TREX Variable Pay & Bonus Programs 2 — Questions and Answers
Question 1: Which metric is MOST appropriate as the sole performance measure for a short-term incentive plan tied to organizational profitability?
- Individual goal attainment
- Economic profit or EVA (Correct answer)
- Employee satisfaction score
- Total headcount reduction
Correct answer: Economic profit or EVA
Economic Value Added (EVA) directly measures wealth created above the cost of capital, making it ideal for profitability-linked STI plans.
Question 2: A company sets a bonus plan threshold at 80% of target performance. What happens if actual performance is 75%?
- Participants receive 75% of target bonus
- Participants receive a prorated amount below threshold
- No bonus is paid to participants (Correct answer)
- The threshold is automatically lowered
Correct answer: No bonus is paid to participants
When performance falls below the threshold (minimum) level, no bonus is paid under standard incentive plan design.
Question 3: In a leverage-based bonus plan, what does a leverage ratio of 3:1 above target typically mean?
- Payout increases 3% for every 1% above target (Correct answer)
- Participants earn three times base salary at maximum
- The plan pays out at 300% of target for any above-target performance
- Three metrics are used for above-target calculations
Correct answer: Payout increases 3% for every 1% above target
A 3:1 leverage ratio means for every 1% performance exceeds target, the bonus payout increases by 3%, accelerating rewards for superior results.
Question 4: Which design feature BEST protects a company from windfall bonus payouts caused by favorable external market conditions rather than management actions?
- Using relative performance measures vs. peer group (Correct answer)
- Setting an uncapped maximum payout
- Paying bonuses in restricted stock
- Increasing the bonus plan threshold
Correct answer: Using relative performance measures vs. peer group
Relative performance measures compare results against peers, filtering out industry-wide tailwinds that benefit all companies equally.
Question 5: A sales commission plan switches from a fixed-rate to a tiered-rate structure. What is the PRIMARY advantage of tiered rates?
- They reduce overall commission expense
- They provide stronger motivation as performance increases (Correct answer)
- They simplify plan administration
- They eliminate the need for draw arrangements
Correct answer: They provide stronger motivation as performance increases
Tiered (progressive) commission rates increase the payout percentage at higher performance levels, creating greater motivation for top performers to keep selling.
Question 6: What is the purpose of a 'malus' provision in an executive variable pay plan?
- It sets the maximum bonus cap at target
- It allows forfeiture of unvested awards before they are paid (Correct answer)
- It requires executives to return previously paid bonuses
- It adjusts awards for inflation annually
Correct answer: It allows forfeiture of unvested awards before they are paid
A malus provision enables the company to reduce or forfeit unvested variable pay awards if certain triggering events occur, such as misconduct or financial restatements.
Question 7: When designing a team-based incentive for a manufacturing plant, which allocation method BEST reinforces collaboration while still recognizing individual differences?
- Equal dollar distribution to all team members
- Allocation proportional to each member's base salary (Correct answer)
- Payout solely based on individual KPIs
- Bonus paid only to team leader
Correct answer: Allocation proportional to each member's base salary
Salary-proportional allocation ties team bonus to individual pay levels, acknowledging role differences while still rewarding collective results.
TREX Variable Pay & Bonus Programs 2
Which metric is MOST appropriate as the sole performance measure for a short-term incentive plan tied to organizational profitability?