CHAPTER 8

MOTIVATING BEHAVIOR IN
MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS
TRUE/FALSE
1.

A major role for control systems is to motivate behavior consistent with the desires of the
organization.
a.
True
b.
False

2.

When implementing a new management accounting and control system design, management
should implement their own ideas without involving employees because management
understands what is best for their companies.
a.
True
b.
False

3.

In todays human resource environment, managers are encouraged to ask employees about
procedures that might improve profitability.
a.
True
b.
False

4.

Individuals are motivated by both financial and nonfinancial means of compensation.

a.
True
b.
False

5.

Careful attention to motivation is a key step for the organization and its employees to align
their respective goals.
a.
True
b.
False

6.

Task control is appropriate to use when knowledge and skill are needed to respond to
changing situations.
a.
True
b.
False

7.

Results control helps organizations maintain goal congruence.

a.
True
b.
False

8.

Video surveillance is an example of results control.

a.
True
b.
False

AKY 4E Test Bank

Chapter 8

Page 1

Schoenebeck

9.

A recent survey conducted by the American Management Association showed that

monitoring of company employees is decreasing due to privacy issues.
a.
True
b.
False

10.

Ethics is a discipline that focuses on the investigation of standards of conduct and moral
judgment.
a.
True
b.
False

11.

A primary purpose of an organizations code of ethics is to encourage behavior that is

consistent with the companys ethical and cultural norms.
a.
True
b.
False

12.

An organizations code of ethics should be integrated into the management accounting and
control system design.
a.
True
b.
False

13.

The text reported survey results that linked cheating during a game of golf to unethical
conduct on the job.
a.
True
b.
False

14.

Violating an organizations code of ethics should be treated leniently for the first offense.
a.
True
b.
False

15.

Consequences resulting from violating an organizations code of ethics should intentionally

be vague to allow for maximum flexibility.
a.
True
b.
False

16.

If the organizations code of ethics is more stringent than an individuals code, conflicts may
arise.
a.
True
b.
False

17.

Poor or nonresponsive service by employees who have direct contact with customers is
usually evidence of poor management.
a.
True
b.
False

18.

For some employees, pay may not be a motivator.

a.
True
b.
False

19.

Management accounting must gather relevant and reliable performance information to

administer intrinsic rewards.

AKY 4E Test Bank

Chapter 8

Page 2

Schoenebeck

a.
b.

True
False

20.

Outcome-based incentive compensation systems can only be used to motivate appropriate

decision-making behavior when employees are empowered.
a.
True
b.
False

21.

An example of an intrinsic reward is recognizing employee accomplishment with a plaque.

a.
True
b.
False

22.

Profit sharing rewards short-term performance while stock options attempt to reward longterm performance.
a.
True
b.
False

23.

The reward system is ineffective if employees do not understand how to improve their
measured performance.
a.
True
b.
False

24.

To be effective, the incentive compensation system must focus primarily on outcomes that
the employee controls or influences.
a.
True
b.
False

AKY 4E Test Bank

Chapter 8

Page 3

Schoenebeck

MULTIPLE CHOICE
25.

When implementing a new management accounting and control system, it is BEST:

a.
to allow management to implement their ideas
b.
for management to involve employees in the implementation
c.
to involve consultants and implement their experienced ideas
d.
to engage in benchmarking

26.

In a management accounting and control system design, behavioral expectations are BEST
incorporated by:
a.
using a mix of short-term and quantitative performance measures
b.
developing a task-related control system
c.
including the organizations code of conduct
d.
monitoring behavior with time and motion studies

27.

The four key behavioral considerations in management accounting and control system
design include all of the following EXCEPT:
a.
integrating the organizations pay scale
b.
using a mix of short- and long-term qualitative and quantitative performance measures
c.
empowering employees to be involved in decision making
d.
developing an appropriate incentive system to reward performance

28.

If careful attention is paid to behavioral considerations when implementing new systems,

then:
a.
dysfunctional behavior may be encouraged
b.
goal congruence will most likely not occur
c.
money will be the driving force behind performance
d.
employee motivation should be high

29.

The underlying philosophy of the scientific management school developed at the turn of the
century was:
a.
to foster a work environment that encouraged creativity
b.
to use multiple performance measures
c.
that people find work objectionable and money is a primary motivator
d.
that employees want to feel they contributed value to their organization

30.

The impetus for developing ways to improve morale and job satisfaction was:
a.
the scientific management school
b.
the balanced scorecard
c.
results control system
d.
the human relations movement

31.

