phase 3 - performance and management - 05-04-2015

FastCatPhase III

Performance and Management

May 4, 2015MGT 9420

Compensation

David OrtizTatiana Villa

Arlena Yuen

Issue 1: Adjusting Green and Red Circle Employees

We recommend that FastCat’s approach begins by reviewing each employee’s work

records to help determine the employee’s short-term potential. The documents to review should

include current employment records, performance review material, salary history (if available),

and work history. Next, we recommend that FastCat perform a review of the position’s long-term

outlook within the organization. Hard to fill positions and positions that will remain must be

taken into consideration when deciding whether to make salary adjustments. While the approach

of reviewing employees is similar in practice, the outcome will vary. Therefore, we recommend

that FastCat follow a “vary by employee” policy for green circled employees. Utilizing a case-

by-case approach offers FastCat the flexibility to invest in certain employees and positions, thus

having the potential of higher employee returns when costs are strategically invested. Potential

disadvantages are employee’s feeling undervalued (if not adjusted) leading to turnover and

addition spending needing to backfill. Additionally, an inconsistent review practice and outcome

may result in legal implications if the practice has any adverse impact on any group of

employees.

Dobbins Consulting recommends that FastCat take a different approach with their red

circled employees. We propose FastCat follow a consistent “pay freeze” policy. This policy

freezes salaries until the market adjusts and the employee’s salary are no longer above the

respective range. At that time management can remove the red circle condition. Freezing red

circled salaries assists with controlling payroll costs, and at this current stage FastCat requires

policies and practices that are going to support cost control. During the salary freeze we

recommend FastCat offer career development opportunities. This is an added value to the

employees and to the organization. Lastly, we recommend that FastCat consider offering slightly

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higher bonuses to the high performers and ensure to communicate this consideration

appropriately. Disadvantages of a consistent red circle policy may come in the form of

frustration and potential lack of motivation to want to continue high level performance.

Furthermore, employees may perceive management as being unfair or take their importance to

the company for granted since their colleagues are earning salary increases.

Issue 2: Design a Merit Plan/Grid

5% Merit Increase Budget

Merit pay is a form of incentive pay plan to reward employees based on measures of

individual performance. Dobbins Consulting recommends that FastCat rewards employees’

behaviors that support the organization’s strategic goals. (e.g., Just working hard and doing busy-

work is not enough if that work doesn’t support FastCat’s strategic goals.) When determining the

allocation of 5% merit increase budget, each area within the merit grid, comprising of quartiles

and performance ratings were examined closely. A main concern was to remain within the

budgeted percentage. Further considerations included an analysis of different concepts

surrounding employee attitudes towards rewards in each area, and possible reasons why

employees could be ranked in each respective rating.

For employees with a performance rating of 5-Did Not Meet Requirements, we

determined salaries falling within each quartile are not eligible to receive merit increases. One

who is not meeting expectations exhibit qualities that are deemed detrimental to the goals of the

organization. Identified employees in this area are recommended to be placed on performance

improvement plans if they are not placed on corrective action in hopes to improve on their

performance and behaviors. Fortunately, this year FastCat did not have employees who fell into

this category.

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Employees with a performance rating of 4-Met Some Expectations will receive a merit

increase marginally within the range budget of 1%-2.25%. Although there is much improvement

needed at this rating level, Dobbins Consulting agreed merit increases are appropriate to

differentiate this set of employees from those with a performance rating of 5-Did Not Meet

Requirements. Those who were rated 4-Met some requirements were given a slight merit

increase in order to incentivize the small positive outcomes and encourage greater future

performance.

There are a number of reasons why an employee could be ranked in this level. Internal

examples could be that employees are new to the position and has not had the opportunity to

learn their role. The biases concept of the recency effect accounts for an employee’s most recent

behavior and performance as the primary focus of the performance rating. In addition, an

employee could have a new manager or poor management who may not know the employee’s

role and may have a different set of expectations that one may not be aware of. Externally, there

could be circumstances beyond the control of an employee that may cause him or her to not meet

part of their objectives such as delay in feedback from clients as a result halting projects that may

otherwise be implemented. The least amount of employees in FastCat are ranked under this

performance rating.

