Compensation 11th Edition Milkovich Test Bank

Compensation 11th Edition Milkovich
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Chapter 08 - Designing Pay Levels, Mix, and Pay Structures
Chapter 08 Designing Pay Levels, Mix, and Pay Structures
Multiple Choice Questions
1. (p. 253) The first step in setting competitive pay and designing a pay structure is _____.
A. specify pay-level policy
B. conduct job evaluation
C. draw policy lines
D. specify relevant market
Difficulty: Easy
2. (p. 253) The second major decision in pay-level determination is _____.

A. specify relevant market
B. define purpose of survey
C. design and conduct survey
D. select product and labor market competitors
Difficulty: Medium
3. (p. 253) The final major decision in pay-level determination is _____.

A. interpret and apply results of survey
B. obtain top-management acceptance of final decisions
C. design grades and ranges or bands
D. draw policy lines
Difficulty: Medium
4. (p. 255) Which of the following is true regarding the Employment Cost Index (ECI)?
A. It is published by the Department of Commerce.
B. It is an excellent source of competitor labor costs.
C. It measures annual changes in employer compensation costs.
D. It allows comparison of labor costs to all-industry averages.
Difficulty: Medium
8-1
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5. (p. 255) A relevant labor market includes all employers who compete in one or more of the
following areas except _____.
A. employees in the same geographic area
B. the same occupations or skills
C. the same products and services
D. pay similar wages
Difficulty: Medium
6. (p. 255, 258) Which of the following types of labor would most likely be recruited only
locally?
A. Office and clerical workers
B. Scientists
C. Managers
D. Executives
Difficulty: Medium
7. (p. 260) Which of the following jobs would most likely fall into a fuzzy market?
A. Screen writer (MGM)
B. Sound engineer (Sony studios)
C. Director of future vision services (West Publishing)
D. Vice-president of people (Southwest Airlines)
Difficulty: Easy
8. (p. 260) The primary responsibility for conducting a pay survey is _____.
A. top management
B. the facility or plant manager
C. outside consultants
D. the compensation manager
Difficulty: Easy
8-2
9. (p. 246) The answer to the question of how many firms to include in a pay survey is _____.
A. there are no firm rules
B. include at least one-hundred
C. focus primarily on labor-market competitors
D. the top 50 percentile of similar sized firms
Difficulty: Medium
10. (p. 261) The _____ publishes extensive information on various occupations in different
geographic areas. It is a major source of publicly available compensation data.
A. Chamber of Commerce
B. Bureau of Labor Statistics
C. compensation association
D. Department of Economics
Difficulty: Easy
11. (p. 262) Companies typically use _______ pay survey(s) when setting pay levels.
A. one well-validated
B. two
C. three or more
D. more than five
Difficulty: Medium
12. (p. 265) A company using a skill-based pay system prices the job of lead assembler at
between $10 and $22 per hour. Survey data showed the job assembler averaged $10 per hour and
the job of assembly supervisor at $22 per hour. The company was using the _____ method of job
matching.
A. benchmark job
B. low-high
C. pay range
D. benchmark conversion
Difficulty: Medium
8-3
13. (p. 265) For organizations using a skill-competency-based pay system or generic job
descriptions, the best approach for pricing jobs is _____
A. benchmark job.
B. low-high.
C. market pricing
D. benchmark conversion
Difficulty: Medium
14. (p. 265) Applying the job evaluation process to pay survey jobs to assess the degree of match
between survey jobs and benchmark jobs is called the _____ approach.
A. low-high
B. benchmark job
C. benchmark conversion
D. point survey conversion
Difficulty: Medium
15. (p. 266) Financial data in pay surveys are used to _____.
A. group firms by size
B. analyze competitors' performance
C. compare competitors' labor costs
D. compare competitors' debt ratios
Difficulty: Medium
16. (p. 266) Pay surveys collect total number of employees for the purpose of_______ _____
A. impact on the labor market
B. how work is organized
C. ability to pay
D. recruiting success
Difficulty: Medium
8-4
17. (p. 267) _____ shows how competitors value work in similar jobs.
A. Base wage
B. Total cash
C. Total compensation
D. Base pay plus benefits
Difficulty: Medium
18. (p. 267) This measure of compensation may overstate competitors' pay.
A. Base pay plus benefits
B. Total cash compensation
C. Base pay
D. Total compensation
Difficulty: Medium
19. (p. 268) _____ measures competitors' use of performance-based pay.