Assumptions of the human resources model of motivation include all of the following
EXCEPT:
a.
employees prefer to follow highly-detailed, prescribed procedures
b.
individuals are motivated by both financial and nonfinancial awards
c.
employees are knowledgeable about their jobs
d.
individuals are highly creative, ethical, and responsible

AKY 4E Test Bank

Chapter 8

Page 4

Schoenebeck

32.

The most contemporary management view of motivation based on initiatives to improve the
quality of working life is called the:
a.
the balanced scorecard
b.
human resources model of motivation
c.
scientific management school
d.
results control system

33.

All of the following may be implemented to help ensure that an organization attains goal
congruence EXCEPT:
a.
performance measures aligned with organizational objectives
b.
employee participation in decision making
c.
employee self-control
d.
a reward system aligned with strategic goals

34.

To help maintain goal congruence, organizations use:

a.
prevention control
b.
monitoring
c.
results control
d.
All of the above are correct.

35.

Prevention control is BEST applied when:

a.
a task requires a significant amount of judgment
b.
a process requires careful handling of precious metals
c.
call center employees need random monitoring
d.
contributions of several individuals need to be assessed

36.

Results control can BEST be applied when:

a.
measuring employee performance against stated objectives
b.
monitoring dealers at gambling casinos for unethical behaviors
c.
legal requirements must be followed
d.
employees must follow standard procedures

37.

Task control requires:

a.
highly skilled employees
b.
a clear understanding of organizational objectives
c.
decentralized decision making
d.
a controlled environment

38.

Setting a targeted operating profit of 10% for a department is an example of:

a.
prevention control
b.
monitoring control
c.
results control
d.
All of the above are correct.

AKY 4E Test Bank

Chapter 8

Page 5

Schoenebeck

39.

Some retailers hire secret shoppers to visit their stores as customers and identify whether
employees are following company policy. This is an example of:
a.
prevention control
b.
monitoring control
c.
results control
d.
All of the above are correct.

40.

When manager and employee goals are aligned with organizational goals, it is referred to as:
a.
a diagnostic control system
b.
the intensity factor
c.
goal congruence
d.
monitoring

41.

Feedback systems that monitor organizational outcomes and correct any deviations from
predetermined performance standards are referred to as:
a.
a diagnostic control system
b.
the intensity factor
c.
goal congruence
d.
monitoring

42.

Feedback systems that force a dialogue among all organizational participants about the data
that are coming out of the system and what to do about the data are called:
a.
diagnostic control systems
b.
monitoring
c.
prevention controls
d.
interactive control systems

43.

An interactive control system should be used when:

a.
human behavior needs to be controlled
b.
there is a large degree of strategic uncertainty
c.
systems are allowed to run in a routine fashion
d.
the behavior of employees needs to be inspected while they are performing a task

44.

The type of control that focuses on measuring employee performance against stated
objectives is called:
a.
task control
b.
monitoring
c.
results control
d.
prevention control

45.

At the center of many boundary systems is(are):

a.
a set of ethical principles
b.
congruent goals
c.
tasks to control
d.
earnings management

AKY 4E Test Bank

Chapter 8

Page 6

Schoenebeck

46.

An organization develops a code of ethics PRIMARILY because:

a.
the code allows for punishment of those who do not follow organizational ethical
standards
b.
it helps reduce ethical conflict by avoiding ambiguity and misunderstanding
c.
the management accounting department finds it helpful
d.
it is required by law

47.

According to the hierarchy of ethical principles presented in the text, an action prohibited by
_________ should also be unacceptable to __________.
a.
legal rules, societal norms
b.
personal norms, professional memberships
c.
organizational norms, societal norms
d.
professional memberships, legal rules

48.

To promote ethical decision making:

a.
consequences should be left undefined to allow for flexibility
b.
a statement of the organizations code of ethics should be communicated to each
employee
c.
violators should be allowed several warnings before severe consequences are imposed
d.
management should be excused from adhering to the ethical code of conduct when it
conflicts with personal values

49.

The elements of an ethical control system include all of the following EXCEPT:
a.
a statement of the employee's ethical responsibilities
b.
an ongoing internal audit of the ethical control system
c.
a statement of the organization's values and code of ethics
d.
a reward system for turning in those who violate the ethical code

50.

When a subordinate is caught padding an expense report, the supervisor should FIRST:
a.
ignore the incident if it is the first offense
b.
report the incident to the personnel department
c.
confront the employee and ask him to submit a corrected expense report
d.
take action that complies with the organizations code of ethics

51.

