Question 1

The credit rating agencies require detailed disclosures of the compensation arrangements of top-level executives.

Accepted Answer

The SEC requires detailed disclosures of the compensation arrangements of top-level executives.

Question 2

An additional criticism of team-based compensation is that there can be problems managing team members who are not productive contributors to a team's success but who, nevertheless, share in the team's rewards.

Accepted Answer

This is a potential criticism of team-based compensation. It can be difficult to ensure that all team members are pulling their weight and contributing equally to the team's success, which can lead to resentment and frustration among those who are working hard but feel like they are not being fairly compensated.

Question 3

The more owners have access to sensitive performance measures, the more they can rely on incentive compensation for their managers.

Accepted Answer

When owners have access to sensitive performance measures, they can better monitor and evaluate their managers' performance. This allows them to design more effective incentive compensation plans that align managers' interests with the company's goals. As a result, managers are more likely to work hard and make decisions that are in the best interest of the company, ultimately improving overall performance.

Question 4

The salary component of compensation dominates when performance measures that are sensitive to managers' actions are not available.

Accepted Answer

When there are no performance measures available to evaluate managers' actions, the only way to incentivize them is through their salary component. Therefore, the salary component dominates in such situations.

Question 5

Vega Corp's 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, ROI being the yardstick.
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.

Accepted Answer

The answer of Vega Corp's corporate income has declined to...

Question 6

Stock options give executives the right to buy company stock at a specified price, called the exercise price, within a specified period.

Accepted Answer

This is a correct statement about stock options. The exercise price and period are determined in the stock option contract.

Question 7

Capital Investments has three divisions. Each division's required rate of return is 15%. Planned operating results for 2015 are as follows:
  
The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000.
Required:
a.Compute the current ROI for each division.
b.Compute the current residual income for each division.
c.Rank the divisions according to their current ROIs and residual incomes.
d.Determine the effects after adding the new project to each division's ROI and residual income.
e.Assuming the managers are evaluated on either ROI or residual income, which divisions are pleased with the expansion and which ones are unhappy?

Accepted Answer

The answer of Capital Investments has three divisions. Each division's...

Question 8

Which of the following describes boundary control systems?
A) set limits by instituting and communicating standards of behavior and codes of conduct expected of all employees
B) articulate the mission, purpose, and core values of a company
C) are formal information systems managers use to focus the company's attention and learning on key strategic issues
D) describe the geographic limits of a company and help organize its layout

Accepted Answer

Boundary control systems set limits and standards for employee behavior and conduct.

Answer: D
 Geographic boundaries are described by boundary control systems, and they help organize layout. Choices B and C do not accurately describe boundary control systems.

Question 9

Many manufacturing, marketing, and design problems require employees with multiple skills; therefore, teams are used and the members have the added encouragement of ________.
A) individual incentives
B) management incentives
C) morale incentives
D) team incentives

Accepted Answer

Team incentives provide motivation for the members to work together and achieve a common goal. It fosters a sense of collective responsibility, which is essential for successful team collaboration. Individual, management, and morale incentives may also play a role, but team incentives are the best choice for encouraging teamwork and collaboration.

Question 10

An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks.

Accepted Answer

Designing compensation arrangements involves balancing the need to provide incentives for employees to perform well with the potential risks associated with certain compensation structures. For example, some forms of incentive pay may motivate employees to take excessive risks, which could harm the organization in the long run. Therefore, finding the right balance between incentivizing employees and mitigating risk is an important consideration in compensation design.

Question 11

LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for 2018 are budgeted as follows:
  
Operating assets for the division are currently $3,600,000. For 2018, the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60% of the selling price.
Required:
a.What is the effect on ROI of accepting the new product line?
b.If the company's required rate of return is 6% and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.

Accepted Answer

The answer of LaserLife Printer Cartridge Company is a decentralized...

Question 12

Which of the following is true of an executive compensation plan?
A) The compensation paid to the executives should be linked only to the financial performance of the company.
B) Most compensation plans are two parts: salary and health plan
C) It does not help balancing risk with short-run and long-run incentives.
D) It includes salary, annual incentive compensation, and benefits such as medical benefits, pension plans, and life insurance.

Accepted Answer

An executive compensation plan typically includes salary, annual incentive compensation, and benefits such as medical benefits, pension plans, and life insurance. It is important to provide a balance of short-run and long-run incentives to align the executives' interests with those of the company. Financial performance is one factor considered, but not the only one, when determining executive compensation.

