FastCat Project - 2016

FastCat Compensation

Analysis

Provided By:

The Six Sigma Group

Members: Adam Cheever, Joseph Clinch, Katherine Waite, Kyle

Riedel and Nellie Logue

Completed Spring of 2016Executive Summary

FastCat is a medical software company that is focused on leveraging information technology to improve care at small and medium-sized facilities. This industry has become very competitive in recent years, and in order to keep up with industry standards, FastCat has hired The Six Sigma Group to overhaul the compensation system in order to continue to be the best in the business. The objectives of this new compensation system is to be competitive in the industry, retain and develop top talent with opportunity of advancement, and to have compensation scales open and understandable.

After determining the objectives of the new compensation strategy, The Six Sigma Group began to analyze the responsibilities and competencies of the jobs at FastCat. Based on the job descriptions and requirements, it was determined that the new compensation strategy would require employees to be broken into three, hierarchical based pay structures. The Six Sigma Group then went through each job’s responsibilities, qualifications, and competencies and determined compensable factors for each structure. The compensable factors of each structure were then given a point value system, with degrees and weights.

The Six Sigma Group recommends that the compensation structure be broken into three sections: Administrative, Support, and Technical. The compensation structures should be hierarchical in order to motivate and retain the top talent in the industry. Each pay structure will have its own set of compensable factors based on the individual responsibilities of that pay structure. Before implementing the system at Fast Cat, it is important to have a proper communication plan in place so all employees find it to be fair and understandable. After communicating the new pay structure to employees, the next step is to ensure the employees have an appeals process in place. Although this new structure was made to be open, understandable, and fair, employees may have objections to new policies. An appeals process will help employees know that if they feel they have an argument against the new compensation plan, that they have a chance to correct the fault in the system. The final recommendation is to make a manual so that new hires and current employees are able to replicate the new pays structure with ease. It is important that others can replicate this system in the future in order to add new jobs as the company expands.

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COMPENSATION OBJECTIVES

After researching FastCat’s current mission and current compensation plan, The Six Sigma Group designed the following compensation objectives:

Remain a competitive within the Medical Software industry by offering compensation similar or above industry levels of compensation

Promote open and understandable compensation scales Encourage flexibility, innovation, and excellent customer service

through retention of top talent Increase productivity through increased opportunities for employee

advancements.

Remaining Competitive Within the Industry:

FastCat’s new compensation plan will hope to be unique within the Medical Software industry. Offering compensation levels that are exceeding industry standards or at the very least similar in nature. By offering high levels of pay and attractive compensation plans FastCat will bring in the highest talent in each respectable industry, which will help fulfill the mission to provide excellent customer service, innovation, and high quality solutions.

Open and Understandable Compensation Scales:

Exhibit 7 shows that only 58% percent of FastCat employees understand how their pay is determined. That is below the nationwide level of 74%. This compensation plan will be openly available to the employees of FastCat. Not only will this increase their understanding of their pay but it will also guide the employees on how FastCat determined their salary or wages. In addition, by being open and honest with its pay structure, FastCat will demonstrate a high level of respect for the employees (Cases in Compensation ).

Retention of Top Talent:

Producing innovative, high-quality solutions and unsurpassed service to customers that competitors will not be able to match requires the industries top talent. Only the best people will be able to match FastCat’s mission. If those employees do not feel a sense of belonging at FastCat there is a chance that they could leave to another competitor. According to Exhibit 7, only 50% of FastCat’s employees feel a strong sense of commitment to the organization, below the National level of 60%. This is a disturbing figure

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when considering that FastCat could lose 50% of their top talent when presented with a better pay/compensation plan. By increasing employee flexibility and innovation opportunities The Six Sigma Group hopes to lower employment costs of finding and training new hires while also increasing employee retention (Cases in Compensation ).

Opportunities for Employee Advancements:

Recognizing individuals and their performance contributions is part of the FastCat’s mission. By providing an increased amount of opportunities for employees to advance within the company, The Six Sigma Group’s compensation plan hopes to give employees a sense of belonging to the company and increase productivity. Employee advancements can range from commission based incentives, conference opportunities, all the way to tuition/training reimbursement. Exhibit 4 shows that productivity is decreasing at FastCat, with productivity, being defined as revenues divided by employment costs The Six Sigma Group proposes to encourage employee advancements. These opportunities may increase employment costs, however, the reward will be overall higher revenues when employees can take these new advantages and apply them to their team members and FastCat’s customers.

