Compensation, 12th Edition Test Bank

Chapter 02 Strategy: The Totality of Decisions Multiple Choice Questions 1. A compensation system that focuses on competitor’s labor costs is most closely associated with a(n) _____ strategy. A. innovator B. customer-focused C. cost-cutter D. differentiated 2. A compensation system using market-based pay is most likely to be part of a(n) _____ strategy. A. innovator B. cost-cutter C. cost leadership D. customer-focused 3. Flexible-generic job descriptions would most likely be used with a(n) _____ strategy. A. innovator B. customer-focused C. differentiated D. cost-cutter 4. Mich Inc., a hardware store, has a rating system in place that rates employees on their friendliness, usefulness, and product knowledge. Based on the ratings an employee receives, he or she gets an incentive. The compensation strategy followed by Mich is most closely described as a: A. customer-focused strategy. B. cost-cutter strategy. C. innovator strategy. D. differentiation strategy. 2-1 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5. A compensation system focusing on system control and work specifications is most closely associated with a(n) _____ strategy. A. innovator B. customer-focused C. cost-cutter D. differentiated 6. All of the following EXCEPT _____ are compensation systems associated with a cost-cutter strategy. A. focus on competitor’s labor costs B. focus on system control and work specifications C. increase in variable pay D. customer satisfaction incentives 7. In the formula predicting performance, the component most closely related to compensation is _____. A. A B. M C. O D. C 8. Whole Foods’ shared-fate philosophy of limiting executive salaries to no more than 19 times the average pay of full-time employees is an example of which strategic pay decision? A. External competitiveness B. Employee contributions C. Corporate responsibility D. Internal alignment 9. Comparisons on the forms of compensation used by other companies are part of _____. A. internal alignment B. external competitiveness C. employee contributions D. corporate responsibility 2-2 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10. The second step of developing a total compensation strategy is to: A. implement the strategy. B. assess total compensation implications. C. estimate the cost of the strategy. D. map the strategy. 11. Which of the following is the correct order of the steps in formulating a total compensation strategy? A. Assess the strategy, implement the strategy, map the strategy, and reassess the strategy. B. Assess the strategy, map the strategy, implement the strategy, and reassess the strategy. C. Map the strategy, implement the strategy, assess the strategy, and reassess the strategy. D. Map the strategy, assess the strategy, implement the strategy, and reassess the strategy. 12. Based on the opinions of 10,000 U.S. workers, Hudson found that when given their choice of unconventional benefits, most employees would select _____. A. more supplemental insurance B. more job training C. a more flexible work schedule D. more personal days and family leave 13. According to the Hudson survey, _____ is the single thing that would make 41 percent of the U.S. workers happier. A. more personal days B. flexible work schedule C. more money D. better health insurance 14. Which of the following statements regarding allowing employees a choice in their pay mix is NOT true? A. Allowing employees their choice is difficult to manage B. Allowing employees their choice is easy for competitor companies to imitate C. Providing unlimited choices for employees to choose from is difficult to design D. Providing too many choices can confuse people 2-3 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15. Union preferences are a major factor in _____ a total compensation strategy. A. implementing B. reassessing C. assessing D. mapping 16. In mapping a total compensation strategy, the question of how important compensation is in the overall HR strategy is part of _____. A. objectives B. internal alignment C. external competitiveness D. corporate responsibility 17. _____ refers to openness and communication about pay. A. Transparency B. Ownership C. Prominence D. Centrality 18. _____ is the measure of how important total compensation is in the overall HR strategy. A. Competitiveness B. Prominence C. Centrality D. Ownership 19. The role non-HR managers play in making pay decisions is called _____. A. ownership B. transparency C. technology D. decentralized decision-making 2-4 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 20. Issues of transparency, technology, and choice are most closely associated with the _____ aspect of mapping a total compensation strategy. A. objectives B. management C. employee contributions D. internal alignment 21. Career growth, hierarchy, and flexible design are most closely associated with the _____ aspect of mapping a total compensation strategy. A. objectives B. internal alignment C. external competitiveness D. employee contributions 22. Which of the following is NOT included in a strategy map? A. External competitiveness B. Management C. HR alignment D. Employee contributions 23. Which of the following is NOT a test of whether a pay strategy is a source of competitive advantage? A. Alignment test B. Cost-effectiveness test C. Differentiation test D. Value-addition test 24. Which of the following tests of competitive advantage is probably the easiest test to pass? A. Alignment test B. Differentiation test C. Integration test D. Value-addition test 2-5 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 25. The alignment test A. is difficult to imitate. B. is the most difficult test. C. helps ensure passing the differentiation test. D. becomes difficult if the differentiation test is not clear. 