ANSWER: True
8. Firms with pension plans have higher turnover rates among employees.
a. True
b. Fals
e
ANSWER: Fals
e
9. One drawback associated with outsourcing routine benefits administration is the notion that employers will begin to
lose touch with benefit needs and issues important to employees.
a. True
b. Fals
e
ANSWER: True
10. Research shows that satisfaction with a benefits plan declines as employees learn more about it.
a. True
b. Fals
e
ANSWER: Fals
e
Multiple Choice
11. Which nonmandatory major benefit is the most common among Canadian organizations with 10 or more employees?
a. life insurance
b. supplemental unemployment
benefits
c. formal pension plans
d. group RRSPs
ANSWER: a
12. For most organizations, what component of its benefits package is second only to mandatory benefits in terms of cost
for an organization?
a. employment assistance
programs
b. wellness and recreational plans
c. retirement plans
d. pay for time not worked plans
ANSWER: c
13. Which of the following is NOT a government-regulated benefit?

a. outplacement
services

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b. rest breaks
c. vacation time
d. statutory holidays
ANSWER: a
14. Which variable is NOT used to determine the income level provided to employees upon retirement under a “defined
benefit program”?
a. some variable (percentage) of the average income over a certain period of time,
usually three to five years
b. the company’s profit level over a period of three to five years
c. employees’ years of service
d. employees’ salary level
ANSWER: b
15. Ricardo has worked for a local company for the last 25 years. Upon retirement, Ricardo has been guaranteed a salary
of $2,000.00 per month under the company’s retirement plan. What kind of retirement benefit program is this company
using?
a. defined contribution plan
b. tax-deferred plan
c. defined benefit plan
d. registered retirement savings
plan
ANSWER: c
16. As a result of a recent human resource audit, it was determined that a particular company has an “underfund liability”
associated with its retirement plan, requiring an immediate injection of cash. What type of pension plan or retirement plan
is this company likely using?
a. hybrid flexible plan
b. registered retirement savings plan
(RRSP)
c. mandatory retirement plan
d. defined benefit plan
ANSWER: d
17. Which variable has NOT caused Canadian organizations to move away from pensions that have defined benefits?
a. inflationary pressures during the early 1980s
b. tax issues associated with the manner in which pension plans are
funded
c. market returns associated with pension funds
d. rising life expectancies of employees
ANSWER: b
18. Which of the following are all Canadians entitled to?

a. Old Age Security

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b. defined pension plans
c. defined contribution plans
d. deferred profit-sharing
plans
ANSWER: a
19. Which term refers to a company pension plan that guarantees a certain benefit to retirees regardless of market
conditions?
a. defined benefit plan
b. money purchase plan
c. defined contribution
plan
d. Canada Pension Plan
ANSWER: a
20. As a member of the company’s defined benefit plan, employees receive a pension based on one percent of the average
of their best three years’ earnings for each year of service. What will be your annual pension if you retire after 30 years of
service and have averaged $50,000 per year during your three best years?
a. $15,000
b. $28,000
c. $30,000
d. $50,000
ANSWER: a
21. Which of the following is NOT a mandatory benefit?

a. Canada Pension Plan
b. defined benefit pension
plans
c. workers’ compensation
d. employment insurance
ANSWER: b
22. From a funding obligation perspective, why do employers prefer to use a defined contribution pension plan?
a. Liability is limited to the amount placed into the
plan.
b. Actuarial predictions are made easier.
c. Pensioners are guaranteed a fixed sum of money.
d. This avoids “underfunded” plans.
ANSWER: a
23. Which statement best describes pension plans in Canada?

a. Defined contribution plans have been decreasing.
b. Defined contribution plans have been increasing.
c. Hybrid plans have been decreasing.

