Question

. Performance measures:

A. are critical in designing a reward system

B. are unimportant in designing a reward system

C. always influence people to achieve them

D. are always worded vaguely

E. are not needed to provide incentives because employees always want to do the right thing

Opportunity Costs:

A. must never be negative

B. may be found in financial statements (annual report)

C. reflect the benefit of the next best alternative

D. are pecuniary in nature

E. none of the above

Answer 1

1) Performance measures are critical in designing a reward system. If performance measures are not clearly defined, it will result in employees undertaking actions which are not in the best interest of the organization. If performance is not rewarded, employees will not have incentive to work better. Hence the answer is option (A).

2) Opportunity Costs reflect the benefit of the next best alternative. It is defined as the cost of next best alternative available. It may be negative, and may include non-pecuniary elements. But it is not recorded in the financial statements as financial statements only record explicit costs. Hence the answer is option (c).