If an employee observes management engaging in unethical behavior, the best thing to do

FIRST is:
a.
ensure the facts are correct
b.
present the facts to the local newspaper
c.
do nothing and hope the problem resolves itself
d.
immediately report the incident to a superior

52.

All of the following encourage ethical behavior EXCEPT:

a.
having a system for employees to point out inconsistencies with the code of ethics
without fear of retribution
b.
dealing promptly and consistently with persons who violate the code of ethics
c.
exemplary behavior demonstrated by senior management
d.
protecting whistle blowers who have also acted unethically

AKY 4E Test Bank

Chapter 8

Page 7

Schoenebeck

53.

Managers are often subject to intense pressures from their job circumstances to suspend
their ethical judgment, which might include all of the choices below EXCEPT:
a.
requests to tailor information to favor particular individuals or groups
b.
pressures to ignore questionable or unethical practices
c.
solicitations for confidential information
d.
pleas to verify reports or test results

54.

The saying what gets measured gets done refers to measuring performance:
a.
so that appropriate disciplinary actions can be taken
b.
to ensure that employees perform equally in all dimensions of their jobs
c.
so that essential tasks get accomplished
d.
to ensure that the ethical code of conduct is also being enforced

55.

Empowering employees in management accounting and control system design requires all of
the following EXCEPT:
a.
allowing employees to participate in decision making
b.
having highly-motivated employees in every position
c.
ensuring that employees understand the information they are using and generating
d.
enabling employee comprehension of performance measure computations

56.

Empowered employees usually:

a.
have greater feelings of job satisfaction
b.
are more productive
c.
have more control over their job
d.
All of the above are correct.

57.

The key attribute of intrinsic rewards is that they:

a.
have a well-defined monetary value
b.
are provided by one person to another
c.
are common across individuals in a given situation
d.
come from inside the individual

58.

All of the following are examples of extrinsic rewards EXCEPT:

a.
job satisfaction
b.
stock options
c.
a cash bonus
d.
recognition in the company newsletter

59.

Extrinsic rewards:
a.
are always motivating
b.
are from another person and reinforce distinguished behavior
c.
result from a feeling of job satisfaction
d.
are always financial

AKY 4E Test Bank

Chapter 8

Page 8

Schoenebeck

60.

Intrinsic rewards:
a.
are generally overused
b.
are most effective when they are financial rewards
c.
may have motivational effects greater than extrinsic rewards
d.
require extensive use of management accounting information

61.

Experts:
a.
are convinced that higher pay leads to higher performance
b.
feel that pay has an insignificant effect in motivating higher performance
c.
disagree about the relationship between higher pay and higher performance
d.
believe that extrinsic rewards are more motivational when they are nonfinancial rather
than financial

62.

To motivate desired performance, the measurement system:

a.
must reward employees on what they control and contribute to the organization
b.
should be complex to gather all relevant information
c.
should measure performance that is independent of employee efforts
d.
should only monitor financial success

63.

The performance measurement system should focus on all facets of performance to:
a.
ensure that reporting is complete
b.
encourage gaming of the performance indicator
c.
provide the highest possible level of internal control
d.
ensure that employees do not sacrifice performance on unmeasured elements

64.

Group performance should be rewarded:

a.
when an individuals work must be coordinated with others
b.
when employees must coordinate their decision making
c.
in addition to individual performance when working in teams
d.
never

65.

Incentive compensation is MOST suited to:

a.
all centralized organizations
b.
centralized organizations where the employees are skilled and empowered
c.
all decentralized organizations
d.
decentralized organizations where the employees are skilled and empowered

66.

When an employee is responsible for long-term growth, incentive compensation would be

MOST LIKELY to reward:
a.
keeping production costs under control
b.
meeting customer service requirements
c.
exceeding standards for production quality
d.
expanding existing facilities and acquiring new facilities

67.

Input-based compensation:
a.
is considered superior to output-based compensation
b.
requires employee understanding of company objectives
c.
bases compensation on employee training and job qualifications
d.
is generally affected by factors beyond employee control

AKY 4E Test Bank

Chapter 8

Page 9

Schoenebeck

68.

Knowledge-based pay is a form of:

a.
input-based reward
b.
output-based reward
c.
outcome-based reward
d.
None of the above is correct.

69.

