Merck & Co.

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 Company Background
• Merck & Co is a pharmaceutical company headquartered in Rahway, New Jersey.
• The enterprise became incorporated in US in 1908.
• In 1953 merged with Philadelphia based pharmaceutical firm of Sharp & Dohme.
• Merck know for introduction of drugs such as Timoptic, Clinirol,Pepcis, Mevacor and
Vasotec.
• Selected as “Americas Most Admired Corporation” by Future Magazine from 1987 –
1990 .
• Ranked first in innovativeness, shareholder value, product quality and financial
soundness.
• Higher tan average return on assets.
• However, Merck’s ROA declined in early 1980’s and it performance lagged behind by
1983
• Causes were disappointing new products, inflation & changes in FOREX.
• Compensation for exempt salaried individuals ranked among the top 25% of large US
companies.
• Its progressive personnel policies & aggressive pay practices contributed to high levels
of employee loyalty and low turnover rates.
 Old Appraisal System
• Merck’s existing Performance Appraisal & Salary
Administration program was first introduced in 1978
• Employees rated on a scale from 1 to 5.
• Plus & Minus scores allowed resulting in 13 effective rating
categories.
• Scale was absolute – the rating assigned reflects only
individual performance independent of the performance of
other individuals
 Salary Determination under Old Plan
• Salary determined on basis of job characteristics & merit.
• Job characteristics measured on basis of Hay Points i.e. Numerical score
obtained for each individual on evaluating for factors- Know How, Problem
Solving & Accountability.
• Hay point converted to a control point
• E.g. Control Point =$1502 + $4.69 *(Hay Points)
• Actual salary is a percentage of the control point known as compa- ratio. It
ranges from 80% to 125%.
• Compa-Ratio increases on basis of merit but decreases only when salary
formula moves upward.
• Salary revision are linked to control point increases and performance ratings.
• Salary line formula revised
• Higher Performance Higher Pay,
• High Compa-ratio Low Raise
 Flaws in Old Appraisal System
• Small rewards for superior performance & Small penalties for
• Rewards for excellent performance were not adequate
• Outstanding performers getting salary increases only marginally better than average performers.
• Employee ratings were crowded together, only a few employees received the top rating 5, and
even less received the lowest rating.
• Outstanding performance not clearly identified.
• Managers reluctant to give high ratings.
• Managers afraid to give experienced people a rating of 1,2 or 3.
• Central tendency rating error results in marginal performers receiving rating 3 instead of 1 or 2.
• Appraisal system doesn’t differentiate outstanding performers from average performers as a result
of which employees demoralised & de-motivated.
• Since salaries are rarely decreased, compa-ratios may be above 100 for employees not performing
well as a result a high percentage of individuals show exceeding ratings even though organisation
just average.
• Managers subject to rating errors such as central tendency, leniency, personal prejudice &
strictness
• Supervisors uncomfortable in giving negative ratings & negative feedback.
• Possibility of losing star performers as they are not rewarded accordingly.
 Features of New Appraisal System
(introduced in 1986)
• Old numerical 13 point scale replaced by 5 categories
– EX: Exceptional within Merck
– WD: Merck standard with Distinction
– HS: High Merck Standard
– RI: Merck standard with room of improvement
– NA: Not adequate for Merck
• Performance measures relative to Merck peers.
• Performance Categories include:
– Specific Job Measure- Both Quantitative & Qualitative measurement
– Performance against planned objectives
– Management of People
• Targeted distribution of ratings for groups of more than 100.
• Evaluation conducted within a single month, making comparative analysis possible.
 Salary Determination under New
System
• Salary planning guidelines ( range of suggested merit pay increase for each
rating & compa-ratio category) change annually.
• Supervisors given the leeway to award 0% when no increase is warranted.
• Compa – Ratio targets pre-determined.
• Salary revisions can occur any time during the year with at least a gap of
12-14 months from the previous rating.
 New Appraisal Systems- Better than
The Old
• Targeted distribution system
– It forces reluctant mangers to make difficult decisions and identify the most & least talented
members of the working group.
– It creates & sustains a high performance culture in which the workforce continuously improves.
– It corrects the central tendency error
• Clear identification of outstanding performers from average performers.
• Performance categories expanded, making it more comprehensive. It appraises
performance on additional aspects.
• Appraisal done at the same time allows comparative analysis of performance
 New Appraisal Systems- Worse than The Old
• Targeted Distribution
– Increase unhealthy cut throat competitiveness
– Discourages collaboration & teamwork
– Demotivates employees & harm their morale.
• Not all job functions are the same therefore inaccurate to rate one person in comparison of
the other.
• Too much emphasis on the performance of employees relative to their peers & did not
sufficiently recognize individual contribution.
• Organisations do not hire a normal distribution of the performance, thus curve skewed to the
right.
• Forced distribution does not allow employees to challenge or rebut their performance
because to challenge ones own review would mean that another employees rating would
have to change.
• Managers forced to give one or more employee low (or high) rating even if employee doesn’t
deserve it.
• Median category too large: impossible to differentiate high end from low end
• Appraisal system subject to managerial abuse.
• Lacked more number of gradations as compared to old system, making small movements
difficult.
• Employees did not appreciate being labelled.
 Possible Changes
• Discontinue targeted distribution & relative performance measurement.
• Instead ,MBO system should be implemented where an employee has pre
determined short term goals to be met during the year and they are evaluated on
whether they meet them or not.
– Employees are rated by comparing their actual performance with expected
results.
– It also involves providing feedback for continuous improvement thus fostering
a culture of continuous development.
– Include individual rating for each goal and competency for a more accurate
overall rating as it is harder to misrepresent against a specific goal or
competency.
– Conduct calibration meetings to ensure consistency in the use of the ratings.
• Once ratings obtained, Salary Administration can be kept same i.e. Salary Planning
guidelines & Compa- Ratio Targets can be followed as mentioned
• Labels under which they are classified should be kept confidential
 Is Pay linked to performance in the
New System ?
• In the new system, employee’s performance in
comparison to peers is given importance. As a
result individual performance is not directly
linked to pay.
• Once ratings are determined, use of salary
planning guidelines and Compa-Ratio Targets
ensure that pay is closely linked to
performance.