A. Base pay
B. Short-term incentive pay
C. Total cash
D. Total compensation
Difficulty: Easy
20. (p. 269) The first step in interpreting survey data is _____.
A. check for the accuracy of job matches
B. seek out non-responders
C. check for fraudulent data
D. remove the top and bottom paying companies
Difficulty: Medium
8-5
21. (p. 269) Survey data from one or a few employers that are significantly out of line with other
employers _____.
A. are deviant data
B. are anomalies
C. reflect a diverse sample
D. are standard deviations
Difficulty: Medium
22. (p. 269) The process of multiplying survey data by some factor judged to reflect the
difference between a survey benchmark job and a company job is called _____.
A. updating
B. point factor adjustment
C. lead/lag policy adjustment
D. survey leveling
Difficulty: Medium
23. (p. 273-74) All of the following are examples of potential anomalies except _____.
A. outliers
B. a large variation in base pay for a job at one company
C. one company dominates the results
D. a large variation in average base pay for a job across companies
Difficulty: Medium
8-6
24. (p. 274-75) You work in a midsize organization and have just conducted a wage survey. Five
midsize companies have provided wage data for a particular job. Here are the numbers.
Which of the following statistics will be the most accurate reflection of the market rate?
A. Mean
B. Weighted mean
C. Median
D. Mode
Difficulty: Difficult
25. (p. 275) Which of the following is often used to set pay ranges?
A. Median
B. Weighted mean
C. Quartiles and percentiles
D. Standard deviation
Difficulty: Medium
26. (p. 275) The _____ minimizes distortion of the central tendency caused by outliers.
A. weighted mean
B. mean
C. mode
D. median
Difficulty: Medium
8-7
27. (p. 275) Which of the following statistical measures shows how similar or dissimilar the
market rates are from each other?
A. Weighted mean
B. Mean
C. Standard deviation
D. Median
Difficulty: Medium
28. (p. 276) Because employers are raising employee pay at various times during the year, survey
data must be updated using a process called _____ or _____.
A. aging, trending
B. aging, smoothing
C. trending, leveling
D. gaining, smoothing
Difficulty: Medium
29. (p. 277) A survey conducted in January, 2013 found the median pay effective January 1,
2013, for a clerk was $22,000 and the forecast rate of wage increases in the market for 2013 of
was 5% and another 5% for 2014. An employer choosing to follow a lead strategy of 4% above
the market for the plan year, will need to _____.
A. multiply salary by 105% and then by 109%
B. increase the clerk salary by $2,200
C. multiply the salary by 109%
D. multiply the salary by 114%
Difficulty: Difficult
30. (p. 279) A market pay line _____.

A. reflects an organization's internal alignment policy
B. links a company's benchmark jobs with market rates paid by competitors
C. provides an accurate prediction of an organization's entry level pay rates
D. compares an organization's minimum and maximum pay rates for each skill level
Difficulty: Medium
8-8
31. (p. 280) In the regression equation, y = a + bx, job evaluation points are _____.
A. a
B. b
C. x
D. y
Difficulty: Medium
32. (p. 281) An organization that has a match (pay) policy will pay its employees:
A. the market rate each month for the duration.
B. more than the market rate for some months and less than the market rate for the other months.
C. at the 100th percentile of the market rate obtained through the wage/salary survey.
D. at the 50th percentile of the market rate obtained through the wage/salary survey.
Difficulty: Medium
33. (p. 281) Aging market data to a point halfway through the plan year is called _____.
A. leveling
B. updating
C. lead/lag
D. lag
Difficulty: Medium
34. (p. 282) Pay ranges:

A. are flexible enough to deal with differences in quality, but not with the productivity or value
of these quality variations.
B. usually lead to an increase in employee turnover.
C. reflect the differences in performance or experience that an employer wishes to recognize
with pay.
D. cause employees to believe that their compensation can increase by only a limited amount.
Difficulty: Medium
8-9
35. (p. 284) Pay ranges for clerical and production jobs commonly range between _____ and
_____.
A. 5, 15
B. 15, 30
C. 30, 40
D. 40, 60
Difficulty: Medium
36. (p. 284) Size of pay differentials between grades should _____.
A. be based upon differentials in market surveys
B. be approximately 15 percent
C. support career movement through the pay structure
D. be between 10 and 25 percent
Difficulty: Medium
37. (p. 286) Which of the following statements is true regarding broad bands?
A. They require a relatively stable organization design.
B. They support recognition via titles or career progression.
C. They foster cross-functional growth.
D. They give managers "freedom with guidelines".
Difficulty: Medium
38. (p. 287) Paying jobs of different functions different rates within a pay band is called ____.
A. reference rates
B. broad banding
C. pay leveling
D. knowledge-based pay
Difficulty: Medium
8-10
39. (p. 288) Job structure is to ________ as pay structure is to pay-policy line.
A. market line
B. pay surveys
C. job evaluation
D. reference rates
Difficulty: Medium
40. (p. 288-89) The _____ pay strategy emphasizes external competitiveness and deemphasizes
internal alignment.
A. job structure
B. broad banding
C. reference rate
D. market pricing
Difficulty: Easy
41. (p. 289) Which of the following statements is true about market pricers?
A. They align pay structures with the business strategy.
B. Their pay structures are unique and difficult to imitate.
C. They assume that little value is added through internal alignment.
D. They emphasize pay structures based on unique technology or the way work is organized.
Difficulty: Medium
True / False Questions
42. (p. 253) The final step in determining externally competitive pay levels and structures is
merging internal and external pressure.
FALSE
Difficulty: Medium
8-11
43. (p. 254) Adjustments to forms of pay occur more often than adjustments to overall pay level.
FALSE
Difficulty: Easy
44. (p. 254) Many employers use market surveys to validate their own job evaluation results.
TRUE
Difficulty: Easy
45. (p. 255) When there is an unusual level of turnover in a job, an employer is likely to conduct
a market survey.
TRUE
Difficulty: Medium
46. (p. 255) The relevant labor market for accounting, sales or clerical skills should be limited to
each industry in which these types of work are found.
FALSE
Difficulty: Medium
47. (p. 258) A segmented labor supply requires multiple labor market comparisons.
TRUE
Difficulty: Easy
48. (p. 259-260) It is easier for employers to determine the worth of jobs that fall into fuzzy
markets than traditional relevant markets.
FALSE
Difficulty: Medium
8-12
49. (p. 260) It is easier for companies using a market pricing approach to price “fuzzy market”
jobs than those using a benchmark job approach.
FALSE
Difficulty: Medium
50. (p. 260) Identifying pay survey participants by company name is considered price fixing
under the Sherman Act.
TRUE
Difficulty: Medium
51. (p. 262) Salary data available to employees via the Internet are as reliable and accurate as
other more traditional surveys.
FALSE
Difficulty: Easy
52. (p. 262) Salary.com provides fewer different job descriptions for a similar job title such as
programmer than the BLS survey.
FALSE
Difficulty: Medium
53. (p. 263) If the purpose of a survey is to price the entire structure, then benchmark jobs can be
selected to include the entire job structure.
TRUE
Difficulty: Medium
54. (p. 265) Pay surveys include information about both all forms of cash compensation and
benefits.
TRUE
Difficulty: Easy
8-13
55. (p. 267) Turnover and organizational revenues are examples of survey data collected to
gather competitive intelligence.
TRUE
Difficulty: Easy
56. (p. 268) Setting your company's base pay to competitors' total compensation risks high fixed
costs.
TRUE
Difficulty: Easy
57. (p. 268) Total cash includes base pay plus stock options and benefits.
FALSE
Difficulty: Medium
58. (p. 269) The process of multiplying survey data by a factor reflecting the difference between
a survey and a company job is called survey leveling.
TRUE
Difficulty: Medium
59. (p. 269) Research shows that most managers analyze pay surveys in similarly by weighting
pay of their major product and labor market competitor more than others.
FALSE
Difficulty: Medium
60. (p. 275) The most common measure of variation in pay surveys is the standard deviation.
FALSE
Difficulty: Medium
8-14
61. (p. 275) The measure of central tendency that minimizes distortion is the mode.
FALSE
Difficulty: Easy
62. (p. 276) A common practice is to use the 10th and 90th percentiles from pay survey data to set
minimums and maximums of pay grades.
FALSE
Difficulty: Medium
63. (p. 277) Market lines may be constructed by either freehand drawing or linear regression.
TRUE
Difficulty: Easy
64. (p. 278) Regression smoothes large amounts of data while minimizing variations.
TRUE
Difficulty: Easy
65. (p. 278) A market pay line is useful for setting pay for benchmark jobs that match
competitors, but not for non-benchmark jobs.
FALSE
Difficulty: Medium
66. (p. 281) Aging the market data to a point halfway through the plan year is called lead/lag.
TRUE
Difficulty: Easy
8-15
67. (p. 282) A pay range exists when at least two employees in the same job are paid different
rates.
TRUE
Difficulty: Easy
68. (p. 283) Grades group job evaluation data on the horizontal axis.
TRUE
Difficulty: Medium
69. (p. 284) Pay ranges for top-level management positions are commonly larger than those other
professional and midlevel managerial positions.
TRUE
Difficulty: Easy
70. (p. 284) Pay ranges for managerial jobs are larger than ranges for other jobs because these
jobs have greater opportunity for both discretion and performance than lower level jobs.
TRUE
Difficulty: Medium
71. (p. 284) Smaller pay ranges may reduce the opportunities for promotion.
TRUE
Difficulty: Medium
72. (p. p. 284) A high degree of overlap between adjacent pay ranges means pay raises can be
larger compared to low overlap.
FALSE
Difficulty: Medium
8-16
73. (p. 286) When flat pay rates are used, they are typically the midpoint of a corresponding
survey job.
TRUE
Difficulty: Medium
74. (p. 286) Flat rates, in which pay is the same regardless of performance or seniority, are often
used in skill-based pay systems and in unionized employers.
TRUE
Difficulty: Medium
75. (p. 287-88) Use of broad bands has risks of bias and high labor costs.
TRUE
Difficulty: Medium
76. (p. 287) Career moves between bands are more common than within bands.
FALSE
Difficulty: Medium
77. (p. 288) Managers often regard external market data as more objective than internal job
evaluation.
TRUE
Difficulty: Medium
78. (p. 288) A job structure is anchored by the organization’s

