Chapter 12

1. McDonald’s global rewards program has resulted in lower managerial and employee turnover. In this type of total
rewards system why would turnover decline?
d. Higher performers receive higher incentives than lower performers, so high
performers would be less likely to quit.

2. Compensation is one of the organization’s largest expenditures. Compensation philosophies and systems vary from
one organization to the next. Why is that?
b. Different organizations have different organizational objectives and strategies.

3. All of the following are compensation objectives of the organization EXCEPT

c. the lowest total cost of compensation in the industry.

4. The total rewards compensation approach has three main components. Which of the following is NOT one of these
components?
d. individual, team and organizational-level incentives

5. In a total rewards compensation approach, it is critical to balance

d. balance the interests and costs of employers with the needs and expectations of
employees.

6. Which of the following would be an example of an intrinsic reward?

d. verbal praise for a job well done

7. Medical insurance, paid by the employer, is classified as ____ compensation.

a. indirect

8. Tom has just taken his first full time job with a salary of $38,000. He knows that he should plan his personal
recurring expenses, such as rent and car payments, around this amount because it is his
c. base pay.

9. A compensation philosophy in which each employee who has gained another year of seniority should have an
increase in pay is called the ____ philosophy.
a. entitlement

10. ____ are payments directly calculated on the amount of time worked.
b. Wages

11. At Artistic Floral Creations, the non-managerial employees all receive the same pay increase every year. Usually this
increase is about 5%, but some years it has been as high as 10% depending on changes in the cost-of-living. Artistic
Floral Creations has a/an ____ philosophy of compensation.
b. entitlement

12. The two basic compensation philosophies, which should be seen as opposite ends of a continuum, are the ____ and
the ____ orientations.
c. entitlement; performance
13. Amber is the manager of a popular clothing store. She regularly works over 40 hour a week. But when new styles
are coming in requiring new displays, she may put in as many as 60 hours a week. Amber’s paycheck is the same
regardless of the number of hours she has worked. Amber is paid on a/an
d. salary basis.

14. Which type of compensation is linked directly to individual, team, or organizational performance?
a. variable pay

15. A/an ____ is an indirect reward given to an employee or group of employees for organizational membership.
c. benefit

16. In an organization with a performance-oriented philosophy,

a. seniority plays little role in whether an employee receives a raise.

17. Justin is an hourly employee of Furnace Brick, a company that manufactures a special high-heat-resistant brick for
industrial kilns. Justin is unhappy with the new compensation system introduced by the company’s new plant
manager and HR director. This system has eliminated the practice of annual raises, the Christmas bonus, and raises
based on seniority for a new system that ties every employee’s raise to how well Furnace Brick is performing in the
market. Moreover, the plant manager has announced that twenty percent of the employees in the plant will receive
no raise at all this year, regardless of the company’s performance. Furnace Brick has moved from a/an ____
compensation philosophy, to a/an____ compensation philosophy.
c. entitlement, performance

18. Jack and Jerry are twins. Both started working at competing firms in the same industry. Jack and Jerry were given
exactly the same starting salary. They have been with their companies for ten years, and both have identical
positions and identical performance ratings. Both Jack and Jerry are consistently average performers. Jack works at
a company with an entitlement compensation philosophy. Jerry works at a company with a pay-for-performance
compensation philosophy. The two companies are identical in revenue and profitability. They allocate the same
budget amount for employee raises each year. All other factors remaining equal, which of the following statements
is most likely to be true?
b. Jack will have a higher salary than Jerry.

19. Gigantic Motor Vehicles, which manufactures the Behemoth, the main competitor to the Hummer, has experienced
huge losses for the last three years due to collapsing sales of their gas-guzzling vehicles. GMV’s stock has
plummeted on Wall Street because it has not met projected profits for the 24th straight quarter. GMV has moved to
a pure pay-for-performance system that is tied to achievement of organizational profit goals. Which of the
statements below are most likely to be true?
b. No GMV employee can expect he/she will receive a pay increase, regardless of
his/her performance.