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Hierarchical Versus Egalitarian

Egalitarian and Hierarchical compensation structures have both their advantages and disadvantages. After establishing compensable factors and structures however, The Six Sigma Group has determined that FastCat’s new compensation plan should be based on a hierarchical system.

Egalitarian structures have some advantages. First, egalitarian structures send the message that a company values all employees equally. This can boost the morale and performance of lower level employees, making the jobs with the fewest compensable skills more productive. Second, egalitarian systems allow for fewer levels and structures of compensation, which would be simpler for management to know how employees should be compensated. Third, egalitarian structures can create more of a team atmosphere. If employees feel equal, they can have a greater sense of cooperation and less competitiveness.

Egalitarian structures have some disadvantages however, with some of them being the reason why FastCat has decided to hire The Six Sigma Group to redo their structure. Egalitarian structures making employees feel equal can be a good thing, but, in the case of FastCat, the goal is to recruit and retain top talent in the industry. In order to do so, they will need to pay very talented people more money than the lower level employees make. Another reason why hierarchical is better in this situation is because it encourages employees to be more competitive, and in FastCat’s case, more innovative. One of the new Compensation Objectives at FastCat is to be competitive within the industry. Employees that are more innovative, productive, and highlight their individual skills and contributions to the organization will be compensated accordingly, and have greater opportunities for advancement in and for the company in terms of innovation.

One might argue that having a hierarchical structure will result in less compensated employees feeling discouraged, however, The Six Sigma Group hopes to combat that issue with another new Compensation Objective that states that the new compensation plan will be openly available to the employees at FastCat. If employees wonder why they are being paid less than their peers are or want to advance in the company, they can easily find the reasons. Employees then know what compensable factors they need to develop in order to increase their salary and increase their chances at being promoted. This will also give employees incentives to work together

Although egalitarian systems have their advantages, most jobs at FastCat vary too much in experience, technical skills, education, and

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leadership to all have similar compensation. A hierarchical compensation structure is better fit for FastCat. In order to stay competitive, retain, and recruit top talent, they will need to pay some employees more than others are paid. With the new pay structure being open to all employees, questions of why employees are compensated the way they are will be limited.

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Compensable Factors Explained:

The compensable factors for each structure have been chosen in order to evaluate the knowledge, skills and abilities required for a position in each respective structure as well as to provide a fair evaluation for new and existing positions. These compensable factors allow the Structure to be updated as needed over time and to allow employees to view the new job breakdowns, ask questions, and appeal the pay structure if necessary. This gives the employees a voice and is in line with the proposed compensation objective of promoting open and understandable compensation scales.

Compensable Factors for the Administrative Structure Overview: The compensable factors for the Administrative Structure are as

follows: Administrative Experience, Communication Skills, Creative Problem Solving, Education, Leadership Experience, and Microsoft Software Experience.

Many positions in the Administrative Structure require a background in administrative duties. The Six Sigma Group believes that those positions requiring over five years of administrative experience were positions that also had more duties and responsibilities required of them. Due to this finding, administrative experience was weighted third highest with a weight of fifteen percent with positions requiring five or more years of experience having the highest point value.

Communication skills are necessary have for individuals working in the administrative fields. Both written and verbal communication are crucial to the daily workings of all the positions listed under the Administrative Structure. There are some positions that require stronger communication skills than others however, and that is why The Six Sigma Group weighted Communication Skills as the second highest weighed compensable factor at twenty percent with the highest point value going to those who are required to have excellent written and verbal communication.

The Six Sigma Group included creative problem solving as a compensable factor for two main reasons. The first due to the fact that some positions, though important to the company, are repetitive and do not require much innovation or out of the box thinking. Other positions however, can require much more creativity and ingenuity. These positions may be undervalued as they do not require as extensive a background in some of the other compensable factors as the less creative positions do but

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require employees in that position to put more effort into each assignment. The second was to separate entry level positions from stadard employee positions by determining how much skill, knowledge, and experience is required to do the job. Thus the Creative Problem Solving factor was added in order to balance such positions against the others but weighted at only ten percent to keep the scale fair and balanced.

