Based on the case study below, I need help figuring out how to solve this:

1. As part of the old plan, the case notes that "salaries for exempt employees are based on a combination of job characteristics (as measured by Hay points) and merit." This requires comparing job descriptions at your company against "Hay factors" --- know how, problem solving, and accountability. As a first step, someone at Merck or at Hay would update job descriptions.

a. "Exempt employees" refers to exemption from what federal act?

b. What classification of job duties would exempt a typical Merck scientist?

Obviously, the law referred to I believe is the FLSA. I am stuck particularly on 1(b).

CASE STUDY:

Merck & Co., Inc. (A)

"It's very easy to develop a rational compensation system," argues Steve Darien, Vice President of Worldwide Personnel. "The problem is that people are not always that rational."

In March 1985, newly appointed Chief Executive Officer Dr. P. Roy Vagelos formed the Employee Relations Review Committee charged with the task of reviewing and evaluating personnel policies and practices at Merck. Chaired by Steve Darien, the task force included officers from almost every division, collectively supervising over 4,500 Merck employees.The committeewas chartered to:

Examine employee policies and practices to determine if they form an environment that encourages and rewards greater productivity and 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 determine whether they are being applied consistent with the objective set forth above and are achieving their intended results.

Over a period of six months, the committee reviewed Merck's policies and practices, visited other companies noted for outstanding employee relation programs, and met with 300 employees of

various rank in a variety of Merck sites across the United States and Canada.

In late 1985, Mr. Darien and the other members of the task force reviewed their findings as they prepared recommendations designed to improve Merck's employee relations environment.

Company History

Merck & Co., Inc., a pharmaceutical company headquartered in Rahway,New Jersey,has roots dating back to 1668 when Friedrich Jacob Merck bought a small apothecary in Darmstadt, Germany. The family business continued for centuries, expanding into full-scale drug manufacturing in 1827.Within thirty years, the German firm hadachievedan international reputation as asupplier of chemicals formedicinal uses.In 1887, Merck openedabranch office in New York City tomarket its German-produced pharmaceuticals, and in 1903 descendant George Merck launched chemical and drugmanufacturingoperationsatMerck'snewplant in Rahway.The enterprisebecame incorporated in the U.S. in 1908, and within the next decade all ties with the German company were severed.Merck continued to expand throughout the century, and in 1953 merged with the Philadelphia-based pharmaceutical firm of Sharp & Dohme.Today, Merck manufactures and markets more than 80 prescription pharmaceuticals and vaccines, and is the nation's largest providerof prescription medicines.

Merck's growth over the past several decades can be traced to major new prescription drugs. In the 1960s, Merck introduced Indocin (for rheumatoid arthritis) and Aldomet (to counter high blood pressure). These two drugs together soon accounted for a quarter of Merck's total sales. In the 1970s, Merck launched Timoptic (a glaucoma treatment), Clinoril (an arthritis painkiller), and Mefoxin (an antibiotic). The 1980s saw the introduction of Pepcid (for ulcers), Mevacor (for lowering cholesterol levels) and Vasotec (which in 1988 became the first Merck product to exceed $1 billion inannual sales). Merck launched seven major new medicines in 1986 and 1987 alone. Spurred by new product innovation, Merck annual sales grew from $218 million in 1960 to $6.6 billion in 1989.

Merck enjoys a reputation for fine management and was selected "America's Most Admired Corporation" by Fortune magazine for four straight years, 1987-1990. Fortune's 1990 rankings of 305 large corporations?based on a survey of nearly 8,000 senior executives, outside directors,andfinancial analysts?rated Merck first in innovativeness, shareholder value, product quality, and financial soundness. For the fourth year in a row, Merck received top marks for its ability to attract, develop, and keep talented people.

Merck has traditionally enjoyed a higher-than-average return on assets relative to its largest competitors (Exhibit A1). The early 1980s brought a decline in Merck's return on assets, and by 1983 Merck's performance began lagging behind the performance of other largepharmaceutical firms. Some causes of the declining performance were obvious, such as disappointing newproducts, inflation, and changes in foreign exchange rates. But newly appointed Chief Executive Officer Dr. P. Roy Vagelos sought to look deeper, and in March 1985 formed the Employee Relations Review Committee to review and evaluate personnel policies and practices at Merck.