26. Trying to measure an ROI for any compensation strategy implies that A. it is possible to align and differentiate and still fail to add value. B. people are “human capital,” similar to other factors of production. C. adding value is the most difficult test. D. value created as a result of costs is difficult to specify. 27. Which of the following statements is NOT true? A. The effect of performance incentives depends on the context. B. Embedding compensation strategy in HR strategy affects results. C. Focusing only on one dimension of the pay strategy is a best practice. D. The effect of paying more than competitors depends on the context. 28. Research investigating high-performance workplaces found that performance-based pay _____ when combined with other high-performance practices. A. improves attitudes and behaviors B. increases the number of middle men required C. reduces labor costs D. has little effect on quality 29. When organization performance declines A. a virtuous circle may be created. B. performance-based pay plans do not pay off. C. managers must avoid changing the pay practices. D. employee attrition rate declines considerably. 2-6 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 30. Research shows that _____ will effectively shift an organization in a downward performance spiral to an upward one. A. reinforcing performance-based pay B. implementing team-based pay C. improving work-life balance D. it is unclear what compensation practices True / False Questions 31. Most organizations rely upon the market to determine how to pay their employees as compensation strategy is uncertain and complex. True False 32. Strategy refers to the fundamental direction that an organization chooses. True False 33. An organization defines its strategy through the tradeoffs it makes in choosing what to do and what not to do. True False 34. At the corporate level, the fundamental strategic decision involves defining the role of the HR in compensation strategies. True False 35. Customer-focused pay strategies are most likely to use market-based pay. True False 36. Compensation systems focusing on competitors’ labor costs typically follow a cost-cutter strategy. True False 37. Although three separate compensation strategies may be identified, many companies use a combination of all three. True False 2-7 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 38. Most firms do not have generic strategies but use a blend of cost and innovation. True False 39. Whole Foods’ shared-fate philosophy means that executive salaries are at least 19 times the average pay of full-time employees. True False 40. How an organization positions its total compensation against its competitors is part of external competitiveness strategic choices. True False 41. All organizations that pay their employees have a compensation strategy even though it may not be stated or written. True False 42. A compensation strategy should reflect an organization’s values. True False 43. A major challenge in the design of future pay systems is how to better satisfy individual needs and preferences. True False 44. Providing unlimited compensation choices to employees would meet with disapproval from the U.S. Internal Revenue Service. True False 45. Since unions represent such a small fraction of the labor force, their influence on pay decisions is insignificant. True False 46. Pay systems should fit well with other HR systems. True False 47. In a high-performance system, pay strategy always plays a lead role. True False 48. Benchmarking and copying best practices does not lead to competitive advantage. True False 2-8 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 49. Research on the effects of pay level shows that how employees are paid has no effect on the performance of the employees. True False 50. In a virtuous circle, a pay-for-performance strategy results in the improvement of performance. True False Short Answer Questions 51. Define defenders and prospectors as referred to by Miles and Snow. 52. Compensation systems can be tailored to general business strategies. List and explain these strategies. 2-9 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 53. Explain AMO theory. 54. What are the aspects of the alignment of pay strategy? 55. Write short notes on virtuous and vicious circles. 