Dobbins Consulting recommends that the merit increases percentages grow at a slower

rate from rating 4 to 3 and 3 to 2, while from rating 2 to 1 have a larger growth in order to attract

employees to “Far Exceed Requirements.” See Exhibit III-1.1.

Fourteen (14%) of total employees fell under 3-Met Requirements. These employees

represent a group that exhibits potential to excel. Many of the reasons discussed in ranking 4

explaining why one would be ranked at that level pertains to this ranking as well. An employee

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may have a basic understanding of their role to achieve goals but not be fully functional in all

aspects of their role to progress at a pace that warrants distinction. However, with proper

guidance, coaching, and development opportunities these employees will be equipped to expand

in their performance. For these reasons, it is determined the merit increase range percentage

allotted to this ranking will range from 1.5%-4.25%.

Fifty five (55%), the majority of staff fell under the rating of 2-Exceeded Requirements.

This is important for an organization like FastCat, where initiative and innovation are greatly

valued. These employees are familiar with their roles and are valued performers that often go

beyond the expectations in their given role. Because they consistently achieve their goals and

often accomplish additional goals, the merit pay allocation is most appropriate to fall within

2.5%-6.75%, which sets apart those who are meeting just the minimum qualifications.

Furthermore, the ranking 5-Far Exceeded Expectations represent 25% of all employees.

These employees are top performers in the organization who are regarded as model employees

who consistently and substantially seek new opportunities to accomplish additional goals to

better FastCat. By exceeding expectations, they make a significant impact on the organization

and should be recognized considerably for their accomplishments and efforts. To properly

reward these distinguished employees, the investment merit increase budget range is appropriate

to range from 4.5%-10.25%.

To follow our compensation strategy of matching the market in terms of base salary, we

opted to offer the highest merit increase for those employees falling under quartile 1. The

increase percentages between quartiles 1 and 2 in comparison to quartiles 2 and 3 are the same at

2% for those rated 1-Far exceeded requirement, at 1.50% for those rated 2-Exceeded

requirements, at 1% for those rated 3-Met requirements, and at .50% for those rated 4-Met Some

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Requirements in order to aid in pushing base pay closer to the midpoint. For employees with

base salaries currently in quartile 3, which is a representation of salaries leading the market, by

moving into quartile 4, they earn a merit increase that is less than employees with base salary

lagging the market. See Exhibit III-1.1 Merit Increase Grid Worksheet Issue 2-a.

As potential downside to this approach we think that employees’ performance can be affected

by factors outside of their reach. Hence, employees might not find the performance review fair.

For example, an employee being rated on customer satisfaction while the product was created by

other teams. Another downside of the merit pay is that the employees can focus only on the

results in order to achieve the goals not on the means. Thus it can create unintended pressure.

Having other performance incentives can alleviate the pressure.

When building the merit increase percentages we took into account the 2014 CPI for

Minnesota, which was at 1.4%. As we can see in Exhibit III-1, the merit incentive percentages

for rating 4 at quartile 3 and 4 does not meet the CPI percentage. This can be viewed as treated

unfairly and lead to unmotivated pockets of staff.

8% Merit Increase Budget

Dobbins Consulting recommends the same approach described in 2-a, if the merit budget were

increased to 8%. With a 3% increased budget we distributed the increases proportionally across

the merit pay grid and obtained the results shown in Exhibit III-2 Merit Increase Grid

Worksheet Issue 2-b. The process followed is described below:

Example: We originally established Quartile 4 Performance Rating 1 having a 4.50%

increase. We multiplied the established increase by “x” percent to produce a value that will then

be added together again with the original established percentage.

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See calculations below:

Quartile 4 Performance Rating 1 = 4.50% (0.045) merit increase in the 5% Merit Grid

Increase Worksheet. Budget set at 5% in Issue 2-a, actual budget used is 4.76% as described in

Exhibit III-1 Merit Increase Grid Worksheet Issue 2-a. New Budget set at 8%. Thus the

budget increase is 68%.

Step 1: 0.045 * 0.68 = 0.0756 (New Merit Increase Percentage)

Step 2: Apply the same formula in step 1 to all remaining merit cells to obtain the new merit

increase percentage for each.