20. The CEO of BizMark Equipment wants to know what return the firm is getting on the money it is spending on its
employees. As the director of HR, you know this is considered return on human capital. You will calculate this as
b. Revenue - Operating Expense -Pay and Benefits = Adjusted Profit / Pay and
Benefits

21. Brian, the director of compensation, has been asked by the board of directors to present the “employee cost factor”
at the next board meeting. Brian needs to do the following calculation:
a. total compensation and benefits divided by FTEs
22. In order to show how the rate of compensation changes compares with the rate of changes in the organization’s
revenues overall
a. compensation metrics should be calculated each year and compared with
previous years’ metrics.

23. If employees are dissatisfied with their pay, they are likely to do or feel all the following EXCEPT
c. lose self-esteem.

24. The HR unit is typically responsible for

d. administering the compensation system.

25. Operating managers typically

a. evaluate employee performance for compensation purposes.

26. As director of HR for Megatherium Products, you are looking for ways to make the compensation function more
efficient. You are considering outsourcing some of the compensation functions to an outside vendor. The function
you are most likely to outsource will be
c. payroll processing.

27. In a division of compensation responsibilities, ____ typically ensure job evaluations and wage surveys are done.
b. HR specialists

28. In an equity calculation, an employee’s base pay, variable pay, and benefits are the ____ he/she receives from a job.
a. outcomes

29. The director of HR at Megatherium Industries knows that there are serious flaws in the company’s compensation
system. If employees freely discuss their salary levels, raises and bonuses, the director is concerned that there will
be widespread dissatisfaction and employee questions that will place the HR department and top management in a
bad light. Consequently, Megatherium has a strict pay secrecy policy, and employees who discuss their pay are
disciplined. Which of the following statements is TRUE?
d. It is possible that Megatherium’s policy violates the National Labor Relations
Act.

30. Simon is outraged that Missy was given a raise because she is related to the chairman of the board. Simon’s sense of
____ has been violated.
d. procedural justice

31. In terms of procedural justice, the process of determining base pay, allocating pay increases, and measuring
performance all must be seen by employees as
a. fair.

32. Amanda is upset because she makes the same amount of money Carl does, although Amanda has 18 clients and Carl
has only 11 clients. Amanda is making a judgment about
c. internal equity.

33. Typical compensation appeals procedures require the employee to discuss the problem first with
d. his/her supervisor.

34. What is a likely outcome when an organization's compensation is viewed by employees and outsiders as lacking
external equity?
 d. difficulty recruiting qualified and high-demand employees

35. Organizations that have specific policies about where they wish to position themselves in the labor market use
a/an ____ strategy.
b. quartile

36. Abundance Nurseries needs large numbers of unskilled employees every spring and summer to plant, maintain,
and harvest the flower fields. Abundance is located in an area where there is a large supply of unskilled workers,
and it has few problems recruiting workers as needed. It would be reasonable for Abundance Nurseries to position
its pay for these workers in the ____ -quartile of the labor market.
a. first

37. A third-quartile approach is a compensation strategy

a. in which the company pays higher wages than its competitors do.

38. A company that structures its compensation system so that half of its competitors pay their employees more than it
does and half of its competitors pay less than it does is using a ____ the market strategy.
b. meet

39. Larry has decided to go back to his hometown of Mellonburg and set up an architectural design business.
Mellonburg is a depressed farming community of 351 residents. It is 20 miles from the nearest restaurant, 70 miles
from the nearest Starbucks coffee shop, and the local schools are the worst in the state. The winters are severe, the
summers are oppressive. Few single people live there, and the social and cultural life is negligible. In order to
attract good quality architects, Larry will probably
c. have pay somewhat more than the market because of the unappealing location.

40. Paul is a single-parent. He received consistently high performance appraisals from his employer, until the company
was wiped out by Hurricane Katrina. Now, Paul is looking for a new job away from the Gulf Coast. As the recruiter
at MilqueMaid Chocolate, you are very interested in Paul. But, your firm has a lag-the-market compensation
strategy. You know that Paul has had an offer from a firm that has a meet-the-market strategy. Your best way to lure
Paul to MilqueMaid is to
a. point out MilqueMaid’s broad-based performance incentive programs.

