Solutions Manual: Ch30-Compensation Systems-s

Review Questions
30.1 What are the three components of an individual’s total compensation?
Answer: The three components are (1) base pay, (2) variable pay, and (3) fringe benefits.
30.2 What are the two basic types of pay systems?
Answer: The two basic types of pay systems are (1) time-based pay systems, in which the
employee is paid for the time worked; and (2) incentivized pay systems, in which pay is
based on the amount of work accomplished or some other measure of performance.
30.3 What is the base pay in an employee’s compensation package?
Answer: The base pay is the wage or salary that is paid to the employee on a regular basis,
such as weekly or monthly.
30.4 What is meant by the term base pay progression?
Answer: The base pay progression is a series of increases within a given job classification
that depends on factors such as length of service to the organization and the merits of the
individual.
30.5 What is the variable pay in an employee’s compensation package?
Answer: The variable pay is usually based on some measure of performance of either the
individual worker or groups of workers (e.g., worker teams). Variable pay is usually an
incentivized pay system.
30.6 Define fringe benefits.
Answer: As defined in the text, fringe benefits are employment benefits that have
monetary value to the employee and are an expense to the employer but do not affect the
employee’s financial pay.
30.7 What are the two categories of time-based pay systems?
Answer: The two categories of time-based pay systems are (1) hourly pay systems, in
which the employee is paid at an hourly rate for the amount of time worked; and (2) salary
systems, in which the employee is paid a fixed amount at regular intervals for his or her
services.
30.8 What does the term exempt mean in the context of pay systems?
Answer: The exempt status means that the employee is exempt from certain provisions of
the Fair Labor Standards Act and similar state laws, specifically that the employee is not
paid at a time-and-a-half rate for hours worked above 40 during a fixed work week.
30.9 Define measured day work.
Answer: As defined in the text, measured day work is an hourly pay system in which time
standards are used to measure the amount of work accomplished by each employee.
30.10 What is a direct wage incentive system?

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Answer: A direct wage incentive system is an incentivized pay system that pays a wage or
salary that increases as work output increases.
30.11 What is the difference between a piecework system and a standard hour plan?
Answer: In a piecework system, the worker is paid a fixed dollar amount for each unit of
work completed. In a standard hour plan, the rate per piece is expressed as a time standard
rather than a dollar amount, and the worker is paid an hourly rate for the number of
standard hours completed. Another difference is that a standard hour plan includes a
guaranteed base rate, while piecework does not.
30.12 What is meant by the expression guaranteed base rate?
Answer: A guaranteed base rate means that the worker is paid a minimum daily rate
(based on an hourly rate) regardless of the quantity of work units produced. It is a safety
net for the worker in case his or her output is less than standard.
30.13 Under what kind of selling circumstances is a sales incentive system appropriate?
Answer: Sales incentives are appropriate when the selling process requires (1)
independence of action to consummate the sale, (2) the selling activity involves a short
sales cycle, and (3) a high degree of persuasion is required.
30.14 What are the two basic objectives of a direct incentive system?
Answer: The two basic objectives of a direct incentive system are (1) to increase
productivity for the organization that sponsors it and (2) to increase earnings for the
workers who participate in it.
30.15 What are some of the reasons why direct incentive plans sometimes fail?
Answer: Reasons given in the text include (1) conflicting objectives between the company
and the workers, (2) workers suffer penalties when they increase productivity, (3) too
much emphasis on physical effort, (4) standards become eroded over time, and (5) mixing
of incentives and day work.
30.16 What is a gain-sharing plan?
Answer: A gain-sharing plan is an indirect group incentive system in which employees are
encouraged to make improvements that increase productivity and reduce cost, and the
company shares the benefits of those improvements with the employees in the form of a
periodic bonus.
30.17 The Scanlon and Rucker gain-sharing plans use financial measures in their bonus-sharing
formula, while Improshare uses labor hours. What are the two main advantages of using
labor hours instead of financial data in a gain-sharing plan?