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d. Defined benefit plans have not changed in terms of their
use.
ANSWER: b
24. From an employee’s point of view, what advantage do defined contribution plans have over defined benefit plans?
a. The employer assumes the risk of investments.
b. They tend to be more portable.
c. They provide a higher pension for those who join the company later in
life.
d. Risk is averaged over a large group of employees.
ANSWER: b
25. Life and accident insurance is almost always included in benefit plans. Which statement does NOT accurately describe
life and accident insurance?
a. Often a spouse or partner may be included under the coverage.
b. Coverage amounts may be increased at the employee’s expense, or on a cost-sharing
basis.
c. Often the coverage is based on a multiple of the employee’s annual salary.
d. Recent changes to the tax code have made group life insurance products much more
tax-friendly to employees.
ANSWER: d
26. Teresa has a dental plan through her employer. Recently, she has undergone dental work costing the plan $2,500.
Luckily for Teresa, this particular dental work was covered completely by her dental plan. What are the tax consequences
as a result of Teresa not having to pay for the dental work?
a. Her employer will add the $2,500 as an expense in their income
statement.
b. She will have to include the $2,500 as additional income.
c. There are no tax consequences at all as benefits are tax-free.
d. Teresa will have to claim half of the benefit as income.
ANSWER: c
27. Which term usually describes severance packages for executives?

a. RRSPs
b. termination benefits
c. golden parachutes
d. just cause severance
ANSWER: c
28. Which type of employee services are free onsite massages during peak times, fitness club memberships, and Internet
stations in lounge areas examples of?
a. work–life balance
b. outplacement services
c. employee assistance

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programs
d. wellness and recreational
ANSWER: d
29. Providing which benefit will reinforce your strong commitment to helping your employees balance work and personal
activities?
a. group banking package discount
rates
b. paid time off for community service
c. subsidized meals and free hot drinks
d. computer purchase plan
ANSWER: b
30. What is usually NOT considered by courts in establishing awards relating to notice periods or severance in lieu of
notice?
a. whether some element of enticement was involved
b. the likelihood that the employee will secure employment
quickly
c. the employee’s age
d. the employee’s gender
ANSWER: d
31. What benefit system provides employees with the choice between two or more fixed plans?
a. modular benefits
plan
b. “core” benefits plan
c. flexible benefits plan
d. “Beneflex” plan
ANSWER: a
32. Which plan allows you to tailor your benefit plan to suit your needs and even trade off benefits that are not important
to you?
a. health care spending
accounts
b. simplified flex plan
c. flexible benefits plan
d. fixed benefits plan
ANSWER: c
33. What is NOT a possible reason for implementing flexible benefit plans?
a. cutting benefit costs
b. developing a more diverse work force
c. lowering overall administrative costs
d. shifting employee perspective away from an entitlement

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approach
ANSWER: c
34. Firms with flexible benefit plans may enjoy a competitive advantage in terms of recruitment. What is the likely reason
for this?
a. Flexible plans can lower administrative costs.
b. Prospective employees may find the idea of choosing their benefits
appealing.
c. Flexible plans enjoy economies of scale.
d. Flexible plans imply higher wages.
ANSWER: b
35. What is the first issue in developing an effective benefit system?

a. determining the tax implications
b. examining the compensation cost structure of the organization
c. establishing the administration process
d. determining the role of indirect pay in compensation strategy
ANSWER: d
36. Which of the following is NOT an issue in establishing an indirect pay system?
a. determining the role of employee performance in establishing
benefits
b. choosing a process for plan design
c. choosing the benefits system and specific benefits
d. determining the structure of each benefit
ANSWER: a
37. Experts will support the notion that employee participation in the process of designing a benefits plan is highly
desirable. Which goal do experts NOT identify as a positive outcome of having employee involvement?
a. better understanding of needs
b. support mechanism in communicating the
plan
c. increased level of acceptance
d. decreased overall plan costs
ANSWER: d
38. What is NOT a consideration in deciding whether to include a particular benefit in indirect pay?
a. whether it contributes to the objectives of indirect pay
b. whether or not there is a union
c. whether it is valued by employees
d. whether it adds much net value to the compensation
package
ANSWER: b

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39. Which statement best describes benefits for full-time versus part-time employees in Canada?
a. Most jurisdictions do not legally require firms to have the same benefits for full-time
and part-time employees.
b. Most firms have the same benefits for both categories of employees, regardless of the
law.
c. All employees who work more than 20 hours a week are entitled to nonmandatory
benefits.
d. All employees who work more than 25 hours a week are entitled to nonmandatory
benefits.
ANSWER: a
40. Which process of evaluating benefits systems considers the net benefits associated with a particular benefit system?
a. competitive analysis
b. cost break-even
analysis
c. cost analysis
d. employee surveys
ANSWER: c
41. Identify and briefly explain the types of pension plans discussed in the textbook.
ANSWER There are two main types of private pension plans: defined benefit plans and defined
: contribution plans. Defined benefit plans provide retirement income based on a
proportion of the employee’s pay at the time of retirement. Defined contribution plans
provide retirement income based on the accrued value of employer and employee
contributions to the plan. Both plans can either be contributory, with employees
required to make an annual contribution to the plan, or noncontributory, where
employees make no contribution to the plan. Another type of pension plan is the hybrid
plan that combines features of the defined benefit pension plan and the defined
contribution plan.
42. Describe how a health care spending account works.

