TREX Variable Pay & Bonus Programs 2

Question 1

Which metric is MOST appropriate as the sole performance measure for a short-term incentive plan tied to organizational profitability?

Accepted Answer

Economic profit or EVA

Answer

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%?

Accepted Answer

No bonus is paid to participants

Answer

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?

Accepted Answer

Payout increases 3% for every 1% above target

Answer

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?

Accepted Answer

Using relative performance measures vs. peer group

Answer

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?

Accepted Answer

They provide stronger motivation as performance increases

Answer

Tiered (progressive) commission rates increase the payout percentage at higher performance levels, creating greater motivation for top performers to keep selling.

(TREX) WorldatWork Total Rewards Certification Practice Test

(TREX) WorldatWork Total Rewards Certification Practice Test

TREX Variable Pay & Bonus Programs 2