Going from a 5% pool to an 8% pool gives employees a higher merit increase, which can

serve as a great retention tool. Employees are motivated by high merit increases, thus they will

tend to perform better in order to achieve higher ratings. This slight improvement in overall

performance could reflect in slight productivity gains. Comparing these merit increase

percentages to industry benchmarks we may lead the market in merit base pay increase, which is

a value added to our organization.

However, from a short-term financial responsibility perspective, high merit increase

percentages will increase the annual base salary cost exponentially, causing restrained budgets in

other areas of total compensation such as benefits, perks, bonuses, and long-term incentive plans.

Also, once a large merit increase is given in one year, the employee will expect it repeatedly

throughout future years, especially if the business continues to be successful. Another downturn

of these high merit increase percentages will communicate that being rated a 4-Met Some

Requirements is appreciated and rewarded significantly. That can demotivate employees to

achieve proposed goals or to exceed them.

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Likewise, it is known that FastCat strives to build a teamwork environment; high merit

increase percentages will motivate employee to work individually, and will minimize the

importance of the Group Incentive Program proposed in earlier phases of the project. Also,

giving significant merit increase will result in high base salaries, positioning FastCat higher than

the proposed “match the market” strategy.

Dobbins Consulting recommends that FastCat stays at the planned 5% (4.76% actual

budget) merit increase budget. According to the Employee Engagement survey, FastCat leads by

5 points to the national survey on rewarding performance. Thus FastCat should concentrate on

other areas to improve, like building transparency. Given the financial situation, FastCat should

concentrate on achieving strategic goals without unnecessary added costs. Likewise, the data

given in the Employment Cost/Total Expenses table, show that for the current year the

employment cost has risen. Allocating an 8% merit increase budget will not help these

indicators. Lastly, increasing the merit budget by 3% will offer minimal ROI.

Forced Distribution

When a forced performance distribution was applied, we noticed a drop of 1.71% in

overall budget if the same merit increases percentages are kept as in Exhibit III-1 Merit

Increase Grid Worksheet Issue 2-a bringing our proposed budget in “2-a” from 4.76% to

3.04%. See Exhibit III-2.b. Merit Increase Grid Worksheet Issue 2-c.

In the initial performance rating, 55% of employees received a 2-performance rating,

versus the forced distribution where 40% of employees are forced in a 3-performance rating.

Overall, this results in a lower merit increase for the majority of the employees, since now more

employees are given a 4-performance rating or lower.

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If we have to allocate a 5% merit increase budget, we noticed that in this situation the

merit increase percentages grow significantly. See Exhibit III-2.a. Merit Increase Grid

Worksheet Issue 2-c. Adopting such a merit increase grid will give some employees a 16.76%

merit increase in base salary, and runs the risk of creating red circle rates in short amounts of

time.

Applying a forced distribution ranking approach to merit increases percentages definitely

contains employment costs. See Exhibit III-2.b. Merit Increase Grid Worksheet Issue 2-c.

Also, it helps in retaining strong performers and eliminating weak ones. Knowing that a forced

distribution is applied in performance reviews, managers will take more seriously the

performance management process. Lastly, this approach to performance management will give

employees a clear understanding where they stay and how their merit increase is calculated.

However, on the other side by creating this high performance driven environment FastCat

might run the risk to demoralize staff. Employees will be less willing to help others or to

participate in team projects, which is crucial for FastCat’s development and advancement.

Additionally, high merit increase percentages, that resulted in Exhibit III-2.a. Merit Increase

Grid Worksheet Issue 2-c will drive employees to compete instead of cooperating and building

partnerships amongst each other. According to our research, a forced distribution approach to

performance management is recommended for small groups (40 or less). As we know FastCat

strive to grow and expand (FastCat’s main three strategies), applying such an approach to

performance management will diverge from the overall vision of the company and its strategic

and proposed compensation goals.

Given the same 5% merit pool but conditioned by the forced distribution of employees,

Dobbins Consulting decided to remain at the same merit percentage increases as proposed in

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Exhibit III-1 Merit Increase Grid Worksheet Issue 2-a. We noticed that by using a forced

distribution of employees, we are able to reward same merit increases percentages but using less

of the budget See Exhibit III-2.b. Merit Increase Grid Worksheet Issue 2-c. If we would have

to stay at 5% merit increase pool, we would have to adjust the merit increase percentages to

higher values. See Exhibit III-2.a.-Merit Increase Grid Worksheet Issue 2-c. As mentioned

before, this can result in rapid increases in base salaries for certain employees and placing them

in red circle rates. The overall base salary strategy is to meet the market, thus, rapid increases

will derail this strategy to leading the market in base salary.