Answer: The two arguments in favor of using labor hours over financial data are (1)
hourly data are easier for employees to understand than financial data and (2) many of the
factors that affect financial data are not related to productivity improvement.
30.18 What are the three basic types of profit-sharing plans?

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Answer: As identified in the text, the three basic types are (1) cash plans, in which the
profit bonus is paid to employees soon after profits are determined; (2) deferred plans, in
which the profit share is credited to an employee account that is withdrawn at retirement or
some other specified circumstance; and (3) combinations of cash and deferred plans.
Problems
Time-Based Pay Systems
30.1 An hourly pay system uses a rate of $12.40/hr. The regular workweek is 40 hours, Monday
through Friday. All workers are non-exempt. There is no paid sick day benefit. Determine
the weekly wage under the following circumstances: (a) the employee worked 32 hours
during the week and called in sick on Friday, (b) the employee worked 45 hours during the
week, including 5 hours overtime on Wednesday evening, and (c) the employee was absent
on Monday, but worked eight hours each day for the remaining four days of the week and
then worked six hours on Saturday.
Solution: (a) W = $12.40(32) = $396.80
(b) W = $12.40(45) + 0.5($12.40)(5) = $589.00
(c) W = $12.40(38) = $471.20
30.2 Solve the previous problem except that all workers are exempt and are paid a weekly salary.
Also, the company has a paid sick day policy that covers up to 10 sick days per year.
Solution: The worker’s weekly salary is W = $12.40(40) = $496.00. Assuming the worker
has not exhausted his/her 10 sick days, he or she will be paid $496 during each of the three
weeks.
Direct Incentive Pay Systems
30.3 A time standard of 0.25 min has been set in a stamping operation. The plant uses a standard
hour plan at $10/hr with a daily guarantee of 8 hours pay minimum. Determine the daily
earnings of a worker whose daily output for two days are: (a) 1800 pieces and (b) 2200
pieces.
Solution: (a) Hstd = 1,800(0.25/60) = 7.5 hr. With a guaranteed base rate,
W = $10.00(8.0) = $80.00 for the first day
(b) Hstd = 2,200(0.25/60) = 9.167 hr
W = $10(9.167) = $91.67 for the second day
30.4 On two consecutive 8-hour days, a worker produced 167 units and 132 units, respectively,
on a job whose standard time is 3.55 min. His hourly rate is $9.00/hr. Compute his earnings
for the two days under the following wage payment plans: (a) daywork, (b) standard hour
plan with guaranteed base rate, and (c) bonus-sharing plan with p = 0.75. Assume the bonus-
sharing plan has a guaranteed base rate.
Solution: (a) For day work, W = $9.00(8) = $72.00 each day
(b) For the standard hour plan with guaranteed base rate,
Day 1: W = $9.00(167 x 3.55/60) = $88.93
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Day 2: W = $9.00(132 x 3.55/60) = $70.29. Because this is below the day work rate, the
worker would be paid the day rate W = $72.00.
(c) For the Halsey plan with proportion p = 0.75,
Day 1: W = $9.00(8.0) + $9.00(0.75)(167 x 3.55/60 – 8.0) = 72.00 + 12.69 = $84.69
Day 2: W = $9.00(8.0) + $9.00(0.75)(132 x 3.55/60 – 8.0) = 72.00 – 1.28 = $70.72. Because
this is below the day work rate, the worker would be paid the day rate W = $72.00.
30.5 A worker's base rate is $10.00/hr, and he works on a job whose standard time is 6.00 min/pc.
Standard output per day for this job is 80 units. Compute his earnings for a given day under
the following circumstances: (a) His output is 90 units and the incentive plan is a standard
hour plan with guaranteed base rate. (b) His output is 75 units and the plan is a standard hour
plan with no guaranteed base rate. (c) His output is 90 units and the incentive plan is a
Bedaux Point System with p = 0.65. Assume that the standard is expressed as 6.0 B-
points/pc, and that the plan has a guaranteed base rate.
