Assessment of Current Compensation Rates Potential Cost Savings Opportunities XYZ Manufacturing Company

1. Assessment of Current Compensation Rates Potential Cost Savings OpportunitiesXYZ Manufacturing Company

2. Quick Review: The Numbers that Matter Analysis begins with an assessment of internal compensation rates to identify any aberration (via the compa-ratio) and external equity (via the market-ratio) The Min, Mid and Max refer to the company-determined salary ranges for each position Min represents the lowest base compensation rate for a given position; Mid is the mid-point within a compensation range; Max is the top of the base compensation rate for that position A compa-ratio is the ratio of an individual’s compensation relative to the mid-point of base compensation within the company’s determined salary range. A compa-ratio of 1 or more indicates that the person is paid more than the mid-point; a compa-ratio below 1 indicates that compensation falls below the mid-point of the range A market-ratio is the ratio of an individual’s compensation relative to the 50th percentile for the market compensation rate. A market-ratio of 1 or more indicates that the person is over- paid relative to the market; a Market-ratio below 1 indicates that the person is underpaid relative to the market

3. External Compensation Review: Market-Ratios Nearly 70% of XYZs’ employees earn more than the current market rate (at the 50th percentile) for their positions, as defined by the market-ratio 68% of XYZ’s workforce earns base salaries above the 50th percentile of the market • Key Questions for Consideration: • Have we defined the positions correctly, such that the market rate – and therefore the market-ratio – is accurate? • Where, relative to the market, does XYZ aim to pay? • Would it make sense for XYZ to consider different target pay rates, relative to market, for different positions?

4. Market-Ratio Assessment: By Grade Across the workforce, incumbents at two grade levels – three and seven – disproportionately earn high base salaries relative to the market (with grade two also somewhat skewed in favor of market-ratios greater than 1)

5. Internal Compensation Review: Compa-Ratios Approximately half of XYZ Manufacturing Company’s employees have a compa-ratio of 1+; 18 individuals earn more than the stated maximum for a given position 6 individuals at Grade 7 (out of a total of 8 at that level) earn more than the maximum rate for their range 4 individuals at Grade 1 - entry level roles - earn more than the maximum rate for their range Key Questions for Consideration: * Has XYZ properly defined ranges for all positions? * Does compensation for individuals who earn more than the stated maximum for their roles warrant further scrutiny – is there a “red circle” opportunity here? * Does compensation for specific grade levels warrant further scrutiny?

6. Potential Cost Savings Ideas Re-evaluate the current market rates for all new hires (replacement and new positions) to avoid the “overpayment” tax in current and future years Implement a “red circle” policy to freeze the salaries of all – or a subset – of employees that are over current market rates, eliminating costs associated with performance management and salary reviews Institute/reinforce a pay-for-performance approach to salary reviews, increasing salaries only for individuals with stellar performance, thus reducing annual performance increase costs Create rigorous salary limits for certain positions/grades (entry level positions may be a place to start) Refresh data on current market rates at least every 6 months to ensure that XYZ’s pay ranges are not inconsistent with current market rates Others?