Dobbins Consulting recommends the merit increase percentage grid proposed in Exhibit

III-1 Merit Increase Grid Worksheet Issue 2-a as the final grid. Organization’s mission and

vision support and encourage an innovative workforce that works together as a team.

Implementing a forced distribution rating would foster a competitive and individualistic

environment, which derails from FastCat’s vision and from our earlier proposed compensation

strategies.

Issue 3 – Recommend a Strategy for Recognizing Performance (besides Merit Pay)

There is an endless plethora of individual and group incentive plans that reward

performance. However, all options must be carefully considered based on FastCat’s

compensation objectives, financial situation, culture, and competitive strategy in mind. Some

plans may better suit FastCat more so than others, while some may not work at all within the

organization.

Although FastCat experienced an increase in revenue growth, the company did not do as

well as they anticipated. The shortcoming was a result of considerable investment towards

employment costs of hiring a staff of 200 employees. Despite FastCat’s financial situation, the

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company’s success is evidently tied to the quality talent residing within the organization as

surfaced in the employee engagement survey. Therefore, it is determined by Dobbins Consulting

that it is in the company’s best interest to adhere to the original established compensation goals

to provide discretionary salary enhancements in the form of lump sum bonus for employees who

develop new skills and knowledge, rewarding innovation within the engineering group and

exceptional service with the business support job structures which will be determined by their

supervisor. Our consulting team also recommends paid time off reward as a cost effective means

to incentivize individual performance. In addition, a long-time incentive plan (LTIP) will be

introduced to target employees identified by the company as high potential staff, comprising of

business leaders and experts in their field whose departure would significantly impact the

business. Eligibility into this plan will be based on demonstrated performance and compensated

according to longevity milestones.

As pay transparency is important to FastCat, all eligibility requirements for incentive

plans will be clearly defined and outlined to ensure a clear line of communication. These

incentives allow employees at all levels the opportunity to maximize their productivity beyond

set expectations and continually foster a working environment that builds on institutional

knowledge so that employees can grow their career at FastCat. The sorting effect of these

incentives can be used to attract and retain high achieving candidates.

On the other hand, there are some individual incentive plans that are not suitable for

FastCat’s business operations. One form of incentive plan that does not make sense for FastCat

to have is a piece-rate incentive. The responsibilities at FastCat vary greatly that this one-

dimensional incentive makes it difficult to evaluate productivity effectively. Even if the plan is

measurable to an extent, this method drives focus away from the importance of teamwork in the

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company since individuals would want to excel in individual results, which can be controlled on

an individual basis. Moreover, another incentive plan we do not recommend is individual spot

awards. Having such incentive will additionally shift the focus of teamwork to an individual

basis such that milestones and major accomplishments would be recognized on an individual

basis rather than as a group.

FastCat not only values individual contributions but the true reality of the business

requires individuals to successfully work as a team to carry-out the company’s mission and

business objectives. As previously discussed in our earlier phase findings, the Business Support

and Engineering structures are not efficiently collaborating. In order to bridge the disconnect,

and to encourage and reward group productivity and successes, a Success Sharing plan will be

introduced. Such plan will support the common goals to be achieved collectively that will unite

FastCat’s compensation objectives to meet its business objectives. A Group Incentive Plan will

be designed to allow all employees across the board to have a stake in the success of the FastCat

organization if the business is successful to be measured by a myriad of factors. However, such

financial rewards would either be limited or withheld during the company’s underperforming

years. The sorting effect of this benefit could attract risk adverse candidates, therefore causing

the company to turn away qualified top quality candidates. This concern can be mitigated during

the recruitment process by providing clear expectations of the role and subjectively screening

candidates during the hiring process.

As FastCat is a growing business and is presently not a publicly traded firm, restricted

stocks, stock options, and restricted stock units are forms of group incentives that are not

conceivable at this time.