Solution: (a) For the standard hour plan with guaranteed base rate,
W = $10.00(90 x 6.0/60) = $90.00
(b) For the standard hour plan with no guaranteed base rate,
W = $10.00(75 x 6.0/60) = $75.00
(c) For the Bedaux point system with p = 0.65
W = $10.00(8.0) + $10.00(0.65)(90 x 6/60 – 8.0) = 80.00 + 6.50 = $86.50
30.6 In a certain repetitive manual operation, the standard time = 2.50 min per work unit and the
worker's base rate = $9.00/hr. The plant's policy is to pay the worker a weekly wage for his
weekly output. During one 40-hour workweek, the daily output in work units was: 200, 230,
180, 220, and 240 for the five days. Determine the worker's wage for the week under the
following payment plans: (a) day rate, (b) standard hour plan with guaranteed base rate, and
(c) bonus-sharing plan where bonus sharing factor p = 0.35. Finally, (d) same as (b) except
the worker is paid daily (8 hours/day) for his daily output. What are his weekly earnings?
Solution: (a) W = $9.00(40.0) = $360.00
(b) For the standard hour plan with guaranteed base rate:
Weekly output Q = 200 + 230 + 180 + 220 + 240 = 1,070 pc
Weekly output at standard performance Qstd = 40(60)/2.50 = 960 pc
Hstd = 1070(2.50/60) = 44.583 hr
W = $9.00(44.583) = $401.25
(c) For the bonus-sharing plan where bonus sharing factor p = 0.35:
W = $9.00(40) + $9.00(0.35)(44.583 – 40) = 360 + 14.44 = $374.44
(d) Daily output at standard performance Qstd = 8(60)/2.50 = 192 pc
The worker’s daily output was above standard every day except Wednesday, so he is paid a
bonus for the four days and earns the day rate on Wednesday.
Wage for Monday WM = $9.00(200 x 2.50/60) = $75.00
Wage for Tuesday WT = $9.00(230 x 2.50/60) = $86.25
Wage for Wednesday WW = $9.00(8.0) = $72.00 (guaranteed base rate)
Wage for Thursday WR = $9.00(220 x 2.50/60) = $82.50
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Wage for Friday WF = $9.00(240 x 2.50/60) = $90.00

Weekly wage W = 75 + 86.25 + 72 + 82.50 + 90 = $405.75
30.7 A machine shop uses a wage payment system that is a combination of a daywork plan
(hourly pay) and a standard hour plan. The day work portion pays an hourly rate of $4.50,
while the standard hour portion pays a rate of $5.50/hr. During a particular 8-hour shift, a
worker produced 92 units on a task in which the standard time = 6.00 min. (a) How much did
the worker earn during the day? (b) Show that this plan is the same as a Halsey-type bonus-
sharing plan, and determine the bonus sharing factor p and the hourly rate that should be
used.
Solution: (a) W = $4.50(8.0) + $5.50(92 x 6.0/60) = 36.00 + 50.60 = $86.60
(b) This pay plan is a Halsey plan with the following parameters: RH = 4.50 + 5.50 = $10.00
and p = 5.50/10 = 0.55
Using the Halsey plan formula W = RHH + RHp(Hstd - Hsh), we have
W = $10.00(8) + 10.00(0.55)(92 x 6.0/60 – 8.0) = 80.00 + 6.60 = $86.60
30.8 A local steel foundry uses a wage payment system that is a combination of a hourly pay and
a standard hour plan. The hourly pay portion pays a rate of $6.00/hour worked, while the
standard hour portion pays a rate of $10.00/standard hour earned. During a particular 8-hour
shift, a worker produced 120 units on a task in which the standard time = 5.00 min. (a) How
much did the worker earn during the day? (b) Show that this plan is the same as a Halsey
Plan, and determine the bonus sharing factor p and the hourly rate that should be used.