ANSWER A health care spending account is a tax-favoured employee benefit that allows
: employees to utilize employer-provided health care credits to purchase a wide array of
health care services. Employers place a certain amount of money or health care credits
in a separate account for each employee, who then draws on them for the
aforementioned services.
43. Identify and briefly explain the most common and important employee services.
ANSWER Employee services encompass a number of advantageous benefits to employees that
: are tax-deductible to the employer and not subject to income tax for the employees.
These services can include: (a) employee assistance programs, which help deal with a
variety of personal issues; (b) recreational services, which are programs or services that
enable employees to participate in fitness or recreational activities; (c) child/elder care
services, which are arrangements made through the employer to provide or subsidize
care for either children or parents of employees; and (d) outplacement services, which

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provide assistance to employees who have been terminated, to provide them with
counselling and guidance in securing re-employment.
44. Discuss the pros and cons of flexible versus fixed benefits plans.
ANSWER Flexible benefits plans are considered a better fit for more diverse work forces, provide
: more value to employees for the benefits dollars, allow employees more choice in their
indirect pay package, and may help to contain escalating benefits costs. However,
flexible plans are more complex to administer, may lose economies of scale, and may
be more confusing to employees. Fixed benefits plans are less complex to administer,
have economies of scale in purchase of benefits, and are simpler to understand.
However, fixed benefits systems tend to escalate in cost and do not adjust to the
specific needs of employees.
45. Describe the main issues in designing the benefits system.

ANSWER The first step is to determine the role that indirect pay should play in a particular firm’s
: compensation strategy. Second, a process for designing the indirect pay plan must be
established—one which fits with the nature of the firm. Third, the firm must decide
whether to use a fixed, semiflexible, or flexible benefits plan, and decide on the
specific benefits to include in the plan. Fourth, the structure of each benefit must be
decided, including the coverage, funding, eligibility, and flexibility. Fifth, procedures
must be developed for administering, communicating, and evaluating the benefits
system.

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Chapter 13 - Activating and Maintaining an Effective Compensation System

1. In the bottom-up approach to compensation budgeting, a budgeted amount is allocated to compensation and given to
department managers for distribution to their employees.
a. True
b. Fals
e
ANSWER: Fals
e
2. A compensation budget is a forecast of what the firm expects to spend on compensation in the coming year.
a. True
b. Fals
e
ANSWER: True
3. Of all the human resource functions, payroll activities were one of the first functions to be computerized in medium and
large organizations in Canada.
a. True
b. Fals
e
ANSWER: True
4. Because of complexity and resistance by stakeholders, computers have taken on a secondary role in communicating
compensation policies and procedures
a. True
b. Fals
e
ANSWER: Fals
e
5. Information technology is particularly useful for pay and remittance calculations.

a. True
b. Fals
e
ANSWER: True
6. Often, organizations will contract out a portion of their benefits administration to “product providers.”
a. True
b. Fals
e
ANSWER: True
7. The more strategic the compensation system is to the organization, the more it should be outsourced.
a. True
b. Fals
e

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ANSWER: Fals
e
8. In order to avoid resistance to a new compensation system, it a good practice to discontinue the usage of the old system
before you have fully tested the new system. Otherwise, employees will gravitate to the old and familiar system. .
a. True
b. Fals
e
ANSWER: Fals
e
9. Research suggests that employee satisfaction with their compensation is directly related to their understanding of the
compensation system.
a. True
b. Fals
e
ANSWER: True
10. In evaluating a new compensation system, two main sets of employee attitudes should be examined—job attitudes and
compensation attitudes.
a. True
b. Fals
e
ANSWER: True
11. Your organization has asked you to prepare a compensation budget by taking into account the following variables:
current employees’ wages, anticipated merit increases, seniority increases, as well as expected turnover. What kind of
compensation budgeting process is your organization using?
a. zero-based
b. top-down
c. bottom-up
d. break-
even
ANSWER: c
12. Which statement best describes outsourcing among Canadian firms?