Surveys of compensation practice suggest that:

a.
incentive compensation systems are generally extremely efficient
b.
people believe that incentive compensation practice is increasingly unfair
c.
increased top management incentives generally correlate with greater shareholder
wealth
d.
senior executives are paid mediocre salaries for superior performance

70.

Management accounting is needed to provide information for all of the following incentive
compensation plans EXCEPT:
a.
intrinsic rewards
b.
stock options
c.
profit sharing
d.
employee stock ownership plans

71.

A cash bonus:
a.
is based on individual or group performance
b.
does not affect long-term pay
c.
is usually triggered when performance exceeds a target
d.
All of the above are correct.

72.

Profit sharing:
a.
is a group incentive compensation plan
b.
is focused on projected long-term performance
c.
must distribute an equal share of the profits to each employee
d.
All of the above are correct.

73.

Gainsharing:
a.
treats employees as owners and all receive corporate dividends
b.
applies to a group of employees within an organization
c.
is generally based on individual performance
d.
provides feedback on an annual basis

74.

Gainsharing plans are PRIMARILY based on:

a.
quality improvements
b.
general efficiency improvements of the entire company
c.
productivity improvements of a group of employees within the company
d.
increases in market price of the company stock

75.

The MOST serious problem with group rewards is that:

a.
some people may earn rewards based on the hard work of others
b.
members of the group are quick to report slackers
c.
unions oppose rewards based on group performance
d.
many labor laws oppose group rewards

76.

A stock option is:

AKY 4E Test Bank

Chapter 8

Page 10

Schoenebeck

a.
b.
c.
d.
77.

categorized as a long-term motivational device

usually reserved for employees who affect long-term results
most effective when the exercise price is more than the market price of the stock at
issuance
All the above are correct.

All of the following are criticisms of stock options EXCEPT:

a.
organizations have been too generous in rewarding stock options
b.
stock options rely on internal measures
c.
stock option value may reflect many factors beyond the employee's control
d.
the option price is often too close to the market price at issuance

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 78 THROUGH 80.

Hansen Company has implemented a gainsharing plan for its production employees. The plan is a
Scanlon plan and the base period payroll costs are $10,000. The value of production in the base
period was $100,000. The plan calls for labor savings to be added to, or excess labor costs to be
deducted from, the bonus pool each quarter. The payroll costs and value of production in each
quarter of the current year were:
Quarter
1
2
3
4
Total

Payroll
$ 9,000
10,000
11,000
12,000
$42,000

Production
$110,000
100,000
120,000
130,000
$460,000

78.

The base ratio is:

a.
0.09
b.
0.10
c.
0.105
d.
None of the above is correct.

79.

The labor savings for Quarter 1 are:

a.
($2,000)
b.
($1,000)
c.
$1,000
d.
$2,000

80.

The bonus pool at the end of the year totals:

a.
($4,000)
b.
-0c.
$4,000
d.
None of the above is correct.

AKY 4E Test Bank

Chapter 8

Page 11

Schoenebeck

EXERCISE/PROBLEM
81.

Hansen Company has implemented a gainsharing plan for its production employees. The
plan is a Scanlon plan and the base period payroll costs are $10,000,000. The value of
production in the base period was $50,000,000. The plan calls for labor savings to be added
to, or excess labor costs to be deducted from, the bonus pool each quarter. The payroll costs
and value of production in each quarter of the current year were:
Quarter
1
2
3
4
Total

a.
b.
c.
d.

82.

Payroll
$11,500,000
10,500,000
13,000,000
16,500,000
$51,500,000

Production
$ 60,000,000
50,000,000
70,000,000
80,000,000
$260,000,000

Required:
Compute the base ratio.
Compute the amount that would be added each quarter to the bonus pool.
At the end of the year, the amount in the bonus pool is distributed equally to the employees
and owners. Compute the amount that would be distributed to the employees at the end of
the year.
Is there anything in this data that would concern you?

R&D Storage is a small, but diversified, moving and storage company. In recent years, its
corporate income has declined to unacceptable levels. To change the direction of the
company, the board of directors hired a new chief executive officer. She is currently
considering three alternative ways to reward division managers for performance. They are:
1.

Give each manager a competitive salary with no bonus for performance.

2.

Give each manager a base salary with the largest portion being a bonus based on
performance.

3.

Give each manager a base salary with a bonus based on comparative performance with
the other divisions.

Required:
Evaluate each of the ideas, giving strengths and weaknesses.

AKY 4E Test Bank

Chapter 8

Page 12

Schoenebeck

CRITICAL THINKING/ESSAY
83.

