Total Rewards Final Exam

What are the two purposes of performance evaluation? Why is it that the two purposes are often incompatible with each other?

1. Development (formative)

2. Judgement (summative)

Why is it that the two purposes are often incompatible with each other?

Employees may resist feedback if it affects rewards or job security.

Development aims to help; judgment aims to rank or decide.

Mixing the two reduces effectiveness of both.

2. What is standard rating scale? Advantages and disadvantages?

Advantages:• Identifies general problem areas• Useful for merit increases• Cheap and easy to use

Disadvantages:• Limited developmental feedback• Criterion contamination (non-performance factors influence scores)• Hard to defend legally

Why does standard rating scale lead to an “evaluation death spiral”?

Ratings inflation

Ratings lose meaning

Development declines

Performance declines

Pay rises

4. What are the two rating dimensions of the nine-box grid? Why does it create gender promotion gaps? How to fix?

Dimensions: Potential and performanceGender gap: Women receive equal/higher performance ratings but lower potential ratings → 14% less likely to be promoted yearly (glass ceiling).Fix: Evaluate performance but not potential to reduce bias. (Hint: evaluate performance, but not potential)

What are halo vs. horn bias, primacy vs. recency bias, leniency vs. strictness bias, similar-to-me bias? Use examples.

Halo: One positive trait → inflated overall rating (e.g., good teamwork = assumed good at everything).

Horn: One negative trait → lower ratings everywhere.

Primacy: Early events overly influence rating.

Recency: Recent events dominate evaluation.

Leniency: Rater gives everyone high scores.

Strictness: Rater gives everyone low scores.

Similar-to-me: Rater favors employees similar to themselves.

What are best practices of performance evaluation?

• Benchmarking inputs or outputs• Regular communication• Clear standards, job descriptions, and consistent feedback

What is Behaviorally Anchored Rating Scale (BARS)? Pros and cons

Pros:• Identifies behaviors for development• Good for administrative decisions• Strong legal defense due to job relevance• High content validity, low rating errors

Cons:• Expensive to develop• Easy to use once created

What is Management by Objective (MBO)? Pros and cons?

. What is Management by Objective (MBO)? Pros and cons?

Benchmarking employee ratings to achievement of prespecified goals.Pros: Clear outcomes; high content validity; low rating errorsCons: Time-consuming; expensive to develop

What are SMART objectives in MBO?

Specific, Measurable, Achievable, Relevant, Time-bound.

How to administer performance evaluation to comply with EEO?

• Provide instructions and training• Clear behavioral and outcome criteria• Good job descriptions• Feedback to employees• Higher-level review of ratings

. What is 360-degree feedback? Pros of each source?

Multi-source feedback from supervisors, peers, customers, direct reports, and self.

Self: Good for development; risk of leniency

Supervisors: Most reliable

Peers: Know performance well; may face group tension

Customers: Reliable when sample is large

Direct reports: Anonymous, candid

What is merit raise? How determined using tenure or performance?

Permanent increase in base pay.

Tenure-based: Based on years of service

Performance-based: Rating determines raise % from guidelines(Know patterns of raise percentages across rows/columns; no math required)

13. Employer and employee factors in determining benefit packages?

Employer: Cost, competition, retention, legal requirementsEmployee: Perceived equity, personal needs (age, sex, dependents)

What are the four major statutory benefits?

Social Security • Workers' Compensation • Leave Benefits • Health Insurance

What are the three components of Social Security?

Unemployment insurance • Old Age, Survivor, and Disability Insurance (OASDI), and medicare

Eligibility for unemployment insurance?

Unemployed through no fault of their own; work minimum base period; not voluntary quit; able/available; actively seeking work; not fired for misconduct; not refusing suitable work.

Major provisions of OASDI? Eligibility for each benefit?

Provides monthly benefits to retired, disabled workers, and survivors.

Old Age:• Fully insured after 40 quarters (10 years)• Benefits at FRA; early at 62 (reduced); delayed increases payout

Survivor:Eligible if deceased was fully insured; includes dependent children, spouse caring for child, widow(er) 60+, dependent parent 62+.

Disability:Covers total disability lasting 1+ year or resulting in death; must be unable to work previous job and adjust to others.

What is medicare and who is eligible?

Coverage for individuals 65+; includes hospitalization, convalescent care, doctor bills.

What does workers’ compensation cover? How does it differ from Social Security?

Covers work-related injuries/illnesses: medical care, temporary/permanent disability, survivor benefits, rehab.Difference:

Workers’ comp = work-related causes

Social Security = disabilities from any cause

FMLA provisions, eligibility, qualifying conditions?

Provisions: 12 weeks unpaid leave; continued health benefits; job restoration; can require use of paid leave.Eligibility: 12 months work; 1,250 hours; 50/75 rule (worksite has 50+ employees within 75 miles).Qualifying: Birth/adoption; care for spouse/child/parent; employee’s own serious health condition.

Components of Affordable Care Act?

Goal: expand coverage; control costs.Components: Individual mandate; employer mandate; qualifying coverage; marketplaces.

“Stick and carrot” approach to employer mandate?

Stick: Penalties for not offering affordable coverage

Carrot: Tax advantages for offering compliant coverage

“Stick and carrot” approach to employer mandate?

Stick: Penalties for not offering affordable coverage

Carrot: Tax advantages for offering compliant coverage

What practices in determining qualified coverage are prohibited?

• Exclusion of preexisting conditions• Maximum dollar caps on benefits (Note: Exclusion of preexisting conditions, setting a maximum amount a plan would cover)

3 goals of health insurance

Low cost, high quality, flexibility • Promote employee wellbeing • Compliance and tax efficiency

4 major discretionary benefits

Pension plans • Protection programs • Paid time off • Services

What is a pension plan? Tax advantage?

