Introduction
Merck & Co., Inc., a major pharmaceutical company was originally a family owned business in Germany. In 1887, Merck opened an office in New York City. The enterprise became incorporated in the US in 1908. Today, Merck manufactures 80 prescription pharmaceuticals and vaccines. At one time Merck grew from $218 million in 1960 to $6.6. Billion in 1989.
Merck’s Mission Statement is as follows:
The mission of Merck is to provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return.
For years Merck received many awards from Fortune magazine for best employer. In 1983, Merck experienced a decline and began to lag behind their competition. In 1985 the Employee Relations Review Committee was established. This committee is in the process of reviewing and evaluating its personnel policies and practices, and evaluating adequate communication to employees, and if the policies and practices are effectively being applied consistently with the employee’s objectives and results.

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The committee examined employee policies and practices to determine if they created an environment that encourages and rewards greater productivity and employee excellence. Employee interviews revealed that rewards for excellent performance were not adequate: outstanding performers received salary increases that were, in many cases, only marginally better than those given to average performers. The majority of the employees received a rating of 3 or 4, there was very little differentiation among the organization. In many cases, outstanding performance was not even clearly identified.
The second area that the committee examined was to determine whether policies and practices are being adequately communicated to employees and clearly understood by all. And most importantly were the policies and practiced were achieving the organizations goals. The committee felt “that was certainly was not the way to encourage the kind of performance we need to excel as a Company.” (page 5)
For this case study, I will review common problems of performance appraisal systems, why employees may not be rated objectively based on their performance, performance appraisal techniques, Competency-Based, MBO, Force-Ranking, Merit Grid, training, communication and recommendations for improving Merck’s performance management process.
A company’s performance management
A company’s performance management process serves as an important foundational component for managing talent and allocating rewards. From a talent management perspective, performance management programs should facilitate the identification of high-potential employees, guide career development and contribute to succession planning decisions. From a productivity and pay perspective, performance management continues to be the most direct way for management to communicate with employees about objectives and link employee performance goals to business goals. Such communication helps ensure employees understand their job definitions.
In 1978 Performance Appraisal Program was not identifying the top and bottom performers in the organization. Compensation was determined by characteristics of the job called Hay factors; -know how, problem solving, and accountability (base level salary) and merit (measured by performance ratings). There were little differences in rewards for great and poor performers.
After revisions in 1986, Merck mandated that performance evaluation be distributed across 5 categories. This was done to help distribute the awards closely related to employee performance and contribution to the organization. The scales changed from absolute to that of relative performance measures were to be used moving forward.
For years Merck has been assigning ratings on a scale from 1 to 5, based on absolute performance) this would only reflect the individuals performance from that of others) and were unrestrained. Employee ratings were crowded together; only a few employees received the top rating 5, and even less received the lowest rating. It is suggested that the salary plan be revised and tied to the comparative performance ratings and relation pay increases. As shown in Exhibit A2, most of the employees (93%) received ratings from 3 to 4+ and only 6 received the lowest ratings of 1. This also shows most employees are grouped together into few rating categories. This tight distribution of ratings in Exhibit A2 in part reflects ineffective performance appraisals by the managers. It also indicates few employees whose performance were generally received small rewards for superior performance and small penalties for low performers.
Employee interviews revealed high levels of employee dissatisfaction over the performance appraisal system. “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’ demoralizing and de-motivating.” The committee then “felt that certainly was not the way to encourage the kind of performance we need to excel as a company.” At this time Merck had a performance management system that was not working for them.