2-10 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 02 Strategy: The Totality of Decisions Answer Key Multiple Choice Questions 1. A compensation system that focuses on competitor’s labor costs is most closely associated with a(n) _____ strategy. A. innovator B. customer-focused C. cost-cutter D. differentiated Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 2. A compensation system using market-based pay is most likely to be part of a(n) _____ strategy. A. innovator B. cost-cutter C. cost leadership D. customer-focused Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 3. Flexible-generic job descriptions would most likely be used with a(n) _____ strategy. A. innovator B. customer-focused C. differentiated D. cost-cutter Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 2-11 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4. Mich Inc., a hardware store, has a rating system in place that rates employees on their friendliness, usefulness, and product knowledge. Based on the ratings an employee receives, he or she gets an incentive. The compensation strategy followed by Mich is most closely described as a: A. customer-focused strategy. B. cost-cutter strategy. C. innovator strategy. D. differentiation strategy. Accessibility: Keyboard Navigation Difficulty: 3 Hard Topic: Support Business Strategy 5. A compensation system focusing on system control and work specifications is most closely associated with a(n) _____ strategy. A. innovator B. customer-focused C. cost-cutter D. differentiated Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 6. All of the following EXCEPT _____ are compensation systems associated with a cost-cutter strategy. A. focus on competitor’s labor costs B. focus on system control and work specifications C. increase in variable pay D. customer satisfaction incentives Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 7. In the formula predicting performance, the component most closely related to compensation is _____. A. A B. M C. O D. C Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support HR Strategy 2-12 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8. Whole Foods’ shared-fate philosophy of limiting executive salaries to no more than 19 times the average pay of full-time employees is an example of which strategic pay decision? A. External competitiveness B. Employee contributions C. Corporate responsibility D. Internal alignment Accessibility: Keyboard Navigation Difficulty: 2 Medium Topic: The Pay Model Guides Strategic Pay Decisions 9. Comparisons on the forms of compensation used by other companies are part of _____. A. internal alignment B. external competitiveness C. employee contributions D. corporate responsibility Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: The Pay Model Guides Strategic Pay Decisions 10. The second step of developing a total compensation strategy is to: A. implement the strategy. B. assess total compensation implications. C. estimate the cost of the strategy. D. map the strategy. Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 11. Which of the following is the correct order of the steps in formulating a total compensation strategy? A. Assess the strategy, implement the strategy, map the strategy, and reassess the strategy. B. Assess the strategy, map the strategy, implement the strategy, and reassess the strategy. C. Map the strategy, implement the strategy, assess the strategy, and reassess the strategy. D. Map the strategy, assess the strategy, implement the strategy, and reassess the strategy. Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 2-13 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 12. Based on the opinions of 10,000 U.S. workers, Hudson found that when given their choice of unconventional benefits, most employees would select _____. A. more supplemental insurance B. more job training C. a more flexible work schedule D. more personal days and family leave Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 13. According to the Hudson survey, _____ is the single thing that would make 41 percent of the U.S. workers happier. A. more personal days B. flexible work schedule C. more money D. better health insurance Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 14. Which of the following statements regarding allowing employees a choice in their pay mix is NOT true? A. Allowing employees their choice is difficult to manage B. Allowing employees their choice is easy for competitor companies to imitate C. Providing unlimited choices for employees to choose from is difficult to design D. Providing too many choices can confuse people Accessibility: Keyboard Navigation Difficulty: 2 Medium Topic: Developing a Total Compensation Strategy: Four Steps 15. Union preferences are a major factor in _____ a total compensation strategy. A. implementing B. reassessing C. assessing D. mapping Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 2-14 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 16. In mapping a total compensation strategy, the question of how important compensation is in the overall HR strategy is part of _____. A. objectives B. internal alignment C. external competitiveness D. corporate responsibility Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 17. _____ refers to openness and communication about pay. A. Transparency B. Ownership C. Prominence D. Centrality Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 18. _____ is the measure of how important total compensation is in the overall HR strategy. A. Competitiveness B. Prominence C. Centrality D. Ownership Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 19. The role non-HR managers play in making pay decisions is called _____. A. ownership B. transparency C. technology D. decentralized decision-making Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 2-15 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 20. Issues of transparency, technology, and choice are most closely associated with the _____ aspect of mapping a total compensation strategy. A. objectives B. management C. employee contributions D. internal alignment Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 