41. An organization can benefit from a properly designed and implemented competency-based pay system through
c. greater workforce skills and knowledge.

42. In a competency-based pay system employees are paid

a. on the skills and knowledge they have, whether they use these or not.

43. Which of the following is the typical structure of team-based compensation?

d. team-based variable pay on top of individual base pay

44. As HR director, you are discussing the implementation of a competency-based compensation system with the
company’s CEO. You point out that in order for the competency system to be effective
c. the company must invest heavily in employee training programs.

45. As director of HR for a medium-sized firm, you are implementing your company’s first overseas location. You will
be transferring ten current employees to the company’s foreign location for assignments lasting up to three years.
You are considering all of the following factors in these employees’ future compensation EXCEPT
d. assignment abandonment penalties.
46. Steven, the vice president of manufacturing for a U.S. textile firm that is opening up a plant in India, must decide
how to pay the hourly workers in the Indian plant. After much consultation with his peers at other companies he
decides to follow the common practice of
b. paying local Indian wages.

47. Compensation plans for internationally-assigned employees that attempt to be comprehensive in providing base
pay, incentives, benefits and relocation expenses regardless of the country to which the employee is assigned are
called ____ compensation plans.
b. global market

48. If the Wage and Hour Division of the U.S. Labor Department investigates an employer’s files looking for violations of
the FLSA, it will focus on
a. time records.

49. A compensation plan for expatriates that equalizes the cost differences between the international assignment and
the same assignment in the home country of the individual or the corporation is the ____ approach.
d. balance sheet

50. The aggregate employer costs for the typical expatriate employee, including all allowances, is about ____ the
expatriate’s salary.
d. three or four times

51. The major federal law that regulates compensation in the U.S. is the
a. Fair Labor Standards Act

52. Which of the following is a NOT major objective of the Fair Labor Standards Act?
a. to give labor unions the right to organize

53. Marcia is very upset. She applied for a waitstaff position at a local restaurant and she was told her base wage would
be $4 an hour. Marcia knows this is much lower than minimum wage.
b. The wage offered is consistent with the FLSA because Marcia would be in a
“tipped” position.

54. ____ is the amount needed for a family of four to be supported by one worker so that family income is above the
officially-identified poverty level.
d. The living wage

55. Chuck has applied to a residential roofing firm for a job as a roofer during school vacation because the pay is very
good. Roofing is considered hazardous work. Under the FLSA Chuck cannot be hired unless he is at least ____ years
old.
c. 18

56. Which of the following are NOT paid overtime under the Fair Labor Standards Act?
c. exempt employees

57. Which of the following is a TRUE statement about the overtime provisions for non-exempt employees of the Fair
Labor Standards Act?
b. Overtime pay is set at one and one-half times the regular pay rate for all hours
 in excess of 40 per week.

58. Under the FLSA, which of the following would be classified as a non-exempt employee?
d. an electrician on staff at a casino

59. Terri is a salaried line worker at Chicken Delight Poultry Processors. Terri joking refers to herself as a “chicken dis-
assembler.” She often works more than 40 hours a week, and is not paid overtime.
c. Terri’s pay is not consistent with the FLSA because she is a non-exempt
employee.

60. Marie has been offered work as an employee trainer for AgriEnterprise. In this job, Marie will use the employer’s
training materials, and she will train employees at AgriEnterprise’s three locations at the times that the company
determines. Marie has been promised that the company will continue to use her services as long as her
performance is satisfactory. Marie has agreed not to work as a trainer for any other company while she is working
for AgriEnterprise. The company is paying Marie as an independent contractor. Which of the following statements
is correct?
b. Marie is an employee.

61. Compensatory time-off can be given to non-exempt employees in the private sector
a. if it is given to employees at the rate of one and one-half times the hours
worked over a 40-hour week.

62. Clemmie is a non-exempt employee of a large law firm. During a particular trial 15 percent of her employer’s staff
caught a particularly virulent flu, resulting in everyone else having to do their own work as well as the sick
employees’ work. One particularly intense week, Clemmie worked 115 hours. Which of the following statements is
true?
c. Clemmie’s overtime pay will be the same amount of pay as if she had worked
112.5 hours of straight time.

