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    Managerial accounting questions - Merck

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    Merck & Co., Inc. (A)

    1. What are the major problems with Merck's performance appraisal and salary administration program?

    2. How are the levels of salaries determines at Merck? What's a campa-ratio?

    3. Is pay for performance exists under the current system?

    4. Would an employee with superior performance year after year keep receiving higher and higher pay increase?

    5. What changes would you recommend?

    Merck & Co., Inc. (B)

    1. What are the key features of Merck's revised plan?

    2. What problems under the old system are solved or mitigated by the new system?

    3. What new problems arise under the new program?

    4. When might relative performance systems be preferred?

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    Solution Preview

    (1) The major problems were:
    - rewards for excellent performance were not adequate;
    - "homogenization" of performance ratings;
    - salary of outstanding performers was only marginally higher than of those with average performance;

    (2) The levels of salaries are determined by Hay points (determined by Hay factors - know how, problems solving, accountability) and merit. Then Hay points are converted into the Control point and actual salary ranges between 80% and 125% of the control point.
    Compa-ratio is the actual salary as a percentage of the control point.

    (3) Pay for performance exists in the form of the pay increase based on performance ratings. ...

    Solution Summary

    The solution looks at managerial accounting questions. The problems that arise under a new program is discussed.