a. Outsourcing of HR functions is on the decline.
b. Outsourcing of HR functions is increasingly used.
c. Larger firms outsource their HR functions more than smaller firms.
d. Outsourcing does not offer any benefits
ANSWER: a
13. What would a human resource professional consider part of documenting the compensation system?
a. ensuring stakeholders have up-to-date job evaluation
manuals

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b. deciding to use an external service provider
c. designing job evaluation criteria that are valid and reliable
d. deciding on the compensation strategy
ANSWER: a
14. Which of the following is NOT a component of compensation administration?

a. collecting the necessary information
b. performing pay calculations
c. establishing accountability
d. preparing and distributing
remittances
ANSWER: c
15. What is NOT an advantage of outsourcing the compensation function?

a. cost savings from economies of scale
b. expertise provided by outside personnel
c. in-house managers may be able to spend more time focusing on strategic
issues
d. increased internal capacity to understand the compensation system
ANSWER: d
16. What is a major issue for most organizations when planning for information technology?
a. whether to use computers
b. whether to use consultants
c. how advanced the system should be
d. whether to protect employee
privacy
ANSWER: c
17. When does communication occur in compensation communications?

a. not until understanding passes from the sender to the receiver
b. once the communication tool, such as a podcast, is launched
c. only after evaluations prove that the communications were effective in increasing
employee satisfaction
d. not until employee attitudes are changed
ANSWER: a
18. You work as a human resource professional at a large accounting firm in Ontario. Part of your mandate requires that
you investigate processes that will streamline basic human resource functions, including remittance of pay stubs to
employees. You are currently contemplating the notion of automating this process. What minimum requirements must you
adhere to so as to make this process compliant with Bill 88?
a. Make the statements available via the company’s intranet to employees.
b.Send out a quarterly summary to each employee via a “personalized email,” and make
the biweekly stubs available via the Intranet.

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c. It is impossible to be compliant with the act while automating the process.
d.On a biweekly basis, send out the statements to each employee via the company’s
email platform.
ANSWER: d
19. You work in a human resource department and have access to the personal health information of employees. A front
line manager contacts you and requests that you look at an employee’s file and let her know if there are any health issues
that could explain an employee’s “bizarre behaviour” (the employee seems extremely quiet). Which action should you
undertake, so as to be compliant with Bill C-6?
a. Email the file to the manager but scrub it so only information that may be related to
the “bizarre behaviour” is included.
b.Email the employee’s file to the manager, including any health-related information you
may have.
c. Do not share any health-related information with the manager, even if she tells you she
is going to escalate the request.
d.Email the requested information but tell the manager not to share it with anyone.
ANSWER: c
20. According to a recent survey of HR professionals, what is the predominant use of human resources management
systems?
a. planning and
research
b. time and attendance
c. payroll
d. benefits
ANSWER: c
21. Which statement does NOT support the notion of outsourcing some human resource functions to third-party service
providers?
a. It provides internal staff with a better sense of issues facing employees.
b. It reduces costs.
c. It leverages the specialized knowledge of external experts.
d. It allows internal staff to focus on strategic human resource activities.
ANSWER: a
22. Which factor is NOT normally a consideration when organizations make the decision to outsource human resource
functions?
a. size of the organization
b. activities competitors are undertaking with their human resource
functions
c. level of internal expertise
d. strategic role played by compensation in the organization
ANSWER: b
23. What is NOT a key aspect in implementing the compensation system?


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a. putting infrastructure in
place
b. testing the system
c. conducting job evaluations
d. conducting training
ANSWER: c
24. A training process is critical to the launch of a new compensation system. The textbook identifies three groups of
stakeholders that should be trained so as to facilitate the introduction of an effective compensation system. Which
stakeholder should have very detailed system knowledge?
a. recruiters and secretarial personnel
b. front-line supervisors and managers
c. support personnel in the human resource
department
d. all customer-facing employees
ANSWER: c
25. Which statement does NOT accurately describe developing a communication plan to introduce a new compensation
system?
a. Employees need to know the rationale behind the change.
b. Ensure it is an on-going process; communicate often.
c. Various modes of communications should be used.
d. It is often a recipe for failure if frontline managers are told of impending changes early
in the process.
ANSWER: d
26. Which of the following is NOT one of the steps in implementing the compensation system?
a. Establish the implementation task
forces.
b. Decide on the compensation level.
c. Test the system.
d. Conduct the training.
ANSWER: b
27. Why is it useful to conduct surveys of key employee attitudes before system implementation?
a. to provide information about the new system
b. to have a baseline for future comparisons
c. to solicit recommendations for changes
d. to create perception of employee
involvement
ANSWER: b
28. Which statement does NOT accurately describe compensation communication?