63. For an employer, the primary advantage of classifying a worker as an independent contractor is that
c. the employer does not have to pay Social Security, workers’ compensation, or
unemployment costs.

64. Orville Brothers Construction, Inc., is making a bid for a federal government contract to build a bridge. In that bid,
the construction company must allow for ____ wages for the employees.
d. prevailing

65. The Equal Pay Act prohibits wage differentials based on

d. gender.

66. MetroUrban Bank has 27 branches, each with a branch manager. These branches range in size from mini-branches
in grocery stores, to large branches with many business and investment clients. Mini-branches may have only three
or four employees. Large branches may have as many as fifty employees. Of MetroUrban’s branch managers, 15 are
female and 12 are male. Female branch managers average pay is 75% of the male branch managers pay. As the
director of compensation for MetroUrban Bank, what proof should you provide that shows your bank has not
broken the Equal Pay Act?
b. The bank only began hiring women to be branch managers about 10 years ago.
Consequently, the female branch managers have been with the bank a fewer
number of years than the males. Typically, the branch managers of the larger
 branches are bank officers who have more years of experience with the bank.

67. ____ is the concept that the pay for all jobs requiring comparable knowledge, skills, and abilities should be similar
even if actual duties and market rates differ significantly.
a. Pay equity

68. ____ is a court action in which a portion of an employee's wages is set aside to pay a debt the employee owes to
someone.
c. Garnishment

69. Aesthetic Decor, Inc., has made the philosophical decision to have absolute internal equity in its pay structure. To
that end, every job in the organization has been rigorously evaluated and assigned points according to the worth of
the job to the organization. The result is that many traditionally female-dominated jobs are paid more than what
they are typically paid, and some traditionally male-dominated jobs are paid less than what they are typically paid.
Which of the statements below is most likely to be TRUE?
d. Aesthetic Decor’s compensation for traditional male jobs will not be externally
competitive.

70. In a job evaluation, every job in an organization is examined and wages are set according to
b. the relative worth of the job to the organization.

71. When using the point method of job evaluation, a ____ factor is used to identify a job value that is commonly present
throughout a group of jobs.
a. compensable

72. Which of the following is a major drawback to the point method of job evaluation?
c. It reinforces traditional organizational structures.

73. Of the following methods of job evaluation, the ____ method is the most subjective.
a. classification

74. Traditional job evaluation programs have been criticized as being gender-biased against women. Employers argue
that
d. job evaluations reflect the pay rates the “market economy” sets for jobs.

75. George, a compensation specialist for a large frozen foods company, has been asked to identify compensable factors
specific to the job of forklift operator in the company’s extensive warehouse. This warehouse is one of the largest
refrigerated warehouses in the country. George would probably include all the following in his list EXCEPT
d. consequences of errors.

76. Much of the accuracy of the market pricing method of job evaluation depends on
c. the quality of the job matches between the survey and the employer’s jobs.

77. The CEO of your company wants to move to a pure market pricing approach to compensating all the employees. She
argues that it is foolish to pay more for any resource (including human resources) than they are worth on the open
market. She argues that a pure market pricing approach would be the most efficient use of organizational funds. It
is her idea to review the market price for each job in the company annually, and revise the employees’ pay up or
down as indicated. She knows this is an unconventional idea, but she is convinced it would work. You make all the
following arguments EXCEPT
 a. a pay structure based entirely on market pricing would be hard to defend in
court against charges of discrimination.

78. Simon is a compensation specialist for Coreopsis, Inc. He is collecting data on compensation rates for workers
performing similar jobs at other organizations,. Simon is conducting a
b. pay survey.

79. A ____ job is one that is found in many organizations and performed by several individuals who have similar duties
and require similar KSAs.
d. benchmark

80. Celeste, the vice president of compensation, is preparing a report for the executive committee recommending that
the company move from using a traditional job evaluation system to a system using market pricing. Celeste will
probably include all of the following arguments in her presentation EXCEPT market pricing
c. can reduce wide fluctuations in data on which pay rates are based.