What do employees fear most about new initiatives implemented by management? Why?

84.

Should management implement a new management accounting and control system without
consulting employees? Why or why not?

85.

What assumptions does the human resource model of motivation make about employees?
Why is it important for management to understand these assumptions?

86.

The two most common types of control are task control and results control. Define and then
explain when each is appropriate to use.

87.

Explain why it is important to integrate the organizational code of ethics into the
management accounting and control system.

88.

Why is it important that employees understand the performance measurement and reward
system of the organization?

89.

What are the major advantages and disadvantages of a cash bonus?

90.

In many cases a large proportion of executive incentive compensation is in the form of stock
options. What is the major criticism regarding the use of stock options as incentive
compensation? How can this criticism be overcome?

91.

How can performance measurements be used to align the interests of the individual
employee and the organization?

AKY 4E Test Bank

Chapter 8

Page 13

Schoenebeck

CHAPTER 8

MOTIVATING BEHAVIOR IN
MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS
TRUE/FALSE

MULTIPLE CHOICE

LO1
LO2
LO2
LO2
LO3

1.
2.
3.
4.
5.

a
b
a
a
a

LO1
LO1
LO1
LO1
LO2

25.
26.
27.
28.
29.

b
c
a
d
c

LO5
LO5
LO5
LO5
LO5

55.
56.
57.
58.
59.

b
d
d
a
b

LO3
LO3
LO3
LO3
LO4

6.
7.
8.
9.
10.

b
a
b
b
b

LO2
LO2
LO2
LO3
LO3

30.
31.
32.
33.
34.

d
a
b
c
d

LO5
LO5
LO5
LO5
LO5

60.
61.
62.
63.
64.

c
c
a
d
b

LO4
LO4
LO4
LO4
LO4

11.
12.
13.
14.
15.

a
a
a
b
b

LO3
LO3
LO3
LO3
LO3

35.
36.
37.
38.
39.

b
a
d
c
b

LO5
LO5
LO5
LO5
LO5

65.
66.
67.
68.
69.

d
d
c
a
b

LO4
LO5
LO5
LO5
LO5

16.
17.
18.
19.
20.

b
a
a
b
a

LO3
LO3
LO3
LO3
LO3

40.
41.
42.
43.
44.

c
a
d
b
c

LO5
LO5
LO5
LO5
LO5

70.
71.
72.
73.
74.

a
d
a
b
c

LO5
LO5
LO5
LO5

21.
22.
23.
24.

b
a
a
a

LO4
LO4
LO4
LO4
LO4

45.
46.
47.
48.
49.

a
b
a
b
d

LO5
LO5
LO5
LO5
LO5

75.
76.
77.
78.
79.

a
d
b
b
d

LO4
LO4
LO4
LO4
LO5

50.
51.
52.
53.
54.

d
a
d
d
c

LO5

80.

MULTIPLE CHOICE
78. $10,000 / $100,000 = 0.10
79. $110,000 x 0.10 = $11,000 - $9,000 = $2,000
80. $460,000 x 0.10 = $46,000 - $42,000 = $4,000

AKY 4E Test Bank

Chapter 8

Page 14

Schoenebeck

EXERCISE/PROBLEM
LO6
81. a.

Base Ratio = 0.20 = $10,000,000/$50,000,000

b.

Quarter
1
2
3
4
Total

c.

The amount that will be distributed to employees at the end of the year will be one half
of $500,000 or $250,000.

d.

What is troublesome about these results is that the amount that is added or deducted
from the bonus pool each period is highly variable. This is evidence that there is some
element that is currently uncontrolled relating to production costs. A second troubling
aspect of these results is that the amount distributed as a bonus is less than 1% of the
payroll. Therefore, this amount is likely to have little motivational effect on the
employees.

LO6
82. 1.

Payroll
11,500,000
10,500,000
13,000,000
16,500,000
51,500,000

Production
60,000,000
50,000,000
70,000,000
80,000,000
260,000,000

Base
12,000,000
10,000,000
14,000,000
16,000,000
52,000,000

Savings
Pool
+500,000
+500,000
(500,000)
-0+1,000,000 +1,000,000
(500,000) +500,000
+500,000

Opportunities for salary increases might be decided via other means such as
improvements in employee motivation, cost savings ideas, or improved management
skills. This method will fit some types of situations and managers better than the bonus
methods, but should not be used in situations where a high degree of motivation is
desired.

2.