a. Employers may be found legally liable for poor benefits communication.

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b. Two-way communication is extremely important.
c. The move towards defined contribution plans has increased the need for effective
communication.
d. Employees who understand their compensation system are less satisfied with it.
ANSWER: d
29. You have been tasked with providing senior management with a plan to evaluate the effectiveness of a new
compensation system to be launched by an organization. What is NOT a typical approach associated with evaluating the
impact of a compensation system?
a. impact on a company’s return on equity
b. impact on compensation objectives
c. impact on compensation costs
d. impact on employees’ attitudes and behaviours
ANSWER: a
30. Which statement does NOT accurately describe the act of evaluating the compensation system?
a. Most organizations don’t even try to evaluate their systems.
b. A slipshod attempt at evaluation may do more harm than good.
c. Compensation costs below budgeted levels should make you happy.
d. If the budget was not realistic in the first place, comparisons are
meaningless.
ANSWER: c
31. What is the logical time for the first evaluation of the compensation system?
a. immediately after
implementation
b. six months after implementation
c. one year after implementation
d. two years after implementation
ANSWER: b
32. A particular company notices that performance, as measured by the accuracy of entries by managers in a new human
resource management system, decreased during the early stages of launch. What phenomenon may account for this
decrease in performance?
a. socialization
b. initial dip
c. integration
d. freedom to
act
ANSWER: b
33. What main indicators should firms examine in the process of examining compensation costs?
a. budgeted costs and actual costs
b. compensation cost ratios and budget ratios

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c. net profit per employee and average employee earnings
d. compensation cost ratios and average employee
earnings
ANSWER: d
34. Which employee attitude towards the compensation system should be evaluated?
a. satisfaction with the process by which compensation is
determined
b. work motivation
c. job satisfaction
d. organizational identification
ANSWER: a
35. When evaluating a new compensation system, you notice that the compensation cost ratio increased, while total
compensation or average earnings remained static. What is a likely explanation?
a. All employees have received some kind of raise.
b. Total costs and/or revenues have decreased.
c. Benefits have been removed from total compensation.
d. There is an error in the data; this situation is not
possible.
ANSWER: b
36. Which change to the compensation system is likely to be triggered by an aging workforce?
a. more vigorous job evaluations
b. more focus on tuition
reimbursements
c. more focus on pension plans
d. increased pay equity
ANSWER: c
37. Katrina works at a factory assembling plastic toys. She prides herself in producing the most units with the lowest
rejection rates. What kind of behaviour is Katrina displaying?
a. loyalty
b. citizenship
c. membership
d. task
ANSWER: d
38. As a result of focusing your recruitment efforts on attracting recent university graduates, your workforce has become
younger. What impact does this change have on your compensation system?
a. It needs greater focus on pension plans and retirement
income.
b. It needs to offer more cash and family benefits.
c. It needs to adopt a job evaluation system.

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d. It needs to adopt a new managerial strategy.
ANSWER: b
39. Given changes in financial circumstances of an organization, senior management requests recommendations geared
towards containing compensation costs. What would NOT be a recommendation that you would bring forward?
a. Enact a hiring freeze.
b. Contain benefit costs.
c. Replace some raises with bonuses.
d. Replace variable pay with fixed pay.
ANSWER: d
40. A good employee threatens to leave your firm because she has received a higher pay offer from a competitor. The offer
is well outside your company’s pay range for the job the employee is performing. What should you tell the employee?
a. You will match the other offer.
b. You will beat the other offer to be sure you won’t lose her.
c. You will try to get her job put into a higher pay grade.
d. You wish her all the best in her new job with the competitor.
ANSWER: d
41. Identify the tasks involved in preparing to implement a compensation system.