Solution: (a) W = $6.00(8.0) + $10.00(120 x 5.0/60) = 48.00 + 100.00 = $148.00
(b) This pay plan is a Halsey plan with the following parameters: RH = 6.00 + 10.00 = $16.00
and p = 10.00/16.00 = 0.625
Using the Halsey plan formula W = RHH + RHp(Hstd - Hsh), we have
W = $16.00(8) + 16.00(0.625)(120 x 5.0/60 – 8.0) = 128.00 + 20.00 = $148.00
30.9 A 50-50 bonus sharing plan guarantees the base rate of $11.00/hr. The standard time per
work unit for a given task is 2.0 min. On three consecutive days, the worker’s efficiencies
were 70%, 100%, and 130% of standard. For each day, determine (a) the worker’s wage for
the 8-hour shift and (b) the direct labor cost per work unit.
Solution: (a) Day 1: At Ew = 70%, W = $11.00(8.0) = $88.00 (guaranteed base rate)
Day 2: At Ew = 100%, W = $11.00(8.0) = $88.00
Day 3: At Ew = 130%, W = $11.00(8.0) + $11.00(0.50)(1.3 x 8.0 – 8) = 88.00 + 13.20 =
$101.20
(b) Day 1: Q = 0.70(480/2.0) = 168 pc. Cpc = 88.00/168 = $0.524/pc
Day 2: Q = 1.00(480/2.0) = 240 pc. Cpc = 88.00/240 = $0.367/pc
Day 3: Q = 1.30(480/2.0) = 312 pc. Cpc = 101.20/312 = $0.324/pc
30.10 A worker is paid weekly, but his wage is calculated on a daily basis. In three days of
interest he worked on the same job, which had a time standard of 4.0 min per work unit.
The worker is paid a rate of $14.00/hr in a standard hour plan that has a guaranteed base
rate. Determine (a) the worker’s wages and (b) the direct labor costs per work unit to the

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company for each of the three days if he produced 110 work units on the first day, 125
units on the second day, and 145 units on the third day.
Solution: (a) Standard output Qstd = 480/4.0 = 120 pc/day
Day 1: Q1 = 110 pc. W1 = $14.00(8.0) = $112.00 (guaranteed base rate)
Day 2: Q2 = 125 pc. W2 = $14.00(125)(4.0/60) = $116.67
Day 3: Q3 = 145 pc. W3 = $14.00(145)(4.0/60) = $135.33
(b) Day 1: Cpc1 = $112/110 = $1.018/pc
Day 2: Cpc2 = $116.67/125 = $0.933/pc
Day 3: Cpc3 = $135.33/145 = $0.933/pc
30.11 Solve the previous problem except that the plan is a bonus-sharing plan in which the
worker’s bonus-sharing proportion is 0.40.
Solution: (a) Standard output Qstd = 480/4.0 = 120 pc/day
Day 1: Q1 = 110 pc. W1 = $14.00(8.0) = $112.00 (guaranteed base rate)
Day 2: Q2 = 125 pc. W2 = $14.00(8.0) + $14.00(0.40)(125 x 4.0/60 - 8) = $113.87
Day 3: Q3 = 145 pc. W3 = $14.00(8.0) + $14.00(0.40)(145 x 4.0/60 - 8) = $121.33
(b) Day 1: Cpc1 = $112/110 = $1.018/pc
Day 2: Cpc2 = $113.87/125 = $0.911/pc
Day 3: Cpc3 = $121.33/145 = $0.837/pc
30.12 A wage payment system is described as a combination of day work (hourly pay) and a
standard hour plan. The day work portion pays an hourly rate of $8.40, while the standard
hour portion pays a rate of $3.60/hr. During a particular 8-hour shift, a worker produced 57
units on a task in which the standard time = 10.00 min. (a) How much did the worker earn
during the day? (b) Show that this plan is the same as a Halsey Plan, and determine the
bonus sharing factor p and the hourly rate that should be used. Using this hourly rate,
determine how much the worker would earn in (c) a 50%-50% bonus sharing plan and (d) a
standard hour plan. What is the labor cost per piece to the company under each of the three
incentive plans: (e) the Halsey plan in (b), (f) the 50-50 plan in (c), and (g) the standard hour
plan in (d)?