21. Career growth, hierarchy, and flexible design are most closely associated with the _____ aspect of mapping a total compensation strategy. A. objectives B. internal alignment C. external competitiveness D. employee contributions Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 22. Which of the following is NOT included in a strategy map? A. External competitiveness B. Management C. HR alignment D. Employee contributions Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 23. Which of the following is NOT a test of whether a pay strategy is a source of competitive advantage? A. Alignment test B. Cost-effectiveness test C. Differentiation test D. Value-addition test Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Source of Competitive Advantage: Three Tests 2-16 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 24. Which of the following tests of competitive advantage is probably the easiest test to pass? A. Alignment test B. Differentiation test C. Integration test D. Value-addition test Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Source of Competitive Advantage: Three Tests 25. The alignment test A. is difficult to imitate. B. is the most difficult test. C. helps ensure passing the differentiation test. D. becomes difficult if the differentiation test is not clear. Accessibility: Keyboard Navigation Difficulty: 2 Medium Topic: Source of Competitive Advantage: Three Tests 26. Trying to measure an ROI for any compensation strategy implies that A. it is possible to align and differentiate and still fail to add value. B. people are “human capital,” similar to other factors of production. C. adding value is the most difficult test. D. value created as a result of costs is difficult to specify. Accessibility: Keyboard Navigation Difficulty: 2 Medium Topic: Source of Competitive Advantage: Three Tests 27. Which of the following statements is NOT true? A. The effect of performance incentives depends on the context. B. Embedding compensation strategy in HR strategy affects results. C. Focusing only on one dimension of the pay strategy is a best practice. D. The effect of paying more than competitors depends on the context. Accessibility: Keyboard Navigation Difficulty: 2 Medium Topic: Guidance from the Evidence 2-17 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 28. Research investigating high-performance workplaces found that performance-based pay _____ when combined with other high-performance practices. A. improves attitudes and behaviors B. increases the number of middle men required C. reduces labor costs D. has little effect on quality Accessibility: Keyboard Navigation Difficulty: 2 Medium Topic: Virtuous and Vicious Circles 29. When organization performance declines A. a virtuous circle may be created. B. performance-based pay plans do not pay off. C. managers must avoid changing the pay practices. D. employee attrition rate declines considerably. Accessibility: Keyboard Navigation Difficulty: 2 Medium Topic: Virtuous and Vicious Circles 30. Research shows that _____ will effectively shift an organization in a downward performance spiral to an upward one. A. reinforcing performance-based pay B. implementing team-based pay C. improving work-life balance D. it is unclear what compensation practices Accessibility: Keyboard Navigation Difficulty: 2 Medium Topic: Virtuous and Vicious Circles True / False Questions 31. Most organizations rely upon the market to determine how to pay their employees as compensation strategy is uncertain and complex. FALSE Accessibility: Keyboard Navigation 2-18 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Difficulty: 1 Easy Topic: Similarities and Differences in Strategies 32. Strategy refers to the fundamental direction that an organization chooses. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Strategic Choices 33. An organization defines its strategy through the tradeoffs it makes in choosing what to do and what not to do. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Strategic Choices 34. At the corporate level, the fundamental strategic decision involves defining the role of the HR in compensation strategies. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Strategic Choices 35. Customer-focused pay strategies are most likely to use market-based pay. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 36. Compensation systems focusing on competitors’ labor costs typically follow a cost-cutter strategy. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 37. Although three separate compensation strategies may be identified, many companies use a combination of all three. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 2-19 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 38. Most firms do not have generic strategies but use a blend of cost and innovation. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Support Business Strategy 39. Whole Foods’ shared-fate philosophy means that executive salaries are at least 19 times the average pay of full-time employees. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: The Pay Model Guides Strategic Pay Decisions 40. How an organization positions its total compensation against its competitors is part of external competitiveness strategic choices. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: The Pay Model Guides Strategic Pay Decisions 41. All organizations that pay their employees have a compensation strategy even though it may not be stated or written. