FastCat

Phase III
Performance and Management

May 4, 2015
MGT 9420
Compensation
David Ortiz
Tatiana Villa
Arlena Yuen

Issue 1: Adjusting Green and Red Circle Employees

We recommend that FastCats approach begins by reviewing each employees work

records to help determine the employees 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 positions 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 caseby-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 employees 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 employees 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
higher bonuses to the high performers and ensure to communicate this consideration
2

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 organizations strategic goals. (e.g., Just working hard and doing busywork is not enough if that work doesnt support FastCats 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.

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 employees 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 employees
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
4

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

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.

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.

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.

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 FastCats 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 (FastCats 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

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. Organizations 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 FastCats 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 FastCats
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 FastCats financial situation, the
10

companys 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 companys 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
FastCats 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 onedimensional 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

11

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 companys 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
FastCats 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 companys 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.

12

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 FastCats 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

Pay grade 2: 0%-12% of gross salary

Pay grade 3: 0%-20% 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 FastCats 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 years 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.
13

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 employees 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 companys overall performance.
Furthermore, we should be clear that bonus can be calculated as a percentage of annual salary.
We recommend FastCats 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

14

were 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 FastCats bonuses to grow employees loyalty to the organization and to
motivate them for future higher performance. Additionally, compensation transparency was
recommended as one of FastCats 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 FastCats job structure and is
benchmarked against the Engineering Manager 2 job. Dobbins 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
15

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 companys 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 515%. 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

16

group of management or highly compensated employee. If FastCat wanted to offer this longterm 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 PPSPs 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.

17

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

Merit raise pool amount

Total payroll

5.00%

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

1
2
3
4
5

3.

$10000
$100000

Far exceeded expectations

Exceeded requirements
Met requirements
Met some requirement
Did not meet requirements

0.25
0.55
0.14
0.06
0

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

4th (top) quartile
3rd quartile
2nd quartile
1st quartile

0.3
0.22
0.21
0.27

4.

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

1
2
3
4
4th quartile
0.075
0.165
0.042
0.018
3rd quartile
0.055
0.121
0.0308
0.0132
2nd quartile
0.0525
0.1155
0.0294
0.0126
1st quartile
0.0675
0.1485
0.0378
0.0162
5.

5
0
0
0
0

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
4th quartile
3rd quartile
2nd quartile
1st quartile

0.0450
0.0625
0.0825
0.1025

0.0250
0.0375
0.0525
0.0675

0.0150
0.0225
0.0325
0.0425

0.0100
0.0125
0.0175
0.0225

0.0000
0.0000
0.0000
0.0000

6.

0.003375
0.004125
0.00063
0.00018
0.0034375
0.0045375
0.000693
0.000165
0.00433125 0.00606375 0.0009555
0.0002205
0.00691875 0.01002375 0.0016065
0.0003645
4.76% - actual merit increase budget
Exhibit III-1.1 Merit Increase Grid Worksheet Issue 2-a
18

0
0
0
0

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.
2.

Merit raise pool amount

Total payroll

Far exceeded expectations

Exceeded requirements
Met requirements
Met some requirement
Did not meet requirements

0.25
0.55
0.14
0.06
0

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

4th (top) quartile
3rd quartile
2nd quartile
1st quartile

4.

8.00%

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

1
2
3
4
5

3.

10000
100000

0.3
0.22
0.21
0.27

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

19

4th quartile
3rd quartile
2nd quartile
1st quartile
5.

1
0.075
0.055
0.053
0.068

2
0.165
0.121
0.116
0.149

3
0.042
0.031
0.029
0.038

4
0.018
0.013
0.013
0.016

5
0
0
0
0

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
4th quartile
3rd quartile
2nd quartile
1st quartile
6.

0.0756
0.1050
0.1386
0.1722

0.0420
0.0630
0.0882
0.1134

0.0252
0.0378
0.0546
0.0714

0.0168
0.0210
0.0294
0.0378

0.000
0.000
0.000
0.000

0.00567
0.00578
0.00728
0.01162

0.00693
0.00762
0.01019
0.01684

0.00106
0.00116
0.00161
0.00270

0.00030
0.00028
0.00037
0.00061

0
0
0
0

8.00% - merit increase budget

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

Merit raise pool amount

Total payroll

Far exceeded expectations

Exceeded requirements
Met requirements
Met some requirement
Did not meet requirements

0.1
0.2
0.4
0.2
0.1

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

4th (top) quartile
3rd quartile
2nd quartile
1st quartile

4.

5.00%

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

1
2
3
4
5

3.

10000
100000

0.3
0.22
0.21
0.27

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

1
2
3
4
20

4th quartile
3rd quartile
2nd quartile
1st quartile
5.

0.06
0.044
0.042
0.054

0.12
0.088
0.084
0.108

0.06
0.044
0.042
0.054

0.03
0.022
0.021
0.027

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
4th quartile
3th quartile
2th quartile
1th quartile
6.

0.03
0.022
0.021
0.027

0.0736
0.1022
0.1349
0.1676

0.0409
0.0613
0.0858
0.1104

0.0245
0.0368
0.0531
0.0695

0.0164
0.0204
0.0286
0.0368

0
0
0
0

0.00220725 0.0024525
0.002248125 0.00269775
0.0028326375 0.003605175
0.0045248625 0.005959575

0.002943
0.0032373
0.00446355
0.00750465

0.000981
0.00089925
0.001201725
0.001986525

0
0
0
0

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

Exhibit III-2.b. Merit Increase Grid Worksheet Issue 2-c
1.

Merit raise pool amount

Total payroll

10000
100000

5.00%

2.

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

1
Far exceeded expectations 0.1
2
Exceeded requirements
0.2
3
Met requirements
0.4
4
Met some requirement
0.2
5
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
0.22
2nd quartile
0.21
1st quartile
0.27

4.

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

1

3
21

4th quartile
3rd quartile
2nd quartile
1st quartile
5.

0.06
0.044
0.042
0.054

0.12
0.088
0.084
0.108

0.06
0.044
0.042
0.054

0.03
0.022
0.021
0.027

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
4th quartile
3rd quartile
2nd quartile
1st quartile
6.

0.03
0.022
0.021
0.027

0.0450
0.0625
0.0825
0.1025

0.0250
0.0375
0.0525
0.0675

0.0150
0.0225
0.0325
0.0425

0.0100
0.0125
0.0175
0.0225

0
0
0
0

0.00135
0.001375
0.0017325
0.0027675

0.0015
0.00165
0.002205
0.003645

0.0018
0.00198
0.00273
0.00459

0.0006
0.00055
0.000735
0.001215

0
0
0
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

22

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