Retirement income via contributions; tax-advantaged growth.

Defined benefit plan? How is retirement benefit determined?

Employer promises fixed monthly benefit based on formula (service + earnings).Lifetime payments; employer bears investment risk; retention-oriented.

Defined contribution plan? How is contribution determined?

Employer/employee contribute to individual account (401k/403b).Benefit = investment performance; employee bears risk; portable.

Compare DB vs. DC.

DB: Fixed payout, employer risk, retention

DC: Variable payout, employee risk, mobility

. Early vs. late career investment portfolios?

Early career → more stocks (growth)

Late career → more bonds (stability)

What is vesting? Examples of cliff vs. graduated?

Right to employer contributions after service period.

Cliff: 0% until year 5 → 100% at year 5

Graduated: 20% at year 2, +20% per year → 100% by year 6

Vesting: Your right to keep employer contributions.

Cliff Vesting: You get 100% all at once after a set time.

Graduated Vesting: You get it gradually over several years.

Protection programs, PTO, and services examples

Protection: Disability, life, dental, visionPTO: Holidays, vacation, sick leaveServices: Childcare, tuition aid, employee assistance programs EAPs

Who are highly compensated employees?

Employees holding substantial responsibility (CEO, VP, etc.) or:

• Own >5% of company

• Earn above annual IRS threshold (e.g., $130k for 2020)

Components of executive compensation? Unique elements?

Base pay • Short-term incentives • Long-term incentives • Benefits/perks • Separation agreements

Unique: Large long-term incentives, equity-based pay, golden/platinum parachutes.

Why long-term incentives form a large share?

Align executives with shareholder value; promote retention; reduce short-termism.

Why long-term incentives form a large share?

Incentive stock options: Buy stock later at fixed (discounted) price; tax at sale.

Restricted stock: Stock granted but cannot be sold until vesting date.

Phantom stock: Equity-like cash award; no actual shares transferred; based on value/appreciation.

. What are golden and platinum parachutes?

Golden: Pay/benefits after mergers/takeovers

Platinum: Very large severance packages with extra benefits and options

Four dimensions of executive compensation?

Fixed vs. variable • Short- vs. long-term • Cash vs. equity • Individual vs. group

1. Use agency, tournament, and social comparison theories to explain executive pay.

Agency: Align executives with shareholders using incentives.

Tournament: Huge top-level compensation motivates competition for promotions.

Social comparison: Benchmark against peers; drives upward adjustments.

1. Agency Theory

Idea: Executives (agents) might make decisions that benefit themselves rather than shareholders (principals).

Solution: Use incentives—like bonuses, stock options, or long-term awards—to align executives’ interests with shareholders.

Example: Give the CEO stock options so they profit when the company’s stock rises.

Bottom line: Pay motivates executives to act in the company’s best interest.

2. Tournament Theory

Idea: Big pay differences at the top create a “tournament” effect.

Executives compete for the top job (CEO, CFO) because the rewards are huge.

Example: The next-level executive sees the CEO’s massive pay and works hard to get promoted.

Bottom line: High executive pay motivates performance by creating competition within the organization.

3. Social Comparison Theory

Idea: Executives compare their pay to peers inside and outside the company.

If they see others getting more, they push for raises or bonuses to match.

Example: A CEO’s pay might be adjusted upward because competitors at similar companies earn more.

Bottom line: Executive pay is influenced by benchmarking against peers to retain and satisfy top talent.

How to minimize conflict of interest with consultants and compensation committees?

Committee members should not receive company compensation as employees.

Advisors must not overcharge or seek additional fees.

VP cannot serve on compensation committee.

Major provisions of Securities and Exchange Act?

Requires disclosure of exec compensation; SEC administers; DEF 14A must include summary compensation table; available via EDGAR.

Key provisions of Dodd-Frank Act?

Say on pay • Independence requirement • Golden parachute disclosure • CEO pay ratio • Clawback provision

What is say on pay? What is clawback?

Say on pay = shareholder vote on exec compensation (non-binding).Clawback = company reclaim incentive pay if wrongdoing from executive (fraud, harassment, illegal actions).

Who are PCNs, HCNs, TCNs?

Parent City National Citizens of parent country working abroadHost Country Nationals : Citizens of host countryThird Country Nationals: Citizens of neither parent nor host country

How to ensure equity in expatriate compensation?

Job evaluation • Market pricing • Compare to domestic employee pay referents

What is home-country-based method?

Pay expats as if performing work in home country; best for short assignments.Host-country-based ties pay to host market; better for long-term assignments.

What are foreign services premium, hardship allowance, mobility premium?

Foreign services premium: 10–30% extra base pay

Hardship allowance: 5–35% for harsh conditions (U.S. State Dept. guidelines)

Mobility premium: Reward for moving between assignments

Examples of enhanced expatriate benefits?

Relocation support • Education reimbursement • Home leave • Rest & relaxation leave

What is balance sheet approach?

Ensures expats maintain same spending power as in home country; home country used as base for all payments.

What is double taxation? Tax protection vs. tax equalization?

Double taxation: Being taxed by both home and host countries.

Tax protection: Employee pays whichever tax burden is lower.

Tax equalization: Employee pays “hypothetical tax” equal to home-country liability; employer handles difference.

What is hypothetical tax (stay-at-home tax)?

A tax amount equal to what the employee would pay if they stayed in home country; deducted to ensure fairness under tax equalization.