Merck needs a performance management system that promotes a performance culture in which the performance and contributions of the workforce are recognized and rewarded more accurately and fully.
Common Problems of Performance Appraisal Systems
Oberg(1972) identified some common problems that interfere with the success of appraisal program.
Performance appraisal may be viewed as demanding too much from supervisors – difficult for the first line supervisor to know what each one is doing.
Standards and ratings tend to vary with some raters being tough and others more lenient.
An appraiser may replace organizational standards with personal values and bias.
Because of lack of communication, standards which the employee thinks he is judged with are sometimes different from those their supervisors actually use.
Appraisal techniques tend to be used as performance panaceas and cannot replace sound selection, placement and training programs.
The validity of the ratings may be reduced by supervisors resistance to making the ratings, due to the discomfort they feel when having to confront the employee with negative ratings and negative feedback.
Ratings can boomerang when communicated to employees because negative feedback fails to motivate the typical employee and may cause that employee to perform more poorly.
Performance appraisal may interfere with the more constructive coaching relationship between the supervisor and the employee. Supervisors may see the evaluation process as placing them in role of judge.
Despite its standard practice in most public and private organizations for more than 50 years, performance appraisal still has many problems. Raters show resistance to criticizing subordinates, and the judgmental aspect of evaluating human performance is subject to both covert (subjective and individual) and overt (prejudice and bias) errors. Raters often aren’t trained in employee counseling and may be forced to conduct performance appraisals with inadequate or erroneous information about ratee performance. In order to make a performance appraisal system effective and successful, an organization comes across various challenges and problems.
The main challenges involved in the performance appraisal process are:
Determining the evaluation criteria
Create a rating instrument
Lack of competence
Errors in rating and evaluation
Resistance
Why employees may not be rated objectively based on their performance
The problem with subjective measure is the rating which is not verifiable by others and has the opportunity for bias. The rate biases include:
(a) halo effect,
(b) the error of central tendency,
(c) the leniency and strictness biases,
(d) personal prejudice, and
(e) the recent performance effect
Halo Effect: It is the tendency of the raters to depend excessively on the rating of one trait or behavioral consideration in rating all others traits or behavioral considerations. One way of minimizing the halo effect is appraising all the employees by one trait before going to rate on the basis of another trait.
The error of Central Tendency: Some raters follow play safe policy in rating by rating all the employees around the middle point of the rating scale and they avoid rating the people at both the extremes of the scale. They follow play safe policy because of answerability to management or lack of knowledge about the job and person he is rating or least interest in his job.
The Leniency and Strictness: The leniency bias crops when some raters have a tendency to be liberal in their rating by assigning higher rates consistently. Such ratings do not serve any purpose. Equally damaging one is assigning consistently low rates.
Personal Prejudice: If the rater dislikes any employee or any group, he may rate them at the lower end, which may distort the rating purpose and affect the career of these employees.
The Recent performance Effect: The raters generally remember the recent actions, of the employee at the time of rating and rate on the basis of these recent actions favorable or unfavorable than on the whole activities.
Based on the employee interviews, I believe the employees felt the appraisal is based on subjectivity, not reliable and the “in the middle” ratings affect interpersonal relations and produced setbacks for the organizations. Most of the employees walked away from the process thinking that the management purely based their ratings on guess work. This could be corrected by training raters to rate more accurately
Rater-error training to reduce psychometric errors
Performance dimension training
Performance-standard training
Performance Appraisal Techniques
There are four main techniques for the process of performance management