The second idea is good for motivating a manager to improve the performance of a
given division. A weakness in this method occurs when managers make decisions that
maximize short run benefits at the expense of long-term needs because they have no
intent to stay with the company over a long period of time.

3.

The third method is great for motivating managers to compete with each other.
However, some reward should be available for the lowest rated manager if that
manager's performance is, in fact, above the company's standard for performance.
Suboptimization is a potential problem with this approach if the winning manager's
bonus is substantially above everyone else's bonus.

AKY 4E Test Bank

Chapter 8

Page 15

Schoenebeck

CRITICAL THINKING/ESSAY
LO1
83. What do employees fear most about new initiatives implemented by management? Why?
Solution: CHANGE! It is a fear of the unknown. Employees want to know how the new
initiatives will affect them personally, whether their performance will be assessed differently,
whether their compensation plans will be altered, and whether their organizational work
culture will be changed.
LO1
84. Should management implement a new management accounting and control system without
consulting employees? Why or why not?
Solution: No. Management needs to include employees in the implementation of any major
change. If not, goal congruence may not occur, motivation could be low, and employees
may be encouraged to engage in dysfunctional behavior.
LO2
85. What assumptions does the human resource model of motivation make about employees?
Why is it important for management to understand these assumptions?
Solution: Assumptions of the human resource model of motivation include:
a.
individuals are motivated by both financial and nonfinancial awards;
b.
employees are knowledgeable about their jobs; and
c.
individuals are highly creative, ethical, and responsible.
To design a motivating work environment and reward system, it is important for
management to understand these assumptions.
LO3
86. The two most common types of control are task control and results control. Define and then
explain when each is appropriate to use.
Solution: Task control is the process of developing standard procedures to control human
behavior so that a job is completed in a specified manner. Task control is most appropriate
when there are legal requirements or specific rules and procedures that must be followed,
when employees handle precious assets, and when the organization can control its
environment and eliminate uncertainty and the need for judgment.
Results control compares employee performance against stated objectives. Results control is
appropriate when employees understand the organizations objectives and their own
contribution to those objectives, when employees have the knowledge and the skill to
respond to changing situations, and when the performance system is designed to assess
individual contributions.
LO4
87. Explain why it is important to integrate the organizational code of ethics into the
management accounting and control system (MACS).
Solution: Integrating the organizational code of ethics into the MACS is important because
it helps to ensure that employee behavior is consistent with the ethical norms of the
organization.

AKY 4E Test Bank

Chapter 8

Page 16

Schoenebeck

LO6
88. Why is it important that employees understand the performance measurement and reward
system of the organization?
Solution: There are two main reasons.
First, since the performance measurement system is intended to reinforce the statement of
the organization's objectives and how the individual employee contributes to those
objectives, a clear statement is required to support and clarify the individual's understanding
of those objectives and his contribution. If the performance measurement system is vague
or confusing, the individual will become confused about the nature of his or her job both in
terms of what is expected and what is important. For example, if the employee is told that
quality is important but the only thing measured is the time taken to complete the work,
quality will usually be sacrificed in the rush to improve the reported performance measure.
Second, since the reward system is important to motivate effort, if the individual does not
understand the relationship between effort, performance, and outcome, the motivational
effect of the reward will be lost. The reward will become more like a lottery than an
incentive compensation system.
LO6
89. What are the major advantages and disadvantages of a cash bonus?
Solution: The major advantages are: it provides the employee with an immediate reward
thereby reinforcing the behavior and providing a higher present value; it creates no future
obligations in the sense of increasing base pay; the value of a cash reward may be more
precise and, therefore, its motivational effect may be more predictable.
The major disadvantage is that it is a short-term performance reward and it may focus
attention on improving short-term performance to the detriment of long-term performance.
LO6
90. In many cases a large proportion of executive incentive compensation is in the form of stock
options. What is the major criticism regarding the use of stock options as incentive
compensation? How can this criticism be overcome?
Solution: First, the criticism could be that the incentive compensation is not related to
performance. That is, it is paid even though the company may not have done that well. For
example, stock options might be valuable not because the company was managed well but
because the entire stock market has moved upward. This criticism can be overcome by
tying the value of the stock option to the organization's performance relative to an industry
average.
LO6
91. How can performance measurements be used to align the interests of the individual
employee and the organization?
Solution: When the performance reward system awards individual behavior that furthers
organizational goals, then individual employee interests and organizational interest will be
aligned.

AKY 4E Test Bank

Chapter 8

Page 17

Schoenebeck