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Issue 4: Group-based Pay

Dobbins Consulting produced the external market reports for the Engineering group and

summarized the information into table Exhibit III-3 External Market Bonus Summary. We

reviewed the market data for these jobs and sorted it by the respective pay grades. Our research

indicates that the market for pay grade 1 positions have a bonus-to-salary ratio range from

2.49%-7.94%. Pay grade 2 carries a bonus-to-salary ratio range from 5.64%-11.52%, and pay

grade 3 from 5.63%-10.95%. See Exhibit III-4 Bonus to Salary Ratio table for further

reference. For FastCat’s internal practices we recommend the following bonus-to-salary ratio for

each position within their respective pay grade.

Pay grade 1: 0%-8% of gross salary



Our recommendation is shaped by our external competitiveness strategy as proposed in

Phase II, where the recommended short-term incentive plan (bonus) is expected to lead the

market in total cash payout. Offering a ratio range higher than the market supports FastCat trying

to achieve their compensation objectives. 88% of FastCat’s direct competitors identified in Phase

II offer a bonus program, and according to the market report each position earned a bonus. In

terms of eligibility at FastCat we recommend a consistent prorated eligibility approach for all

pay grade levels. Eligibility revolves around date of hire for the given calendar year. FastCat

employees hired prior to October 1 are eligible for that year’s bonus pool, while employees hired

on or after October 1 are ineligible and must wait until January 1 the following year. Following

this method of eligibility is fair, consistent, and allows the organization the ability to

appropriately forecast total compensation costs when workforce planning.

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We propose an annual pay frequency which occurs after the close of the fiscal year. The

fiscal year runs from January 1 to December 31, and pay out of such bonus would occur by

March 15th of the following year. This proposal allows FastCat to deduct the annual bonus for

the prior calendar year. Cautiously, we urge FastCat owners to speak with their tax attorney to

ensure they are complying with Internal Revenue Code (Sec. 461). While employees may be

eligible for a bonus in their respective pay grade, it is not a guaranteed part of their total

compensation. To ensure consistency and accuracy, it is suggested that a bonus payout scale is

developed and tied to performance measurables achieved during the year. Our proposed

threshold does not allow employee’s with a performance rating of 5-Did Not Meet Requirements

to earn a bonus, while employees with a rating from 1 to 4 will earn a bonus for their

contribution. We are advising FastCat against rewarding for no contribution. It sets a precedent

to other employees that they will receive a reward even if they do not meet their performance

objectives.

The amount of the respective bonus-to-salary ratio (i.e., 0%-8%) employees will earn is

dependent on the results of their performance rating and company’s overall performance.

Furthermore, we should be clear that bonus can be calculated as a percentage of annual salary.

We recommend FastCat’s bonus-to-salary ratio be tied to the gross salary earned for the given

year, as opposed to the annual base salary, commonly found in employment offer letters. Lastly,

we recommend FastCat does not implement a bonus-to-salary cap, or ceiling, for any of the

bonus-to-salary ratios we proposed. Since the annual bonus pool amount is a percentage of profit

after expenses, FastCat finance executives are expected to stay within the allotted bonus pool

budget. Placing a cap on bonus payouts will have an opposing impact on the reward strategy

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we’re proposing, where FastCat is asking and promoting employees to enhance their innovation,

teamwork efficiency, and productivity.

Our recommendation is based on building a sound tradition at FastCat surrounding the

distribution of bonuses shaped by the eligibility, thresholds, caps, and payout frequency

proposals. A poorly defined bonus structure will be based on politics or favoritism rather than

employee contribution, which may have a drastic impact on employee morale and financial

controls. We want FastCat’s bonuses to grow employee’s loyalty to the organization and to

motivate them for future higher performance. Additionally, compensation transparency was

recommended as one of FastCat’s compensation strategies during Phase 1. We want to ensure

employees can trust our internal compensation practices and guidelines which includes how the

bonus payout is formulated. When FastCat employees are asking why they earned the bonus

amount they did, line managers and human resources can confidently and comfortably

communicate our compensation practices since there will be a formal process in place. We

believe our recommended bonus structure is justifiable in the eyes of the recipient and holds

merit in how it will be managed.

The Senior Fellow is the most important job within FastCat’s job structure and is

benchmarked against the Engineering Manager 2 job. Dobbin’s Consulting reviewed the external

market information for the Senior Fellow and observed the following stock option component.

