CCP Performance Management & Pay 3 — Questions and Answers
Question 1: Which type of incentive plan rewards employees for improving operational efficiency, such as reducing labor costs per unit of output?
- Profit sharing
- Stock appreciation rights
- Gainsharing (Correct answer)
- Deferred compensation
Correct answer: Gainsharing
Gainsharing plans reward employees for measurable improvements in productivity or cost reduction, sharing the financial gains with the workforce.
Question 2: A performance management system uses 360-degree feedback. What is the primary challenge when linking this feedback to compensation decisions?
- 360 feedback is illegal under Title VII
- Respondents may inflate ratings to avoid harming colleagues' pay (Correct answer)
- It cannot be used for exempt employees
- It requires third-party administration by law
Correct answer: Respondents may inflate ratings to avoid harming colleagues' pay
When 360-degree feedback directly affects pay, raters may inflate scores to protect colleagues' compensation, reducing the accuracy and usefulness of the feedback.
Question 3: An organization sets a merit budget of 3%. How should managers typically allocate increases across employees with different performance ratings?
- Distribute 3% equally to all employees regardless of rating
- Allocate higher percentages to top performers and lower or no increases to poor performers (Correct answer)
- Give 3% only to employees rated 'exceeds expectations'
- Reserve the entire budget for employees at the bottom of their pay range
Correct answer: Allocate higher percentages to top performers and lower or no increases to poor performers
Merit budgets should be allocated differentially, with top performers receiving above-average increases and low performers receiving minimal or no increases to reinforce the pay-for-performance philosophy.
Question 4: What is a 'performance share plan' in executive compensation?
- A plan where executives share performance review duties with HR
- An equity plan granting shares contingent on achieving multi-year performance goals (Correct answer)
- A profit-sharing arrangement limited to C-suite executives
- A plan where executives receive shares equal to their merit increase percentage
Correct answer: An equity plan granting shares contingent on achieving multi-year performance goals
Performance share plans grant executives a target number of shares that vest only if specified performance metrics (e.g., EPS growth, TSR) are achieved over a defined period, typically three years.
Question 5: What does 'line of sight' mean in the context of incentive compensation design?
- The span of control a manager has over compensation decisions
- The degree to which employees can see how their actions influence the metrics tied to their pay (Correct answer)
- The visibility of pay ranges to all employees in the organization
- Management's ability to monitor employee performance in real time
Correct answer: The degree to which employees can see how their actions influence the metrics tied to their pay
Line of sight refers to how clearly employees can connect their individual behaviors and results to the incentive metrics that determine their pay, which is critical for motivating desired performance.
Question 6: Under a management by objectives (MBO) system, performance ratings and merit pay are based primarily on:
- Supervisor's subjective assessment of attitude and teamwork
- Achievement of specific, mutually agreed-upon goals set at the beginning of the period (Correct answer)
- Seniority and years in the current position
- Comparison of the employee against peers on a forced ranking
Correct answer: Achievement of specific, mutually agreed-upon goals set at the beginning of the period
MBO ties performance ratings and pay decisions to whether employees achieve predetermined, measurable objectives that are agreed upon by both the employee and manager.
Question 7: Which scenario best illustrates 'pay compression' caused by a performance management system?
- All employees receive the same flat dollar merit increase regardless of rating (Correct answer)
- A new hire is brought in at a salary higher than a longer-tenured, higher-performing employee
- Variable pay erodes base salary differentials over time
- Top performers leave because their bonuses are paid in deferred stock
Correct answer: All employees receive the same flat dollar merit increase regardless of rating
Paying all employees the same flat dollar increase (rather than a percentage) compresses salary differentials, reducing the pay gap between high and low performers over time.
CCP Performance Management & Pay 3
Which type of incentive plan rewards employees for improving operational efficiency, such as reducing labor costs per unit of output?