For this assignment you will determine merit pay increases for the employees of an organization. All the information you need to complete this assignment is in this document. Examples are provided to you in the various steps. Your assignment is to replace the question marks (?) with answers as you proceed through the problem.

Your company has allocated a total merit budget of $600,000 for merit rewards.

Your company employs 400 people eligible to receive merit awards.

Your company uses a performance appraisal instrument with four potential ratings and an individuals quartile location in a pay range to make judgments about how much of a merit reward to allocate to an individual.

Lets use the following performance distribution for your companys employees:

O Excellent (30 percent)

O Above Average (35 percent)

O Average (20 percent)

O Below Average (15 Percent)

Lets assume a quartile range distribution for your companys employees as follows:

10 percent (.10) of employees are in the top (fourth) quartile of the pay range for the job

35 percent (.35) are in the third quartile

30 percent (.30) are in the 2^nd quartile

25 percent (.25) are in the lowest quartile

Let us assume for this example that the median for each of the 4 quartiles for the pay range are as follows:

Q4 $75,000

Q3 $40,000

Q2 $35,000

Q1 $30,000

Let us assume that an employees merit increase will be used by their location in the range quartile and by their performance appraisal ranking in the following manner:

Above Below

Excellent Average Average Average

Q4 ($75,000) 6% 5% 4% 0%

Q3

($40,000) 7% 6% 5% 0%

Q2

($35,000) 8% 7% 6% 0%

Q1

($30,000) 9% 8% 7% 2%

Step 1. Multiply the performance distribution by the range distribution to obtain the percent of employees in each cell. Cell entries = Performance X Range. For instance, the percent of employees whose performance rating is excellent and whose base pay falls in the 4^th quartile equals .03 (30 percent rated as excellent and 10 percent in the top (fourth quartile). For instance, the percent of employees whose performance rating is below average and whose base pay falls in the 1^st quartile equals .0375 (15 percent rated as below average and 25 percent in the 1^st quartile (lowest quartile). Obtain the percent of employees in all the remaining cells.

Step 2. Calculate the expected number of employees who fall into each cell. For this example assume that the company employs 400 people. For instance, the number of employees whose performance rating is excellent and whose base pay falls in the 4^th quartile equals 12 (400 x .03 percent). For instance, the number of employees whose performance rating is below average and whose base pay falls in the 1st quartile equals 15 (400 x .0375 percent). Obtain the expected number of employees who fall into each remaining cell.

step 3: Distribute the expected merit increase amount for each cell based in the following manner. Take the expected number of employees in cell x desired pay increase for cell (%) x the current median pay level for the range quartile. The expected number

of employees in each cell were determined in step 2 and the desired pay increase amount were identified in the assumptions of the organization.

For instance, as we learned from step 2 the number of employees whose performance rating is excellent and whose base pay falls in the 4^th quartile equals 12. As we learned from the organizational assumptions, the percentage merit increase to salary for individuals who receive an excellent rating and who are in the 4^th quartile of pay is 6%. As we learned from the organizational assumptions, the median income of individuals in the 4^th quartile of pay is $75,000. Multiplying those three figures together, (12 X .06 X $75,000), we learn that the total desired merit pay increase for all those receiving an excellent rating and falling in the 4^th pay quartile is $54,000.

For instance, as we learned from step 2 the number of employees whose performance rating is below average and whose base pay falls in the 1st quartile equals 15. As we learned from the organizational assumptions, the percentage merit increase to salary for individuals who receive a below average rating and who are in the 1st quartile of pay is 2%. As we learned from the organizational assumptions, the median income of individuals in the 1st quartile of pay is $30,000. Multiplying those three figures together, (15 X .02 X $30,000), we learn that the total desired merit pay increase for all those receiving a below average rating and falling in the 1st pay quartile is $9,000. Distribute the expected merit increase amount for each remaining cell.

Step 4. Total the sum of ALL the cells to determine the expected merit increase for the organization. The sum of all the cells to determine the expected merit increase is $???

Step 5. Compare the expected merit increase amount with the merit increase budget.

Step 6. Compare the sum of the expected merit increases determined in step 4 against the companys merit budgeted amount of $600,000. Is the expected merit increase amount OVER or UNDER the companys merit budget amount?

I disagree that employees should be paid more based on how long they have worked for the company. This is because people are more likely than ever to change jobs as a result of social change. The tendency for seniority pay to undervalue performance may be a drawback. The most talented and motivated employees might not find this appealing. Even so, I still think it belongs in the discussion.