Performance Management & Pay Flashcards

Which type of incentive plan rewards employees for improving operational efficiency, such as reducing labor costs per unit of output?

Answer: Gainsharing

Gainsharing plans reward employees for measurable improvements in productivity or cost reduction, sharing the financial gains with the workforce.

A performance management system uses 360-degree feedback. What is the primary challenge when linking this feedback to compensation decisions?

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.

An organization sets a merit budget of 3%. How should managers typically allocate increases across employees with different performance ratings?

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.

What is a 'performance share plan' in executive compensation?

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.

What does 'line of sight' mean in the context of incentive compensation design?

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.

Under a management by objectives (MBO) system, performance ratings and merit pay are based primarily on:

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.

Which scenario best illustrates 'pay compression' caused by a performance management system?

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.