Comparative; using ranking, forced distribution, paired comparison
Attribute; graphic rating scales, mixed standard scales
Behavioral; critical incidents, BARS and essay
Results; use of MBO

Performance appraisal is a multistage process involving several activities, which can be administered using a variety of approaches. Some of these approaches are considered below, based on Einstein and LeMere-Labonte, 1989; and Monga, 1983
Intuitive approach; In this approach, a supervisor or manager judges the employee based on their perception of the employee’s behaviour.
Self-appraisal approach; Employees evaluate their own performance using a common format.
Group approach; The employee is evaluated by a group of persons.
Appraisal based on achieved results In this type of approach, appraisal is based on concrete, measurable, work achievements judged against fixed targets or goals set mutually by the subject and the assessor.
Behaviourial method; This method focuses on observed behavior and observable critical incidents
Competency-Based
Another significant feature of a Performance Management Program is the competency-based framework. The HR should take extensive efforts to identify and validate core performance competencies (i.e., measurable or observable knowledge, skills, abilities, behaviors, and other characteristics required by a position) that apply broadly to many, if not all, of the positions at Merck.
MBO
Management by objectives is both a planning and appraisal tool that has many different variations across firms. As a first step, organizations objectives are identified from the strategic plan of the company. Each successful lower level in the organizational hierarchy is charged with identifying work objectives that will support attainment of organizational goals. At the beginning of a performance review period, the employee and the supervisor discusses performance objectives. At the end of the review period, the two again meet to record results, they are then compare against objectives, in a performance rating is determined based on how well the objectives were met. The MBO portion of the performance review is regularly updated to ensure the individual objectives are lined with corporate and department goals. MBOs provide direction, improve the planning process, and increases employee manager communication. Using a measurement-based performance appraisal process is the most objective approach to evaluating employees. One of its significant advantages is that it makes the process predictable for employees; they’ll know just what they need to do to earn rewards. And placing the focus on objective financial, productivity, quality, or customer outcomes is much more useful than focusing employees on pleasing their managers.
Force-Ranking
I would recommend a “Force-ranking” where each manager goes through his or her list and shares the names that appear in each grade level. As they discuss and justify their classifications, others on the management team may challenge the manager when they have a different perspective on or evaluation of an employee. The management team incorporates any reclassifications and arrives at a final grouping of the employees by their level of performance.
Force-ranking employees into top-, middle-, and bottom-performing groups have intensified this process in some companies. General Electric sorts employees into these three categories, then systematically weeds out the bottom 10%. Other companies have adopted forced-ranking evaluation systems too, including IBM, Hewlett-Packard, Ford, and Sun Microsystems. This method is somewhat controversial in some organizations. Although the process actively differentiates performance in the workplace the key to effective staffing reviews is not in the ranking, but in the discussions about it.
Merit Grid for Employee Increases
Developing a Merit Grid for employee increases will provide Merck away for tying pay to their appraisal performance. It will determine what the poorest performer increase should be, what the average and top performers should be paid as an increase. It also differentiates between different levels of performance. Merit Grids Combine 3 Variables: Level of Performance, Distribution of Employees Within Pay Ranges, and Merit Budget Increase Percentage.
The most recent survey data indicates that 94 to 95 percent of private-sector companies have merit pay programs to provide individual pay increases to their eligible (“exempt”) employees, and 71 percent of companies have merit pay programs for their nonunion hourly employees. Performance appraisal is at the heart of merit pay plans. Although there are numerous variations in systems labeled as merit plans, some sort of rating of each employee’s performance precedes compensation decisions.
The plan is tied to a management-by-objectives system of performance appraisal for exempt employees and a work standards or graphic rating scale performance appraisal for salaried nonexempt employees.
The typical appraisal summary format has four to five levels of performance.
Pay increases are administered via a matrix (merit grid) that uses both an employee’s performance level and position in the pay grade to determine a pre-specified percentage increase (or increase range) in base salary. The other components of the merit grid are the organization’s pay increase budget and the time between pay increases.
(cited in http://www.nap.edu/openbook.php?record_id=1751&page=10)
Training
In order to effectively administer the performance appraisal process, it is imperative that employees understand their job expectations and the way in which those expectations relate to the performance criteria. This can be accomplished through direct, ongoing communication between supervisor and subordinate. Train all employees in the process. Perhaps the single most important key is to provide training to employees on:
The specific details of the new appraisal process and
How to give constructive feedback in a productive, noncritical manner.
Learning to receive feedback.
Instructions for the Performance Appraisal Form direct supervisors to work with employees in developing their performance plans by discussing goals and objectives of the work group and how the employee’s work contributes to the planned results and the business objectives.
Communication
Performance expectations should be communicated at the beginning of the review period and reinforced periodically during that period. Additionally, it is encouraged that the supervisor review the performance criteria used in the appraisal process and the ways in which they relate to job expectations. In this way, the employee will have an ongoing perception of the level of performance he or she is delivering and the basis upon which that performance will be rated. This will avoid the “surprise” factor often associated with a performance appraisal process.
There is no standard time intervals established as to when or how frequently the ongoing communication relative to expectations should occur. This can be influenced by several factors including the level and type of job, the nature of the work performed, etc. However, it is encouraged that discussions regarding performance expectations occur as a minimum at the beginning of the review period and at least one other time during the review period. Encourage managers/supervisors to keep notes on each employee through out the year. This will help ensure that supervisors are knowledgeable about subordinates’ performance.
Recommendation
I would make the following recommendation to Merck. Have a Performance Management Program that engages the entire organization in managing performalnce and improving productivity. Develop an approach to employee performance appraisal that;

Is results-oriented
Is competency-based
Is supported by a paperless, automated system that facilitates performance plan development, performance monitoring during rating cycles, and performance rating at the end of the cycle
Results in meaningful distinctions in performance levels
Enables substantive employee involvement

Helpful tools include

Performance Journals – Individuals and their managers track performance.
Self-assessment – Require employees to use this best practice employee involvement process.
Multi-rater feedback – Harness the observations of peers, coworkers, and customers to provide a complete picture of performance.
Second Level Supervisory Review – Get the leaders involved and hold managers accountable at the same time for on-time, accurate, and thorough reviews.
HR – HR leads the way and also becomes the final step in the quality assurance process by defining, implementing, and monitoring the performance management process.

Currently at Merck
Total Compensation at Merck is comprised of three distinct programs, designed to recognize and reward different aspects of your performance.
Base Pay – Determined by an employee’s actual position in the marketplace and sustained performance over time, as well as development of skills and abilities.
Incentive Pay – Cash bonus that rewards individual performance through the achievement of specified objectives and allows employees at all levels to share in Company and divisional results.
Long-Term Incentives – Equity based incentives, such as stock options, that recognize employees’ future potential for significant contribution to the Company.