Personnel Practices at Merck

From the beginning, Merck has been a global corporation?more than half of its 34,500 employees work outside theUnited States.Approximately 10,000ofits 18,000domesticworkforce are exempt salaried professionals employed in the human and animal health fields, including research professionals, marketing personnel, manufacturing employees, and corporate staff. Most of these employees (with the exception of about 3,000 field salespeople) are covered by the firm's Performance Appraisal and Salary Administration programs. In addition, a small number of research professionals are covered by a key innovator and key contributor stock option plan. (Eight thousand hourly, unionized, and non-exempt salaried workers are not covered by the same plan, but about 1,000 overseas employees are covered by the plan.) Compensation for exempt salaried employees at Merck has traditionally ranked among the top 25% of large U.S. companies. Merck's progressive personnel policies and aggressive pay practices have contributed to high levels of employee loyalty as characterized by historically low turnover rates.

PerformanceAppraisalunderthe Old PlanMerck's existing Performance Appraisal and Salary Administration program, itself a revision of an earlier program, was first introduced in 1978. Under

the plan, supervisors rated employees on a scale from one to five, with five designating exceptional performance and one indicating unacceptable performance. Pluses and minuses were allowed (excluding scores of 1- and 5+), thus supervisors effectively chose from thirteen different rating categories. The scale was absolute?the rating assigned to an individual was to reflect only that individual's performance independent of the performances of other employees.

SalaryDeterminationunderthe Old Plan.Salaries for exempt employees are basedon a combinationofjobcharacteristics(asmeasuredby"Haypoints") and merit. Hay points are determined by individually evaluating each position in terms of the three "Hay factors"?know how, problemsolving, and accountability.Numerical scores are assigned to each factor according to guidelines provided by Hay Associates, and the sum of these scores defines the Hay points for each position in the organization.

Hay points are converted to a "control point" (roughly an average monthly salary) using a salary line formula. For example, the 1986 salary line formula was:

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

Thus, a mid-level employee with 500 Hay points had a 1986 control point of $3,847 per month. The employee's actual salary can range from 80% to 125% of the control point; actual salaryasapercentage of the control point is called the employee's "compa-ratio." An employee with 500 Hay points and a compa-ratio of 90, for example, would have a 1986 monthly salary of $3,462. An employee's compa-ratio goes up each time he / she gets a merit increase, and falls whenever the salary line formula is moved upward (holding salaries constant).

John Markowski, Director of U.S. Compensation, explains that Merck sets the salary line formula so that employees with compa-ratios of 100 earn roughly seven or eight percent more than

average compensation (for similar Hay points) in other large firms:

"In determining Merck's overall compensation levels, Merck takes part in an extensivevarietyof salarysurveys each year. In May 1986, 920 industrial organizationssubmitteddatafor thissurvey.For comparative purposes, Merck selected only those companies with sales that exceed $1 billion, since these com- panies tend to be the higher paying ones."

The salary line formula is revised annually on April 1 so that control points for a particular position (quantified by Hay points) approximates pay at the 75thpercentile forsimilarpositions in the sample of large firms. Salaries are not automatically adjusted when the salary line formula changes; thus, individual compa-ratios generally decline every April 1 when control points are increased.

Salary revisions are linked to both control point increases and performance ratings through guidelines established by the personnel department. Employees with higher ratings tend to get larger pay increases, while raises for a given performance rating tend to be smaller for employees who have already attained a high compa-ratio. For example, the recommended salary revision for an employee rated 4+, 4, or 4- might be 5%-7% if her compa-ratio was in the 80-95 range, but only 3%-5% if her compa-ratio was in the 120-125 range.

Mr. Markowski points out that compa-ratios considerably above 100 "should indicate that the employee's performance level is consistently above the level of his / her Merck peers."In addition, since salaries are rarely decreased, compa-ratios may be above 100 in the short run for employeesnot performing well and, therefore, not being promoted. The maximum attainable compa-ratio is 125. Thus, salaries are effectively capped at 125% of the control point, and employees near the cap can only receive up to (but not surpassing) the cap.

practice, however, very few employees achieve and sustain compa-ratios exceeding 120. First,the salary line formula is adjusted prior to salary revisions. Thus even employees hitting the cap in a particular year will likely be well below the cap after the salary line changes on April 1. Second, employees with high compa-ratios are often strong candidates for internal promotions. Since it takes time to learn the skills required for a new position, the starting compa-ratio for a newly promoted employee is usually lower than his final compa-ratio in his prior position. For example, the average starting compa-ratio for all employees promoted into positions in the 400-600 Hay- point range during 1984-1985 was 87.

The Employee Relations Review Committee

The Employee Relations Review Committee ultimately made more than 50 recommendations in a number of areas including management training, recruiting practices, alternate work patterns, employment stability and communications. The most difficult issues, however, related to identifying and rewarding performance.

According to task force member Joe Keating, President of the Pharmaceutical Manufacturing Division:

"The thing that really struck us was the negative feeling of some of our best performers concerning rewards. We spent more time on the issue of rewarding excellence than on any other. The appraisal system was the most difficult issue of all, but it had to be dealt with."

