TREX Variable Pay & Bonus Programs 3 — Questions and Answers
Question 1: Which of the following BEST describes a 'draw against commission' arrangement?
- A guaranteed annual bonus unrelated to sales
- An advance on future commissions that must be repaid from earnings (Correct answer)
- A base salary increase tied to quota achievement
- A non-recoverable monthly subsidy for new hires
Correct answer: An advance on future commissions that must be repaid from earnings
A draw against commission is an advance payment that is offset against future commission earnings, ensuring reps have income during ramp-up periods.
Question 2: Under WorldatWork Total Rewards principles, which factor is MOST critical when selecting metrics for a variable pay plan?
- Metrics should be easy to calculate internally
- Metrics must be within participants' line of sight and influence (Correct answer)
- Metrics should mirror those used by the largest competitor
- Metrics must always be financial in nature
Correct answer: Metrics must be within participants' line of sight and influence
Line-of-sight (the degree to which employees can see how their actions affect the metric) is essential for a variable pay plan to motivate behavior change.
Question 3: A company funds its annual bonus pool based on a percentage of operating income above a hurdle rate. If operating income does not exceed the hurdle, what is the pool?
- Equal to last year's pool
- Zero — no pool is funded (Correct answer)
- The minimum threshold payout for all participants
- Funded at 50% of target
Correct answer: Zero — no pool is funded
A hurdle-rate funding model only generates a bonus pool when profitability exceeds the minimum required return; below the hurdle, the pool is zero.
Question 4: What is the key distinction between a 'spot bonus' and a 'project bonus'?
- Spot bonuses are taxable; project bonuses are not
- Spot bonuses recognize immediate one-time contributions; project bonuses reward completion of a defined initiative (Correct answer)
- Spot bonuses are paid in equity; project bonuses are cash
- Spot bonuses require board approval; project bonuses do not
Correct answer: Spot bonuses recognize immediate one-time contributions; project bonuses reward completion of a defined initiative
Spot bonuses are ad hoc awards given immediately for exceptional acts, while project bonuses are pre-defined awards tied to completing a specific project milestone.
Question 5: Which scenario represents an unintended consequence of a poorly designed sales commission plan?
- Sales reps focus exclusively on high-margin products
- Sales reps manipulate deal timing to maximize commissions within a period (Correct answer)
- Sales reps share best practices with peers
- Sales reps prioritize long-term customer relationships
Correct answer: Sales reps manipulate deal timing to maximize commissions within a period
Commission plans that reward bookings within periods can incentivize 'sandbagging' or deal timing manipulation rather than steady productive selling.
Question 6: A company wants its STI plan to reinforce both financial and non-financial strategic priorities. Which weighting structure is MOST appropriate?
- 100% financial metrics to maintain objective rigor
- A mix of financial metrics (e.g., 70%) and strategic/operational metrics (e.g., 30%) (Correct answer)
- Equal weighting of 10 different metrics
- Non-financial metrics weighted at 100% for leadership roles
Correct answer: A mix of financial metrics (e.g., 70%) and strategic/operational metrics (e.g., 30%)
A blended weighting (typically majority financial plus a minority strategic component) balances accountability for results with broader organizational priorities.
Question 7: Which of the following is the PRIMARY risk of setting bonus plan targets too easily achievable?
- Reduced participant engagement due to lack of challenge
- Excessive bonus costs without commensurate performance (Correct answer)
- Increased regulatory scrutiny of the plan
- Higher employee turnover among top performers
Correct answer: Excessive bonus costs without commensurate performance
When targets are set below realistic performance, the company pays out bonus costs that do not reflect true value creation, eroding the return on incentive investment.
TREX Variable Pay & Bonus Programs 3
Which of the following BEST describes a 'draw against commission' arrangement?