Background Information:

One of the major limitations or drawbacks of using a merit pay system is that it can creating significant organizational costs. Because merit pay increases are added back into an employees base pay, costs can quickly escalate from one year to the next, simply because pay increases are essentially reoccurring each year. For todays homework, you will be performing some basic calculations to illustrate the recurring cost nature of merit pay plans.

Instructions:

1. Refer to Table 3-9 on page 70 of your text, shown below:

At the end of 2015, Anne Brown earned $50,000 per year as a system analyst and John Williams earned $35,000 per year as an administrative assistant. Each received a 5% pay increased every year until the year 2020.

	Anne Brown ($)	John Williams ($)
2016	52,500	36,750
2017	55,125	38,587
2018	57,881	40,516
2019	60,775	42,542
2020	63,814	44,669

1. Under a merit pay system, calculate Annes salary based on a 7 percent annual increase through the year 2020. For John, apply a 3 percent annual increase rate. What are their adjusted salaries for each year?
2. Lets assume that both employees have reached the maximum pay rates for their jobs in 2015. Under a longevity pay system, calculate the annual longevity payments for each employee through the year 2020. Using a 5 percent rate for each, what will the annual increases amount to? What will their base pay rates be at the end of 2020?

	Anne Brown	John Williams
2016
2017
2018
2019
2020