81. Bruce, the director of compensation for a regional medical center, wishes to examine pay survey data for the
various classifications of nurses in the organization. Bruce is aware of some concerns over “price fixing” of wages.
He decides that he will use all of the following sources of information on nursing pay EXCEPT
a. a pay survey of regional healthcare institutions that he will conduct himself
during an upcoming conference of healthcare executives.

82. As director of compensation and benefits, you are deciding whether you should purchase a new pay survey. You
consider all the of following characteristics of pay surveys in your decision EXCEPT
b. Is the survey focused exclusively on companies of your size, the city in which
you operate, and your industry?

83. In the next five years pay surveys will be

b. conducted largely electronically, using Web-based technology.

84. Angela, one of the company’s best administrative employees, has made an appointment with you, the vice president
of HR. Angela is extremely upset because she has done an Internet search on compensation levels for her particular
job. She has found that her salary falls below both the industry median and industry average, even though she has
been with the company for four years and has had outstanding performance reviews. Angela is a valuable employee
and she would be difficult to replace. In addition, if Angela’s morale declines, her attitude will strongly affect her co-
workers. The compensation system at your company has a strong emphasis on internal equity, and it is a solid and
legal system. Which of the following arguments would be LEAST effective for retaining Angela and maintaining her
morale?
a. Tell Angela that the company has done extensive job evaluation studies, and although
she is a highly-valued employee, you can’t justify paying her any more.

85. A____ is a group of jobs having common organizational characteristics.

d. job family

86. Organizations use pay grades to

a. group individual jobs having approximately the same job worth.

87. The last step in establishing a pay structure is to

b. review individual pay.
88. The ____ shows the relationship between job value, as determined by job evaluation points, and pay survey rates.
d. market line

89. The ____ derived from the pay survey is/are used to develop pay range minimums and maximums.
a. midpoint of the survey average

90. ____ is the practice of using fewer pay grades with much wider ranges than in traditional compensation systems.
c. Broadbanding

91. Which of the following is a benefit of reducing the number of pay grades and broadening pay ranges?
b. It encourages employees to take horizontal job moves.

92. Which of the following employees will be qualified for the LARGEST pay raise according to a typical pay adjustment
matrix? An employee with
d. a compra-ratio of 85 who exceeds performance expectations.

93. Which of the following approaches is recommended for bringing a red-circled employee's pay into line?
d. Freeze the employee's pay until the pay range is adjusted upward.

94. Martha has been a professor at a major state university for 20 years. Martha loves her work and is satisfied with the
university. Because of her high level of publications and her high quality of teaching, Martha has received the
highest raises possible every year. Since this a public university, Martha has access to all the salary data for all her
fellow professors. She has learned that the last three professors hired in her field at her level were paid one-quarter
more than she is paid. This amounts to tens of thousands of dollars. Martha is shocked and gathers data on the job
market in her field. She finds that her pay is much lower than the market rate. Martha has encountered
d. pay compression.

95. George is a long-term exceptional performer. He has a compra-ratio of 120 and once again his performance has
exceeded expectations. But, George only gets a raise of 3%, which is less than some of his co-workers who have less
seniority and whose performance only meets expectations. George is incensed and waiting in your office. As
director of HR, how will you explain this situation to George?
b. You explain that George’s compra-ratio shows that he is at the top of his pay
range and that he is already earning above the market midpoint set in his pay
grade.

96. A person's ____ is that employee's current pay level divided by the midpoint of the pay range.
a. compra-ratio

97. Which of the following is an advantage of a lump-sum increase (LSI) plan compared with traditional raises?
c. It heightens employees' awareness of what reward their performance merited.

98. The goal in giving pay increases to average performers should be

a. to align their pay with the labor market.

99. A true cost-of-living raise

b. must be tied to economic indicators.
100. As a young employee who consistently meets (but does not exceed) performance expectations, which type of pay
increase system would most likely be to your personal financial benefit considering that you expect to stay with the
company another 10 years?
c. across-the-board raises

101. Cost-of-living adjustments are typically tied to changes in the

d. Consumer Price Index.

