Deck 16: Performance Measurement and Incentives in Firms

Question 1

Which of the terms best describes the effect that results from supervisors giving all their subordinates average (or above average)grading to avoid making sharp distinctions between those subordinates when evaluating them?

A)Forced ranking system
B)Subjective assessment
C)Ratings balancing
D)Ratings compression
E)Merit ratings system

Answer 1

D

Question 2

Which of the following terms best describes a review system in which an employee's supervisor,coworkers and subordinates are all asked to provide information regarding that employee's performance over a period of time?

A)Traditional top down review system
B)360-degree peer review system
C)Management-by-objective system
D)Subjective performance evaluation
E)Pay-for-performance

Answer 2

B

Question 3

Which of the following terms describes a phenomenon whereby individuals ignore their own information about the best course of action and instead simply do what everyone else is doing?

A)Relative performance
B)Absolute performance
C)Herding
D)Risk sharing
E)Pay-for-performance

Answer 3

C

Question 4

What term best describes an agent who is indifferent between a sure thing and a gamble of equal expected value?

A)Risk sharing
B)Risk seeking
C)Risk neutral
D)Risk averse
E)Risk premium

Question 5

Which of the following terms describes a contract based on information that cannot be observed by courts or arbitrators?

A)Explicit incentive contract
B)Implicit incentive contract
C)Risk sharing contract
D)Compensation contract
E)Pay-for-performance

Question 6

Which of the following terms describes an incentive contract that can be enforced by an outside third party such as a judge or an arbitrator?

A)Explicit incentive contract
B)Implicit incentive contract
C)Risk sharing contract
D)Compensation contract
E)Pay-for-performance

Question 7

What term best describes a payment above and beyond the expected outcome of a gamble which must be offered to a risk-averse individual to willingly accept the gamble?

A)Certainty equivalent
B)Risk equivalent
C)Risk premium
D)Risk preference payment
E)Certainty payment

Question 8

Which of the following terms best describes the situation in which a set of employees competes to win a promotion?

A)Promotion criteria
B)Forced ranking system
C)Ratings compression
D)Merit ratings system
E)Promotion tournament

Question 9

Which of the following terms best describes the principle stating that when allocating effort among a variety of tasks,employees will tend to exert more effort toward those tasks that are rewarded?

A)Effort allocation principle
B)Premium principle
C)Compensation principle
D)Risk-reward principle
E)Multitask principle

Question 10

What term best describes an agent who prefers a sure thing to a gamble of equal expected value?

A)Risk sharing
B)Risk seeking
C)Risk neutral
D)Risk averse
E)Risk premium

Question 11

Which of the following statements is least true regarding the use of incentive pay for sales employees?

A)If a firm wants to tie pay to a performance measure that is affected by random factors, the firm need not compensate employees for the resulting increase in the variability of their pay
B)In determining how closely to tie pay to performance, the firm must weigh the costs of imposing risk on risk-averse employees against the benefits of providing additional incentives
C)When both risk and incentives are present, the optimal commission rate will reflect a tradeoff among these forces and will be somewhere between 0 percent and 100 percent
D)Stronger incentives are called for if the variance of measured performance is lower
E)When an employee captures all the value associated with extra effort, the employee chooses the effort level that equates the total marginal benefit of effort to the total marginal cost

Question 12

What term best describes the payment which must be offered to a risk-averse individual to willingly accept a gamble?

A)Certainty equivalent
B)Risk equivalent
C)Risk premium
D)Risk preference payment
E)Certainty payment

Question 13

Which of the following terms describes a contract by which the value of the compensation depends on the measured performance of the employee?

A)Explicit incentive contract
B)Implicit incentive contract
C)Risk sharing contract
D)Compensation contract
E)Pay-for-performance contract

Question 14

Which of the following terms best describes a piece of information on which an incentive contract (explicit or implicit)can be based?

A)Absolute Performance
B)Relative Performance
C)Incentive
D)Performance measure
E)Performance standard

Question 15

Which of the following jobs best represents one for which performance is relatively difficult to measure?

A)Mowing lawns
B)Delivering newspapers
C)Flight attendant
D)Pharmaceutical sales representative
E)Advertising campaign manager

Question 16

Which of the following terms best describes a contract that guarantees an agent some payment,but provides enough incentive so that the agent does not shirk?

A)Certainty equivalent contract
B)Risk-sharing contract
C)Risk premium contract
D)Variability reduction contract
E)Risk-averse contract

Question 17

What term refers to the practice in a multidivisional firm where orders from other parts of a company are rushed to be filled at the end of each month (allowing divisions filling the orders to recognize revenue but cause inventory problems)?

A)Order rushing
B)Commission sales
C)Pay-for-performance measures
D)Channel stuffing
E)Multitask principle

Question 18

Which of the following terms best describes a review system in which an employee and a supervisor work together to construct a set of goals for that employee?

A)Traditional top down review system
B)360-degree peer review system
C)Management-by-objective system
D)Subjective performance evaluation
E)Pay-for-performance

Question 19

What term best describes how a firm performs based on a comparison to another firm in its peer set within an industry?

A)Absolute performance
B)Comparative performance
C)Proportional performance
D)Performance measurement
E)Relative performance

Question 20

What term best describes an agent who prefers a risky outcome with the same expected value over a sure thing?

A)Risk sharing
B)Risk seeking
C)Risk neutral
D)Risk averse
E)Risk premium

Question 21

Which of the following statements is untrue with regards to stock options as a form of incentives for employees?

A)A stock option is a contract that allows the employee to purchase a share of the firm's stock at a specified price at any time up till a preset expiration date
B)Option grants to employees typically come with a vesting period
C)Since options are worth more if the stock price is higher, the employee has little reason to care about the firm's performance
D)At any point after the end of the vesting period and prior to expiration, an employee can exercise their option and sell pocketing the difference between stock and exercise price
E)If a firm's share price falls below the exercise price at expiration, the options may be worthless to the employee

Question 22

Which of the following is least likely a technique firms can use to mitigate the free-rider problem?

A)Firms can reduce the repeated interactions among team members so that actions depend less on what other members may have done in the past
B)Firms can keep teams small
C)Firms can allow employees to work together for long periods
D)Firms can structure teams so that their members can monitor one another's actions
E)Firms can use future periods of interaction and let natural team dynamics of peer pressure and social isolation take place as punishment for team members who have failed to contribute in the past

Question 23

What term best refers to a wage payment made to an agent that exceeds his opportunity cost of working and discourages the agent from shirking?

A)Living wage
B)Efficiency wage
C)Minimum wage
D)Efficiency payment
E)Termination wage

Question 24

What type of performance measurement based process was used to determine Jack Welch's successor,Jeffrey Immelt,as CEO of GE?

A)Ratings compression
B)Merit ratings system
C)360-degree peer review system
D)Promotion tournament
E)Management-by-objective system

Question 25

Which of the following phrases best describes the effect created when there is a mismatch between the total benefit to a team and the personal benefit to one team member such that the one team member's effort choices may not be the ones that maximize the teams overall welfare?

A)Personal benefit
B)Team performance problem
C)Effort mismatch
D)Free-rider problem
E)Team dynamic problem