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1. Incentive compensation is a monetary reward that is based on measured
performance. Organizations where employees have been given the
responsibility to make decisions are best suited for incentive compensation
2. The four guidelines are: fairness, participation, basic wage level, and
independent wage policy.
Fairness deals with the ratio of salaries of the highest paid to lowest paid
Participation states that all employees should be included in a
compensation plan. Although, they do not need to be included in the same
Basic wage level states that a market wage should be paid, and incentive
compensation should not be used to adjust the market wage downward.
Independent wage policy states that the incentive compensation system for
the most senior levels of the organization should be set by a group that is
independent of senior management.
3. a. based on salary – easy to administer, likely to be considered fair, and,
to the extent that salary reflects the relative ability to contribute to
results, is based on contribution;
based on equal share – easy to administer, likely to be considered fair,
and reflects how people often divide up rewards when left to their own
based on position – same as based on salary;
based on individual performance – ties reward most closely to
performance and likely to have the highest motivational impact.
b. based on salary – may convince lower level employees that they have
little to contribute, does not necessarily reflect contributions;


4. deemed to be able to affect the value of an organization’s shares. or an organization unit’s. based on position – same as based on salary. are given the option to purchase those shares at a specified price which is usually higher than the share price at the time the option is issued. A stock option plan is a process where employees. Cash bonuses are best tied to measures of achieved operating performance such as quality improvement. Problems Problem 1 Requirement (a) 26-2 . A cash bonus is a cash reward tied to measured performance. Profit-sharing is a cash bonus incentive compensation plan where the total of all cash bonuses paid to all employees is determined by a formula involving the organization’s. based on individual performance – may be difficult and costly to administer.Chapter 26 Executive Performance Measures and Compensation based on equal share – may have little motivational effect. II. on long-run performance. Profit-sharing is used to focus organization members on team activities to improve the organization’s short-term performance. may lead to feeling of inequity if some people contribute nothing. may lead to arguments about interpreting the performance measure. Gain sharing is best used when there is a visible and agreed performance standard and the employees can work as a group to improve performance relative to that standard. A cash bonus is a bonus that is best related to activities oriented to short-run performance that should be rewarded immediately to provide a reinforcement effect. Stock options are best used to focus attention of senior people. reported profit. who can affect the organization’s longrun performance by their decisions. sales increases. Gain-sharing is a cash bonus incentive compensation plan where the total of all cash bonuses paid to all employees is determined by a formula involving cost performance (on materials or labor that the group is deemed able to control) relative to some standard. and success at short-run cost control.

000.260.000. Requirement (b) P50.000 P9.33 Problem 2 Requirement (a) P30.000 = P8.040 III.040. 26-3 C D B D .000. 13.200.Executive Performance Measures and Compensation Chapter 26 P20. 24. 20.000 – (0. Requirement (b) P40. 14.000) = P9.260. 12. 5. 10.000 – (0. 22. 17. 15.000 Therefore. 16. 18. 4. Multiple Choice Questions 1. C A D C B D D A D B 11.000 Therefore. 2.18 x P72.000 x P2.333.20 = P1. 8.000 x 0.000 would be larger.000. P4. 19.260.840.000. 3.25 = P4.18 x P60.000) = P17. P2.000 x 0.000 / P10. C B D B A D C B B B 21. 7.000 = P17.000.000 would be larger.000 x P4.000 / P12.000. 23.000 P17. 9.000.200. 6.040.