external competitive position and reflected in its pay-policy line.
FALSE
Difficulty: Medium
8-17
79. (p. 289) Market pricers match a small percentage of their jobs with market data.
FALSE
Difficulty: Easy
80. (p. 289) A pure market pricing strategy tends to ignore internal alignment.
TRUE
Difficulty: Medium
81. (p. 293) Grades and ranges or bands recognizes both external and internal pressures
on pay decisions.
TRUE
Difficulty: Easy
Short Answer Questions
82. (p. 239-240) What is a survey? What purpose does it serve in terms of compensation?
Translating any external pay policy into practice requires information on the external market.
Surveys provide the data for translating that policy into pay levels, pay mix, and structures. As
such, a survey is the systematic process of collecting and making judgments about the
compensation paid by other employers.
An employer conducts or participates in a survey for a number of reasons: (1) to adjust the pay
level in response to changing rates paid by competitors, (2) to set the mix of pay forms relative to
that paid by competitors, (3) to establish or price a pay structure, (4) to analyze pay-related
problems, or (5) to estimate the labor costs of product/service market competitors.
Difficulty: Medium
8-18
83. (p. 241) How is a relevant labor market defined?
A relevant labor market must be defined that includes employers who compete in one or more of
the following areas:
1. The same occupations or skills
2. Employees within the same geographic area
3. The same products and services
Difficulty: Easy
84. (p. 246) Who should be involved in designing a compensation survey?
In most organizations, the responsibility for managing the survey lies with the compensation
manager. But since compensation expenses have a powerful effect on profitability, including
managers and employees on task forces makes sense. Outside consulting firms are typically used
as third-party protection from possible "price-fixing" lawsuits.
Difficulty: Easy
85. (p. 249) Explain the low-high approach in selecting jobs for inclusion in a compensation
survey.
If an organization is using skill-competency-based structures or generic job descriptions, it may