ANSWER The tasks involved in preparing to implement a compensation system include the
: following: preparing the compensation budget, planning the infrastructure for
compensation administration, planning for information technology, and organizing for
compensation administration.
42. Identify the four key aspects that need to be considered in planning for compensation administration.
ANSWER The four key aspects that need to be dealt with in planning for compensation
: administration include the following: documenting the compensation system,
administering compensation, assigning compensation responsibilities and planning the
infrastructure, and developing processes for ongoing communication about
compensation.
43. What are the primary areas for computer applications in a compensation system?
ANSWER Many firms use an integrated human resources information system, in which
: compensation is just one part. Computers are used to assist in job documentation and
evaluation, including analysis of the questionnaires, developing factor weightings for
evaluating the jobs, and determining market and pay policy lines. Labour market data
can be easily downloaded directly from outside sources. An effective intranet allows
employees to access compensation information and improve communication.
Computers perform routine computations, such as pay and remittance calculations, and
are used extensively for record keeping. Other applications include information
collection for matters such as new hires, terminations, pay rates, and changes to these
statistics, and also for compensation planning and research.
44. Discuss the advantages and disadvantages of outsourcing compensation administration, as well as the factors involved
in deciding outsourcing policy.

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ANSWER Possible advantages of outsourcing include cost, specialized expertise, and freedom to
: focus on the strategic issues of indirect pay and communications. Possible
disadvantages include losing touch with compensation problems and issues, becoming
overreliant on the service provider, and managing the relationship with the vendor.
Four factors need to be considered when deciding whether to outsource—company
size, internal capabilities, complexity and dynamism of the compensation system, and
the strategic importance of compensation.
45. Identify and describe the steps necessary for implementing a compensation system.
ANSWER Actual implementation of the new compensation system involves the following steps:
: Step 1: Establish the implementation task forces. Unless there is designated
responsibility for the implementation, articulated expected outcomes, and
accountability for results, the implementation will be at risk.
Step 2: Put the infrastructure into place. Make sure all the necessary resources are in
place and prepared to run the system.
Step 3: Test the system. Prior to implementation, the system needs to be test-run to
determine any final bugs to be sorted out and corrected.
Step 4: Conduct the training. At this point, all those outside the HR department who
will play a role in the new compensation system need to be trained.
Step 5: Communicate information on the system. Activate the communications plan

developed while preparing for implementation.
Step 6: Launch and adjust the system. The system can now be launched. However,
ongoing scrutiny and adjustments will be needed to ensure success.

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Chapter 1 - A Road Map to Effective Compensation

1. There is no one best compensation system that fits all firms.

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Chapter 1 - A Road Map to Effective Compensation

11. Which of the following statements is supported by evidence in the textbook?

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Chapter 1 - A Road Map to Effective Compensation

16. Which item is considered part of a compensation system?

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Chapter 1 - A Road Map to Effective Compensation

19. Which of the following best explains intrinsic rewards?

22. Which of the following would be an example of an extrinsic reward?

23. According to Maslow’s theory, what is the most basic need?

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Chapter 1 - A Road Map to Effective Compensation

26. Which statement is most accurate regarding the reward strategy?

27. Which of the following items is a component of the compensation strategy?

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Chapter 1 - A Road Map to Effective Compensation

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Chapter 1 - A Road Map to Effective Compensation

39. In small organizations, who is typically responsible for compensation strategy?

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Chapter 1 - A Road Map to Effective Compensation

Subjective Short Answer

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Chapter 1 - A Road Map to Effective Compensation

The goals of reward and compensation system are to:

45. Identify the steps in developing an effective compensation strategy.

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Chapter 2 - A Strategic Framework for Compensation

3. An organization’s vision refers to its long-term, optimal desired state.

5. An organization’s domain is simply another term for managerial strategy or plan.

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Chapter 2 - A Strategic Framework for Compensation

8. Narrow jobs characterize high involvement systems.

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Chapter 2 - A Strategic Framework for Compensation

14. What can you determine by examining a firm’s contextual variables?

17. Which of the following is a structural variable interrelated with compensation?

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Chapter 2 - A Strategic Framework for Compensation

18. What should an effective organizational structure provide an organization?

19. What can you determine by examining a firm’s structural variables?

20. Which of the following is classified as a “main” managerial strategy?