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: The Pay Model Guides Strategic Pay Decisions 42. A compensation strategy should reflect an organization’s values. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 43. A major challenge in the design of future pay systems is how to better satisfy individual needs and preferences. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 2-20 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 44. Providing unlimited compensation choices to employees would meet with disapproval from the U.S. Internal Revenue Service. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 45. Since unions represent such a small fraction of the labor force, their influence on pay decisions is insignificant. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 46. Pay systems should fit well with other HR systems. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 47. In a high-performance system, pay strategy always plays a lead role. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Developing a Total Compensation Strategy: Four Steps 48. Benchmarking and copying best practices does not lead to competitive advantage. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Source of Competitive Advantage: Three Tests 49. Research on the effects of pay level shows that how employees are paid has no effect on the performance of the employees. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Virtuous and Vicious Circles 2-21 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 50. In a virtuous circle, a pay-for-performance strategy results in the improvement of performance. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Topic: Virtuous and Vicious Circles Short Answer Questions 51. Define defenders and prospectors as referred to by Miles and Snow. According to Miles and Snow, defenders are those firms that operate in stable markets and compete on cost, while prospectors are firms that are more focused on innovation and new markets. Difficulty: 1 Easy Topic: Support Business Strategy 52. Compensation systems can be tailored to general business strategies. List and explain these strategies. Compensation systems can be tailored to three general business strategies: i. The innovator stresses new products and short response time to market trends. A supporting compensation approach places less emphasis on evaluating skills and jobs and more emphasis on incentives designed to encourage innovations. ii. The cost cutter’s efficiency-focused strategy stresses doing more with less by minimizing costs, encouraging productivity increases, and specifying in greater detail exactly how jobs should be performed. iii. The customer-focused business strategy stresses delighting customers and bases employee pay on how well they do this. Difficulty: 2 Medium Topic: Support Business Strategy 2-22 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 53. Explain AMO theory. Boxall and Purcell found an increasingly common “very basic theory of performance” being used, which they referred to as “AMO theory”: P = f (A, M, O) P is performance, which is specified to be a function (f) of three factors: A is ability, M is motivation, and O is opportunity. In other words, the AMO logic is that HR systems will be most effective when roles are designed to allow employees to be involved in decisions and have an opportunity to make an impact, when employee ability is developed through selective hiring and training and development, and when the compensation system motivates employees to act on their abilities and take advantage of the opportunity to make a difference. Difficulty: 2 Medium Topic: Support HR Strategy 54. What are the aspects of the alignment of pay strategy? Alignment of the pay strategy includes three aspects: i. align with the business strategy, ii. align externally with the economic and sociopolitical conditions, and iii. align internally within the overall HR system. Difficulty: 1 Easy Topic: Source of Competitive Advantage: Three Tests 2-23 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 55. Write short notes on virtuous and vicious circles. Virtuous circle – Thinking of pay as part of a circle suggests that performance-based pay works best when there is success to share. An organization whose profits or market share is increasing is able to pay larger bonuses and stock awards, which fairly improves employee attitudes and work behaviors, which in turn improves their performance. The circle gains upward momentum. Employees receive returns that compensate for the risks they take. And they behave like owners, since they are sharing in the organization’s success. Vicious circle – Circles can also gain momentum going downward to become a vicious circle. When organization performance declines, performance-based pay plans do not pay off; there are no bonuses, and the value of stock declines—with potentially negative effects on organization performance. Declining organization performance increases the risks facing employees—risks of still smaller bonuses, demotions, wage cuts, and even layoffs. Unless the increased risks are offset by larger returns, the risk-return imbalance will reinforce declining employee attitudes and speed the downward spiral. Difficulty: 2 Medium Topic: Virtuous and Vicious Circles 2-24 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.