Solution: (a) Hstd = 57(10.0/60) = 9.50 hr
W = $8.40(8.0) + $3.60(9.5) = 67.20 + 34.20 + $101.40
(b) This pay plan is a Halsey plan with the following parameters: RH = 8.40 + 3.60 = $12.00
and p = 3.60/12.00 = 0.30.
W = $12.00(8.0) + $12.00(0.30)(9.5 – 8.0) = 96.00 + 5.40 = $101.40
(c) W = $12.00(8.0) + $12.00(0.50)(9.5 – 8.0) = 96.00 + 9.00 = $105.00
(d) W = $12.00(9.5) = $114.00
(e) Cpc = 101.40/57 = $1.779/pc
(f) Cpc = 105/57 = $1.842/pc
(g) Cpc = 114.00/57 = $2.00/pc
30.13 In a bonus-sharing plan, the worker gets 65% of the bonus earned. The plan has a guaranteed
base rate of $12.50/hr for the regular 8-hour shift. The wage is computed daily and paid
weekly. Company policy allows 10 paid sick days per calendar year at the guaranteed base

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rate. In the first full week of January, the worker Sam called in sick on Monday and
Tuesday. On Wednesday, Thursday, and Friday of the same week, Sam produced 150
pieces, 180 pieces, and 193 pieces, respectively, on a job whose standard time per piece was
3.00 min. (a) What was the worker’s gross wage that week? (b) What was the average cost
per piece to the company for the pieces produced by Sam that week?
Solution: (a) Output at standard performance Qstd = 480/3.0 = 160 pc
Monday and Tuesday: WM = WT = $12.50(8.0) = $100.00 each day (paid sick days)
Wednesday: QW = 150 pc, which is less than Qstd. Therefore, worker earns the guaranteed
base rate. WW = $12.50(8.0) = $100
Thursday: WR = $12.50(8.0) + $12.50(0.65)(180 x 3.0/60 - 8.0) = $108.13
Friday: WF = $12.50(8.0) + $12.50(0.65)(193 x 3.0/60 - 8.0) = $113.40
(b) Weekly output Q = 150 + 180 + 193 = 523 pc
Weekly wage for the worker W = 3(100) + 108.13 + 113.40 = $521.53
Cpc = 521.53/523 = $0.997/pc
Gain-Sharing Plans
30.14 A Scanlon Plan used a two-year base period several years ago to compute the base ratio.
During that period, total sales amounted to $125 million, and total employee payroll costs
were $55 million. The plan operates with the following features: it pays quarterly; there is no
reserve pool, all bonus monies above the ratio are shared between the workers and the firm;
sharing is 75% to workers and 25% to firm; and a negative bonus amount is absorbed by the
company. Under this plan, determine the amount of the bonus and how it was shared during
the last two quarters of last year: (a) third quarter during which sales = $18 million and
payroll costs = $7 million; (b) fourth quarter during which sales = $20 million and payroll
costs = $9 million.
Solution: (a) Base ratio SBR = 55/125 = 0.44
Third quarter sales = $18 million and payroll costs = $7 million
BQ3 = 0.44(18,000,000) – 7,000,000 = 7,920,000 – 7,000,000 = $920,000
Worker share of bonus = 0.75(920,000) = $690,000
Company share = 0.25(920,000) = $230,000
(b) Fourth quarter sales = $20 million and payroll costs = $9 million
BQ4 = 0.44(20,000,000) – 9,000,000 = 8,800,000 – 9,000,000 = -$200,000
Worker share of bonus = 0
Company share = -$200,000
30.15 A Scanlon Plan with the following features was established three years ago at the Lifelong
Uniform Company: payments are made annually based on productivity improvements in
the preceding year; no reserve pool, all bonus monies above the ratio are shared between
the workers and LU: sharing = 60% to workers and 40% to LU; and any negative bonus
amount is absorbed by LU. Two years ago a total bonus was paid to the workers of
$1,200,000 based on net sales of $75,000,000. One year ago a total bonus was paid to the
workers of $2,040,000 based on net sales of $80,000,000. Payroll costs for both years were
the same. If net sales for the current year are projected to be $83,000,000, and payroll costs
are expected to increase by 5%, what will the workers’ expected bonus be? The hourly
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base rate paid to the workers remained the same throughout the period of interest in this
problem.