86% of employees in this job received stock options worth approximately 70% of the base

salary. This equates to a stock option mean of $103,176.36.

After researching several long-term incentive plan options, Dobbins Consulting is

recommending the initiation of a Performance Phantom Stock Program (PPSP) at FastCat,

specifically for the Senior Fellow. It is expected that the Senior Fellow will be motivated by such

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a program and will want to continue working (sorting effect) for FastCat under these provisions.

A PPSP is a promise from the company to pay an amount of cash (bonus) equivalent to the value

of the company’s stock/shares or the appreciation of the value of stock/shares over a period of

time. It is a way for FastCat to share a stake in the company. Most importantly, FastCat owners

can avoid the risks of having additional owners or shareholders.

Dobbins Consulting recommends the PPSP include two different performance based

foundations. First, FastCat executives must decide on the performance targets they wish for the

Senior Fellow to achieve. Secondly, executives must set expectations of the potential

improvement in value of the phantom stock (appreciation). The target size of the payout is

proposed at five percent (5%) of the new value of the stock using the rule of thumb between 5-

15%. We propose using net income as the indicator of value in FastCat, and utilize $8.9 million

as the annual value expecting to reach $13.0 million (+46%) in net income over a five year

spread. The target size of payout would be $615,000 if the Senior Fellow were to meet the two

performance based objectives discussed in our proposal.

Furthermore, Dobbins Consulting recommends a five year vesting schedule to match the

number of years FastCat expects to be able to reach the financial goals. The schedule will build

incrementally at twenty percent (20%) for each vesting year, making the Senior Fellow eligible

to earn up to $123,000 per year, for five years, in Phantom Stock payout. The $123,000 is 86%

of the Senior Fellows base salary ($142,903), and would lead the external market when

compared to stock option dividends at our competitors.

Dobbins Consulting would like to note the disadvantages to offering a Performance

Phantom Stock Program. The Employee Retirement Income Security Act (ERISA) states that a

PPSP is a Non-Qualified Deferred Compensation plan, and it can only be offered to a “select

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group of management or highly compensated employee.” If FastCat wanted to offer this long-

term incentive plan to the company, in lieu of a success sharing plan bonus, FastCat will be

unable to or need to offer a plan that is governed by ERISA. Lastly, when PPSP’s are paid out

they are treated as bonuses (taxable income), therefore the same income tax regulations apply.

Most senior employees participating in a PPSP would prefer to defer these payments until

retirement, and not incur the high tax burden.

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Appendix

Exhibit III-1 Merit Increase Grid Worksheet Issue 2-a

1. Merit raise pool amount $10000Total payroll $100000 5.00%

2. Distribution of performance ratings (what percentage of employees got each rating?)

1 Far exceeded expectations 0.252 Exceeded requirements 0.553 Met requirements 0.144 Met some requirement 0.065 Did not meet requirements 0

3. What percentage of employees is in each quartile of the pay distribution?

4th (top) quartile 0.33rd quartile 0.222nd quartile 0.211st quartile 0.27

4. Multiply to get the estimated % of employees in each cell.1 2 3 4 5

4th quartile 0.075 0.165 0.042 0.018 03rd quartile 0.055 0.121 0.0308 0.0132 02nd quartile 0.0525 0.1155 0.0294 0.0126 01st quartile 0.0675 0.1485 0.0378 0.0162 0

5. Decide merit raise percentages to allocate to people in each part of the grid.This will be the final merit pay grid given to managers to communicate merit raises to employees.

Performance Ratings

1 2 3 4 5

4th quartile 0.0450 0.0250 0.0150 0.0100 0.00003rd quartile 0.0625 0.0375 0.0225 0.0125 0.00002nd quartile 0.0825 0.0525 0.0325 0.0175 0.00001st quartile 0.1025 0.0675 0.0425 0.0225 0.0000

6. 0.003375 0.004125 0.00063 0.00018 00.0034375 0.0045375 0.000693 0.000165 00.00433125 0.00606375 0.0009555 0.0002205 00.00691875 0.01002375 0.0016065 0.0003645 04.76% - actual merit increase budget

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Exhibit III-1.1 Merit Increase Grid Worksheet Issue 2-a

This will be the final merit pay grid given to managers to communicate merit raises to employees.