102. Wimsey Enterprises has announced that it will give all employees a 5% merit increase this year. This increase
should really be termed a/an
b. across-the-board increase.

103. Of the following, which type of pay adjustment has the most ability to reward employee performance?
c. lump-sum increases
ESSAY

1. What are the two major compensation philosophies and how to they affect employee attitudes and behavior?

ANS:
There are two major compensation philosophies: entitlement and performance. Most organizations fall somewhere
on a continuum between the two extremes. The entitlement philosophy assumes that employees are entitled to
(that is, they deserve) annual increases in pay regardless of their individual performance. Automatic increases,
cost-of-living increases, and many mis-called merit systems fall under the entitlement philosophy. Employees
expect their raises and bonuses in this system, seniority is rewarded, and performance is not emphasized. The pay-
for-performance philosophy requires that compensation changes reflect individual performance differences.
Employees who perform well receive larger raises than those performing satisfactorily (that is, at average levels).
Poorly performing employees may not receive any raise at all. Bonuses and incentives are based on individual,
group, and/or organizational performance. This system focuses employee attention on performance. In addition,
individual incentive plans and team/group reward systems may increase organizational performance, reduce
employee turnover and increase employee commitment and retention.

2. What is meant by equity? Is equity an important consideration in compensation?

ANS:
Equity is the perceived fairness of the relation between a person's inputs and outcomes. Inputs are what a person
brings to the job, that is, their effort and performance. Outcomes are what the person receives from the
organization, their rewards A sense of inequity occurs when there is a perceived imbalance between inputs and
outcomes. Comparisons are made both within the organization and externally. If employees view their pay as
unfair, there are negative effects on their performance, their view of their jobs, and their view of their employers. If
employees feel the organization pays too little in relation to other organizations (external inequity), the
organization will not be able to attract and keep high performing employees. If the employees feel the organization
is unfair in how it decides and distributes pay (internal equity, procedural justice, distributive justice), the
employees will have negative attitudes.

3. Would you recommend that an employer require that all salary information be kept confidential? Why or why not?

ANS:
Organizations sometimes choose to keep pay information secret in "closed" systems. This information includes
how much people make, what raises have been received, and what pay grades and ranges exist in the organization.
Several court rulings have ruled that companies who prohibit employees from even discussing their pay with one
another violate the National Labor Relations Act. A growing number of organizations are opening up their pay
systems to allow employees to make more accurate equity comparisons. Having more open pay system has positive
effects on employee retention and organizational effectiveness.
4. What are exempt and non-exempt jobs? How are exempt and non-exempt jobs identified in the organization? What
are independent contractors and why is it important for the organization to identify who is a contractor and who is
an employee?

ANS:
The FLSA requires that some employees be paid time-and-one-half overtime for any hours worked over 40 in a
week. The jobs that the law applies to are called non-exempt. The jobs that the FLSA does not apply to are called
exempt, and they are not entitled to overtime. There are five categories of exempt jobs: executive, administrative,
professional, computer employees, and outside sales staff. Independent contractors do not have to be paid
overtime, nor does the employer have to incur unemployment, workers’ compensation or Social Security expenses
for contractors. The IRS has twenty factors that it considers when classifying workers as independent contractors
or employees. Mainly this involves whether the worker has to comply with instructions and limitations set by the
employer or whether the worker operates at his/her own discretion.

5. What are the advantages and disadvantages of using market pricing to set compensation in organizations?

ANS:
Market pricing uses market pay data to identify the relative value of jobs in an organization based on what other
employers pay for similar jobs. Data is gathered through pay surveys on jobs that are good matches with the
organization’s jobs. The main advantage of market pricing is that it closely ties organizational pay levels with what
is actually being paid by other organizations competing for employees. This prevents compensation levels from
being distorted by internal job evaluation. Also, market pricing is easy to explain to employees, and employees tend
to see this method as objective and having face validity. The main disadvantage of market pricing is that pay survey
data is limited for many jobs and may not be gathered in methodologically sound ways. Also, it is sometimes
difficult to find good matches between jobs in the pay survey and jobs within the organization. Finally, tying pay
levels to the market data may lead to wide fluctuations in pay.