Question 13

Which of the following is a difference between a diagnostic control system and an interactive control system?
A) A diagnostic control system focuses on meeting expectations, while an interactive control system focuses on standards of ethical behavior.
B) A diagnostic control system focuses on standards of ethical behavior while an interactive control system focuses on meeting expectations.
C) A diagnostic control system focuses on meeting expectations, while an interactive control system focuses on organizational attention and learning on key strategic issues.
D) A diagnostic control system focuses on organizational attention and learning on key strategic issues, while an interactive control system focuses on meeting expectations.

Accepted Answer

A diagnostic control system focuses on detecting and correcting deviations from expected performance, while an interactive control system focuses on using open communication and involvement to facilitate organizational attention and learning on key strategic issues. Therefore, option C is the correct choice as it correctly highlights the difference between the two systems. Option A and B are incorrect as they mix up the focus of both systems. Option D is incorrect as it reverses the focus of both systems.

Question 14

There should be strict congruence between the performance evaluation of a subunit and the performance evaluation of that subunit's manager.

Accepted Answer

A company should distinguish between the performance evaluation of a manager and the performance evaluation of that manager's subunit.

Question 15

Craylon Corp. is planning the 2018 operating budget. Average operating assets of $1,800,000 will be used during the year and unit selling prices are expected to average $100 each. Variable costs of the division are budgeted at $500,000, while fixed costs are set at $300,000. The company's required rate of return is 18%.
Required:
a.Compute the sales volume necessary to achieve a 20% ROI.
b.The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for 2015, assuming he achieves the 20% ROI from part (a)?

Accepted Answer

The answer of Craylon Corp. is planning the 2018 operating...

Question 16

Which of the following is true of benchmarking two managers against each other if they carry out similar operations?
A) It would lead to better cooperation among the managers.
B) It would reduce the managers' incentives to help one another.
C) It would enhance the accomplishment of organization goals.
D) It would help reduce costs common to both the departments.

Accepted Answer

Benchmarking two managers against each other, especially if they carry out similar operations, can create a competitive environment rather than a cooperative one. This competition might reduce their incentives to help one another since each may focus on outperforming the other to look better in the comparison.

Question 17

A manager's job entails gathering information, interpreting that information and making judgments on that information and thus is less susceptible to moral hazards than jobs that require repetitive tasks and less subjective decision making.

Accepted Answer

Repetitive task-based jobs are relatively easy to monitor and are less subject to moral hazard than manager's jobs which are more difficult to monitor and therefore higher in moral hazard risk.

Question 18

Executive compensation plans are based on both financial and nonfinancial performance measures. Discuss

Accepted Answer

The answer of Executive compensation plans are based on both...

Question 19

Which of the following best describes a belief control system?
A) it describes standards of behavior and codes of conduct expected of all executives and board of directors
B) it articulates the mission, purpose, and core values of a company
C) they are formal information systems managers use to focus the company's attention and learning on key strategic issues
D) it describes standards of behavior and codes of conduct expected of all employees

Accepted Answer

A belief system articulates the mission, purpose, and core values of a company, guiding employees in understanding the organizational culture and ethical standards.

Question 20

"Levers of control," in addition to a diagnostic control system, are needed in an organization because ________.
A) diagnostic controls have been found to lead to poor financial performance
B) diagnostic controls have no place in a balanced scorecard system
C) pressure to perform on diagnostic controls may lead to unethical behavior
D) they are mandated by the Financial Accounting Standards Board

Accepted Answer

The answer of "Levers of control," in addition to a...

Quiz 23: Performance Measurement, Compensation, and Multinational Considerations

The credit rating agencies require detailed disclosures of the compensation arrangements of top-level executives.

An additional criticism of team-based compensation is that there can be problems managing team members who are not productive contributors to a team's success but who, nevertheless, share in the team's rewards.

The more owners have access to sensitive performance measures, the more they can rely on incentive compensation for their managers.

The salary component of compensation dominates when performance measures that are sensitive to managers' actions are not available.

Stock options give executives the right to buy company stock at a specified price, called the exercise price, within a specified period.

Which of the following describes boundary control systems?

Many manufacturing, marketing, and design problems require employees with multiple skills; therefore, teams are used and the members have the added encouragement of ________.

An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks.

Which of the following is true of an executive compensation plan?

Which of the following is a difference between a diagnostic control system and an interactive control system?

There should be strict congruence between the performance evaluation of a subunit and the performance evaluation of that subunit's manager.

Which of the following is true of benchmarking two managers against each other if they carry out similar operations?

A manager's job entails gathering information, interpreting that information and making judgments on that information and thus is less susceptible to moral hazards than jobs that require repetitive tasks and less subjective decision making.

Executive compensation plans are based on both financial and nonfinancial performance measures. Discuss

Which of the following best describes a belief control system?

"Levers of control," in addition to a diagnostic control system, are needed in an organization because ________.