Exhibit III-2 Merit Increase Grid Worksheet Issue 2-b

1. Merit raise pool amount 10000Total payroll 100000 8.00%


1 Far exceeded expectations 0.252 Exceeded requirements 0.553 Met requirements 0.144 Met some requirement 0.065 Did not meet requirements 0



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4. Multiply to get the estimated % of employees in each cell.

1 2 3 4 54th quartile 0.075 0.165 0.042 0.018 03rd quartile 0.055 0.121 0.031 0.013 02nd quartile 0.053 0.116 0.029 0.013 01st quartile 0.068 0.149 0.038 0.016 0

5. Decide merit raise percentages to allocate to people in each part of the grid.This will be the final merit pay grid given to managers to communicate merit raises to employees if the 8% budget merit increase is chosen.

Performance Ratings

1 2 3 4 5


6. 0.00567 0.00693 0.00106 0.00030 00.00578 0.00762 0.00116 0.00028 00.00728 0.01019 0.00161 0.00037 00.01162 0.01684 0.00270 0.00061 0

8.00% - merit increase budgetExhibit III-2.a. Merit Increase Grid Worksheet Issue 2-c



1 Far exceeded expectations 0.12 Exceeded requirements 0.23 Met requirements 0.44 Met some requirement 0.25 Did not meet requirements 0.1



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4. Multiply to get the estimated % of employees in each cell. 1 2 3 4 5


5. Decide merit raise percentages to allocate to people in each part of the grid.This will be the final merit pay grid given to managers to communicate merit raises to employees if a forced distribution performance rating will be chosen.

Performance Ratings

1 2 3 4 5

4th quartile 0.0736 0.0409 0.0245 0.0164 03th quartile 0.1022 0.0613 0.0368 0.0204 02th quartile 0.1349 0.0858 0.0531 0.0286 01th quartile 0.1676 0.1104 0.0695 0.0368 0

6. 0.00220725 0.0024525 0.002943 0.000981 00.002248125 0.00269775 0.0032373 0.00089925 00.0028326375 0.003605175 0.00446355 0.001201725 00.0045248625 0.005959575 0.00750465 0.001986525 0

4.97% - merit increase budget if a forced distribution performance approach applied

Exhibit III-2.b. Merit Increase Grid Worksheet Issue 2-c


2. Distribution of performance ratings (what percentage of employees got each rating?)1 Far exceeded expectations 0.1

2 Exceeded requirements 0.23 Met requirements 0.44 Met some requirement 0.25 Did not meet requirements 0.1

3. What percentage of employees is in each quartile of the pay distribution?4th (top) quartile 0.3

3rd quartile 0.222nd quartile 0.211st quartile 0.27

4. Multiply to get the estimated % of employees in each cell.

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1 2 3 4 54th quartile 0.03 0.06 0.12 0.06 0.033rd quartile 0.022 0.044 0.088 0.044 0.0222nd quartile 0.021 0.042 0.084 0.042 0.0211st quartile 0.027 0.054 0.108 0.054 0.027

5. Decide merit raise percentages to allocate to people in each part of the grid. This will be the final merit pay grid given to managers to communicate merit raises to employees if a forced distribution performance rating approach would be recommended and percentage merit increases same as in Exhibit III-1 Merit Increase Grid Worksheet Issue 2-a.

Performance Ratings

1 2 3 4 5

4th quartile 0.0450 0.0250 0.0150 0.0100 03rd quartile 0.0625 0.0375 0.0225 0.0125 02nd quartile 0.0825 0.0525 0.0325 0.0175 01st quartile 0.1025 0.0675 0.0425 0.0225 0

6. 0.00135 0.0015 0.0018 0.0006 00.001375 0.00165 0.00198 0.00055 00.0017325 0.002205 0.00273 0.000735 00.0027675 0.003645 0.00459 0.001215 0

3.04% - actual merit increase budget if a forced distribution applied while recommending the same percentage merit increases as in Exhibit III-1 Merit Increase Grid Worksheet Issue 2-a.

Exhibit III-3 External Market Bonus Scheme Issue 4

Exhibit III-4 Bonus to Salary Ratio Issue 4

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phase 3 - performance and management - 05-04-2015

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