The education required for each position is a good indicator of how much responisbility a position has as well as how much knowledge is required. The Six Sigma Group recognizes that not all positions require high educations or multiple degrees, so the degree scale ranges from have a High School Diploma, all the way up to a PhD in a related field. Education has been weighted as twenty percent in order to classify positions that require higher education levels as those in which there are higher levels of responsibility.

Leadership Experience is required in positions of management and as such is weighted the highest at twenty-five percent to ensure that those in management who have the most responsibilities are compensated accordingly.

Some technical experience is required for almost any position in this day and age but varies in its application. Experience in Microsoft Software suce as Word, Excel, and Powerpoint can be the difference between an entry level position and a standard employee position. The Six Sigma Group included this compensable factor as a way to help separate such positions from one another.

Compensable Factors for the Support Structure Overview:The compensable factors used for the Technical band are as follows:

Communication Skills, Computer Programming Skills, Creative Problem Solving Skills, Education, Health Care Industry Knowledge, Leadership Experience, Sales Experience, and Software Development/Computer Engineering Experience.

As with the Administrative Structure, the Support Structure relies on a great deal of customer, coworker, and written interaction. The degree of communication skills necessary for each position is one of the qualifying factors between entry level, standard, and upper level employees. This is why Communication Skills has been weighted highest at twenty percent in the Support Structure.

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The Support Structure relies on positions with a working knowledge of Computer Programming Skills and Software Development/Computer Engineering Experience in order to support those who design and create the software FastCat sells. Thus, both categories have been listed as compensable factors but with relatively low weights of seven and a half percent since many support positions do not require in-depth knowledge of these fields but simply the ability to utilize the tools offered to support those in the Technical Structure who create the products.

As previously mentioned, creative problem solving is a large factor in what determining the skills, knowledge and abilities necessary to complete a job. It has been weighted at twenty percent in the Support Structure to separate out those positions that require ingenuity and creativity and those that simply follow instructions.

Education has been weighted at seven and a half percent in order to take into account those positions that require higher levels of education. These positions are more likely to have great levels of supervisory tasks and responsibility that are associated with positions requiring higher levels of education.

Positions in the Support Structure require varying degrees of knowledge of the Health Care Industry. Seeing as FastCat is a company whose primary concern is developing software for the Health Care Industry, the Six Sigma Group has weighed knowledge of this industry the second highest at fifteen percent. This high weight is to account for the positions that need significant knowledge of the industry to fulfil their duties and increase FastCat profitability.

Leadership Experience has been weighted at twenty percent due to the fact that positions requiring previous leadership experience are typically in managerial roles and thus it is important that such positions be compensated for both the previous experience required and the current supervisory tasks expected of them.

Many positions in the Support Structure require varying levels of sales experience. As such, the Six Sigma Group determined that, while sales experience was important and should be utilized as a compensable factor, it was not a factor that was crucial to all of the positions in this structure and was thus weighted at two and a half percent of the total structure.

Compensable Factors for the Technical Structure Overview:

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The compensable factors used for the Technical band are as follows: Communication Skills, Computer Programming Skills, Creative Problem Solving Skills, Education, Graphics Design Experience, Health Care Industry Knowledge, Leadership Experience, and Software Development/Computer Engineering Experience.

As previously noted, communication skills are very important in nearly every position within FastCat. As such, it has been weighted highest among the technical compensable factors at twenty percent, seeing, as many of these positions require employees to not only understand and create software, but also explain and teach others how to operate it and/or receive feedback from customers and attend to their needs.

The Technical Structure also relies heavily on the knowledge and experience of those in the computer science field. The Six Sigma Group has included both Computer Programming Skills and Software Development/Computer Engineering Experience as compensable factors for this reason. Both have been weighted at seven and a half percent, as nearly every position in this structure requires the fourth or fifth degree of each factor. Thus, in order to reduce point inflation, these factors weights were kept low.

As previously iterated in both the Administrative Structure and the Support Structure, creative problem solving skills are crucial to the innovation and advancement of FastCat and are important to separate out entry-level positions from the others. Thus, Creative Problem Solving Skills has been weighted at twelve and a half percent in the Technical Structure.

Education has been weighted at seven and a half percent in order to take into account those positions that require higher levels of education. These positions are more likely to have great levels of supervisory tasks and responsibility that are associated with positions requiring higher levels of education.