Solution: Equation to determine worker bonus: WB = 0.60(SBR x NS – PC), where WB =
worker bonus, SBR = base ratio, NS = net sales, and PC = payroll costs.
Two years ago, WB2 = $1,200,000 and NS2 = $75,000,000 (1)
One year ago, WB1 = $2,040,000 and NS1 = $80,000,000 (2)
Payroll costs were the same in these two years: PC1 = PC2
Solving two equations of the above form and two unknowns
(1) 1,200,000 = 0.60(75,000,000 SBR – PC) = 45,000,000 SBR – 0.60 PC
(2) 2,040,000 = 0.60(80,000,000 SBR – PC) = 48,000,000 SBR – 0.60 PC
(1) 0.6 PC = 45,000,000 SBR - 1,200,000
(2) 0.6 PC = 48,000,000 SBR – 2,040,000
(1) = (2): 45,000,000 SBR - 1,200,000 = 48,000,000 SBR – 2,040,000
2,040,000 – 1,200,000 = 840,000 = 48,000,000 SBR – 45,000,000 SBR = 3,000,000 SBR
SBR = 840,000/3,000,000 = 0.28
0.6 PC = 45,000,000(0.28) - 1,200,000 = 11,400,000
PC = 11,400,000/0.6 = 19,000,000
Current year worker bonus WB0 = 0.6(83,000,000(0.28) – 19,000,000(1.05)) = $1,974,000
30.16 A Rucker Plan used a two-year base period three years ago to compute the base ratio. During
that period, total sales amounted to $152 million, total employee payroll costs were $55
million, and other production costs were $67 million. The plan has the following features: it
pays quarterly; there is a reserve pool of 25% to offset negative gains; sharing is 50% to
workers and 50% to firm. Under this plan, determine the amount of the bonus and how it
was shared during the last two quarters of last year: (a) third quarter during which sales =
$25 million, payroll costs = $8.8 million, and other production costs = $10.7 million; (b)
fourth quarter during which sales = $32 million, payroll costs = $11.2 million, and other
production costs = $14.1 million.
Solution: Value added in base year VAb = 152,000,000 – 67,000,000 = $85,000,000
Rucker base ratio RBR = 55,000,000/85,000,000 = 0.647
(a) Third quarter value added VAQ3 = 25,000,000 – 10,700,000 = $14,300,000
Bonus BQ3 = 0.647(14,300,000) – 8,800,000 = 9,252,100 – 8,800,000 = $452,100
25% is deducted for the reserve pool, leaving 0.75(452,100) = $339,075
The bonus is shared 50-50, so the firm and the workers each get $169,537.50
(b) Fourth quarter value added VAQ4 = 32,000,000 – 14,100,000 = $17,900,000
Bonus BQ3 = 0.647(17,900,000) – 11,200,000 = $381,300
25% is deducted for the reserve pool, leaving 0.75(381,300) = $285,975
The bonus is shared 50-50, so the firm and the workers each get $142,988
30.17 During the base period in the implementation of an Improshare system, a total of 118,000
standard hours were required to complete a mixture of products, while the total employee
hours during the same period totaled 197,000 hr. These values were used to determine the
base productivity factor. Later, during one particular month of interest, the total standard
hours = 16,300 hr and the total employee hours = 22,700 hr. Determine (a) the base
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productivity factor, (b) the labor hour savings to the company during the month of interest,
and (c) the percent incentive bonus that is paid to the employees.
Solution: (a) Base productivity factor BPF = 197,000/118,000 = 1.6695
(b) Labor hour savings LHSi = 1.6695(16,300) – 22,700 = 4513 hr
(c) Half of LHSi = 2256.4 hr
% incentive bonus= 2256.4/22,700 = 0.099 = 9.9%