not have benchmark jobs to match with jobs at competitors that use a traditional job-based
approach. Market data must be converted to fit the skill or competency structure. The simplest
way to do this is to identify the lowest - and highest-paid benchmark jobs for the relevant skills
in the relevant market and to use the wages for these jobs as anchors for the skill-based
structures. Work at various levels within the structure can then be slotted between the anchors.
For example, if the entry market rate for operator A is $12 per hour and the rate for a team leader
is $42 per hour, then the rate for operator B can be somewhere between $12 and $42 per hour.
The usefulness of this approach depends on how well the extreme benchmark jobs match the
organization's work and whether they really do tap the entire range of skills.
Difficulty: Medium
8-19
86. (p. 252) What are the advantages and disadvantages of the different measures of
compensation?
Three commonly used measures of compensation are base pay, total cash, and total
compensation.
The advantage of base pay is that it reflects how competitors value work in similar jobs.
However, it fails to include performance incentives and other forms, and hence does not provide
a clear picture if competitors offer a low base but high incentives.
Total cash (base + bonus) shows how competitors value work. It also tells the cash pay for
performance opportunity in the job. The disadvantage is that all employees may not receive
incentives, so it may overstate the competitors' pay; plus, it does not include long-term
incentives.
Total compensation (base + bonus + stock options + benefits) tells the total value competitors
place on the work. However, all employees may not receive all the forms and firms should be
careful not to set base pay equal to competitors' total compensation.
Difficulty: Medium
87. (p. 260) Explain the difference between standard deviation and quartiles and percentiles.
Standard deviation tells us how tightly all pay rates are clustered around the mean. As such they
show how similar or dissimilar the market rates are from each other. A small standard deviation
means they are tightly bunched at center; a large standard deviation means rates are more spread
out.
Quartiles and percentiles order all data points from lowest to highest and then convert them in to
percentages. Quartiles are frequently used to set pay ranges or zones.
Difficulty: Medium
88. (p. 262) What is a market line?
A market line links a company's benchmark jobs on the horizontal axis (internal structure) with
market rates paid by competitors (market survey) on the vertical axis. It summarizes the
distribution of going rates paid by competitors in the market.
Difficulty: Easy
8-20
89. (p. 267) Explain the concept of pay ranges.
A pay range exists whenever two or more rates are paid to employees in the same job. Hence,
ranges provide managers the opportunity to:
1. Recognize individual performance differences with pay.
2. Meet employees' expectations that their pay will increase over time, even in the same job.
3. Encourage employees to remain with the organization.
From an internal alignment perspective, the range reflects the differences in performance or
experience that an employer wishes to recognize with pay. From an external competitiveness
perspective, the range is a control device. A range maximum sets the lid on what the employer is
willing to pay for that work; the range minimum sets the floor.
Difficulty: Medium
90. (p. 269-270) What is broad banding? What are some of its advantages?
Broad banding consolidates as many as four or five traditional salary grades into a single band
with one minimum and one maximum.
Broad bands provide flexibility to define job responsibilities more broadly. They support
redesigned, downsized, or boundary less organizations that have eliminated layers of managerial
jobs. They foster cross-functional growth and development in these new organizations.
Employees can move laterally across functions within a band in order to gain depth of
experience. The emphasis on lateral movement with no pay adjustments helps manage the reality
of fewer promotion opportunities in flattened organization structures. The flexibility of banding
eases mergers and acquisitions since there are not a lot of levels to argue over.
Difficulty: Medium
91. (p. 273) Explain the market pricing approach to compensation.
The market pricing approach sets pay structures almost exclusively on external market rates thus
emphasizing external competitiveness and deemphasizing internal alignment. Market pricers
match a large percentage of their jobs with market data and collect as much market data as
possible. The competitive rates for jobs for which external market data are available are
calculated; then the remaining (nonbenchmark) jobs are blended into the pay hierarchy created
by the external rates ("rank to market").
Difficulty: Medium
8-21

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Compensation 11th Edition Milkovich

Chapter 08 Designing Pay Levels, Mix, and Pay Structures

Multiple Choice Questions

2. (p. 253) The second major decision in pay-level determination is _____.

3. (p. 253) The final major decision in pay-level determination is _____.

19. (p. 268) _____ measures competitors' use of performance-based pay.

30. (p. 279) A market pay line _____.

34. (p. 282) Pay ranges:

True / False Questions

78. (p. 288) A job structure is anchored by the organization’s

Short Answer Questions

83. (p. 241) How is a relevant labor market defined?

84. (p. 246) Who should be involved in designing a compensation survey?

If an organization is using skill-competency-based structures or generic job descriptions, it may

88. (p. 262) What is a market line?

89. (p. 267) Explain the concept of pay ranges.

91. (p. 273) Explain the market pricing approach to compensation.

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