There was general agreement among employees that rewards for excellent performance were not adequate: outstanding performers got salary increases that were, in many cases, only marginally better than those given to average performers. In many cases, outstanding performance was not even clearly identified.

The problem was that everyone had different ideas as to how to structure a performance appraisal system. The Employee Relations Review Committee got an earful about the existing appraisal system:

"Managers are afraid to give experienced people a 1, 2, or 3 rating. It's easier to give everyone a 4 and give new people a 3."

"I could walk on water and spit gold quarters and my supervisor wouldn't give me a 5; he never got a 5 so why should I get one?"

"There is no way to get rid of the 'deadwood.'They justhang in there with 3- ratings and no one will move on them. Marginal people aredrainingourstrength."

"What's the use of killing yourself? You still get the same rating as everyone else, and you still get the same 5% increase. It's demoralizing and demotivating."

"Charlie's been in that job for 20 years. He hasn't done anything creative for the last 15 years. Do you think my boss would give him a 3 rating? No way! Then,he'd have to spend the next 12 months listening to Charlie complain."

"Tell me this, how in the world can 83% of the people be exceeding job expectations while the Company, as a whole, is doing just average? It just doesn't make any sense."

"I'm the one who carries this department, and yet I get the same increase as everyone else. It's just not fair."

"A lot of these people get to the top of the range and just sit there sucking up merit money, because the boss is afraid to give them anything less than an average increase. Where's the equity?"

"How can I rate my people objectively when the other directors are giving all their people 4s? A 3 isn't acceptable. I wouldn't mind ifeveryone playedbythesame rules, but they don't."

"I'll be honest. It's getting to the point where some of the best people are going to walk out of here unless they get recognized and rewarded properly. Now, who do you want to do the walking? Your best people or your worst?"

The committee concluded that many of the complaints raised in the employeeinterviews could be traced to the way employees were evaluated under the existing performance appraisal program (see Exhibit A2):

"Veryfew employeesreceived ratings of 5.The vast majority of our employees were rated 3 or 4.There were only a few 2s, and even fewer rated as1(not performing well). What we had done was 'homogenize' our ratings by giving justabouteveryonethe same rating.Although some divisionswould assign uniformly higher ratings than others, there was very littledifferentiationamong people within a division and, as a result, very little differentiation in the rewards they received for their contribution to the Company.Someonewho hadan outstanding year rarely received an outstanding reward for those results because so many other peopleinthedivisionwererated the same. The Employee Relations Review Committee felt that certainly was not the way to encourage the kindofperformance we need to excel as a Company."

Exhibit Al Return on Assets for Merck and Merck's 10 Largest Competitors, 1970-1984 21.0% - 20.0% - 19.0% - 18.0% Return on Assets 17.0%- 16.0% - 15.0% - 14.0% - 13.0% - 12.0% - 11.0% - 10.0% - 1970 1971 - 1972 - 1973 1974 - 1975 - 1976 - 1977 - 1978 - 1979 1980 - 1981 - 1982 1983 - 1984 Year Note: Return on assets, defined as after-tax income plus interest divided by assets, obtained from Compustat. The list of Merck's 10 largest competitors (as measured by sales, SIC code 2834) has generally varied from year to year, due to takeovers, acquisitions, and different rates of growth. The companies depicted in the graph (and the years during which they were one of Merck's 10 largest competitors) are Abbott Laboratories (70-73, 75-84), American Home Products (70-84), Baxter International (85-84), Bristol-Myers (70-84), International Minerals & Chemicals (70, 71, 74-81), Johnson & Johnson (70-84), Eli Lilly & Co (70-84), Pfizer Inc (70-84), Schering-Plough (82), Smithkline Beckman Corp (80-84), Squibb (70-78, 84), Sterling Drugs (70-79, 83), Upjohn (72-74, 78-84), and Warner-Lambert (70-84).Exhibit A2 1985 Rating Distribution and Average Pay Increases under the 1978 Performance Appraisal and Salary Administration Program Average 1985 Pay Increase, by Compa-Ratio 1985 Number of Percentage Compa-Ratio Compa-Ratio Compa-Ratio Compa-Ratio Rating Employees Distribution 80.00-95.00 95.01-110.00 110.01-120.00 120.01-125.00 19 28% 8.3% 8.1% 6.5% 4.4% 5- 77 1.14% 4+ 709 10.53% P. 1,849 27.46% 6.5% 5.5% 4.8% 4.6% A- 1,427 21.19% 3+ 1,607 23.86% w . 694 10.31% 5.7% 4.0% 3.3% 3.5% 3- 200 2.97% 2+ 97 1.44% 2 44 65% 4.3% 1.3% 0.0% 0.0% 3 .04% 1+ 2 .03% - .09%