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Companys History

Employee Relations Review Committee

Performance Appraisal

Salary Determination

Flaws in Appraisal System

Compa ratio calculation and analysis

Recommendations

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It is a pharmaceutical company headquartered in Rahway, NewJersey.

Founded by Friedrich Jacob Merck.

Expanded in drug manufacturing in 1827.

Today, it is nations largest provider of prescription medicines.

Introduced Indocin, Aldomet, Timoptic, Clinoril, Mefoxin, Pepcid,Mevacor

Annual sales grew from $218 million in 1960 to $6.6 billion in1989.

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Selected Americas Most Admired Corporation byFortunemagazine.

Ranked first in innovativeness, shareholder value, product quality

and financial soundness.

Higher than average return on assets.

But Mercks ROA declined in early 1980s and its performance

lagged behind by 1983.

Some causes were disappointing new products, inflation andchange in foreign exchange rates.

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The committee was formed keeping in mind various flaws in thesystem and appraisal issues which emphasized on the followingissues:

Examine employee policies and practices to determine if they createand environment that encourages and rewards greater productivityand employee excellence.

Determine whether policies and practices are being adequately

communicated to employees in a way they can clearly understand.

Review the application of these policies and practices to determinewhether they are being applied consistent with objectives set forth.

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Mercks Performance appraisal and Salary Administration programwas first introduced in 1978

Supervisors rated employees on a scale of 1 to 5

5 = exceptional performance and 1 = unacceptable performance

Plusses and minuses were allowed, thus supervisors chose from 13

different rating categories.

The scale was absolute and the rating assigned to an individual wasto reflect only the performance of the individual independent ofperformance of others.

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Based on job characteristics(measured by HAY POINTS) and merit

Hay points are determined by individually evaluating each positionin terms of the three hay factors-know how, problem solving, and

accountability. Numerical scores are assigned to each factoraccording to guidelines provided by Hay Associates, and the sum ofthese scores defines the Hay points for each position in theorganization.

Hay points are converted to a control point using a salary line

formula. For example, the 1986 salary line formula was:;

Thus, a mid-level employee with 500 Hay points had a 1986 control

point of $3,847 per month.

control point = $1502 + $4.69x(Hay points)

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An employees compa-ratio(actual salary as a percentage of thecontrol point) goes up each time he/she gets a merit increase, andfalls whenever the salary line formula is moved upward.

Salary revisions are linked to both control point increases andperformance ratings through guidelines established by thepersonnel department

Employees with higher ratings tend to get larger pay increase, while

raises for a given performance rating tend to be smaller foremployees who have already attained a high compa-ratio.

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actual salary as a percentage of the control point = Compa ratio

The employees actual salary range from 80% to 125% of thecontrol point

Thus salary range = 80% of 3847$ = 3077.6 = 3078 approx 125% of 3846 $ = 4808.75 = 4809 approx

Min salary range = 3078$, Maximum salary = 4808$

When control point is 3847$, salary range as above: Min Compa ratio = 80 mid= 100 Max = 125

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Negative feeling of some of the best performers concerning rewards.

Outstanding performers gets salary increase only marginally than thoseto average performers.

No clear identification of outstanding performances

Different ideas regarding how to structure a performance appraisalsystem.

Managers afraid to give experienced people low ratings.

Supervisors are reluctant in giving high ratings despite of working hard.

Lack of equity as bosses were afraid to give anything less that anaverage.

Homogenized the rating method by giving uniform rate to everyone.

Outstanding performer rarely received an outstanding reward as peoplein the division were rated the same.

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Performance appraisals are typically conducted by the

managers who work closely with the employees every

day, because these managers have the specificknowledge required to evaluate their subordinates'performance.

Because performance appraisals are often a requiredbut unrewarded managerial task, it is rational formanagers to spend no more than the minimumacceptable time and effort in evaluating subordinates'performance

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Merck & Co. is an example of a firm which though very successful in

its venture can go wrong when it comes to employees and theirdemands

Merck & Co. should definitely give away with the absolute ratingsystem and adopt relative grading among the employees which willmake the employees more competitive.

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Advantages:

They force reluctant managers to make difficult decisions and identifythe most and least talented members of the work group.

They create and sustain a high performance culture in which the

workforce continuously improves. Forced distribution is primarily used to eliminate rating errors such as

leniency and central tendency

Disadvantages

They increase unhealthy cut-throat competitiveness; They discourage collaboration and teamwork; forces discriminations between employees even where job performance

is quite similar

For this reason, raters and ratees do not readily accept this method,especially in small groups or when group members are all of high

ability.