Graphics Design is compensable factor that requires both knowledge and skill. With many different facets and uses, graphics design is weighted at ten percent due to its complexity and level of creativity required.

Health Care Industry Knowledge has been weighted at fifteen percent to ensure that those positions that require extensive knowledge of the Health Care Industry are fairly compensated for both the knowledge and application of that knowledge.

Leadership Experience has been weighted at twenty percent due to the fact that positions requiring previous leadership experience are typically in managerial roles and thus it is important that such positions be

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compensated for both the previous experience required and the current supervisory tasks expected of them.

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Degrees Explained:

Five degrees for each structure were chosen for the purpose of allowing enough variation between the first and last degree to be substantial without over complicating the scoring processes. To do this, the first degree in each structure became a “dud degree.” That is to say that, by choosing that degree option, the scorer is indicating that that position does not require and experience, knowledge, or skill in that particular compensable factor. The second degree is to indicate that the position requires the minimalist experience, knowledge, or skill possible in that compensable factor. The third degree is the middle ground, requiring some knowledge, skill, or experience in that particular factor, but not enough to incur a higher compensation rate. The fourth degree however is where the job requires moderate skill, knowledge, or experience to allow to a higher compensation rate. The fifth and final degree are where the positions that are given the highest compensation rates are found due to the fact that these are the positions that require the most skill, knowledge, and abilities.

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Job Structures

Originally, The Six Sigma Group designed four different Job structures within FastCat. The first four structures were, Technical, Support, Administrative and Management. These were chosen in the beginning because it was practical to choose a reasonable number of structures to allow enough movement for employees but not so few that the structures blend.

The Six Sigma Group then observed each of the jobs at FastCat in order to sort them into one of those four structures. The Technical structure would best fit jobs that required a high level of computer science experience and designing software and included positions such as the Software Engineer or the User Interface Designer. Jobs that were Administrative in nature required high levels of teamwork and comfortability in office day-to-day activities. Examples of Administrative jobs would be the Travel Coordinator and the Administrative Aide. Expertise in customer service and communication between different department’s best described the Support structure and include most of the positions that require knowledge of the healthcare industry best fit within this structure. Examples of jobs in this structure would include the Clinical Liaison and Project Leader.

The Management job structure was intended to be a separate structure due to the high levels of leadership needed for certain jobs such as the Project Leader and Senior Fellow. Trying to fit management positions such as the Administrative Leader and Client account leader under a separate structure however, proved to be difficult. The Administrative Leader would not be within the same job structure as their employees within the Administrative Structure. The Six Sigma Group was worried that having the leadership positions under a separate structure would put strain on teamwork. Also having a separate job structure would make it difficult to promote within the company. An employee would have a harder time trying to move over to the Management Structure as opposed to moving up within that employee's own current job structure. For this reason, it was decided to scrap the Management Structure and fit those leadership positions into the other three structures, Support, Technical and Administrative. There is the potential weakness that with only three structures the may have too many jobs within them, mainly the Technical Structure. However, being a software focused company, The Six Sigma Group believes that the Compensable Factors have been defined enough so that it is clear what is expected of the positions and encourages teamwork within the structure.

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RankPosition

CF Points

Total Points

1 Administrative Leader 4.2

Administrative Experience 5

Communication Skills 5

Complex Problem Solving Skills 4

Education 2 Leadership Experience 5

Microsoft Software Experience 4

2 Marketing Support 3






3 Project Support Assistant 2.65






4 Travel Coordinator 2.6






5 Administrative Assistant II 2.1


Communication Skills 3 Complex Problem Solving 2

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Skills Education 1 Leadership Experience 1


6 Administrative Aide 1.65






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Rank Position CF Points

Total Points

1 Project Leader 4.275 Communication Skills 5

Computer Programming Skills 5


Education 4

Health Care Industry Knowledge 4

Leadership Experience 4 Sales Experience 1

Software Development/CE Exp. 5

2 Client Account Leader 4.25 Communication Skills 5



Education 3




3 Software Solutions Consultant 3.45 Communication Skills 4



Education 3




4 Training Assistant 3.4 Communication Skills 5



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Education 3




5 Implementation Consultant 2.95 Communication Skills 4



Education 3




6 Clinical Liaison 2.875 Communication Skills 4



Education 3




7 Quality Assurance Analyst A 2.825 Communication Skills 4



Education 2




8 Marketing Services Representative 2.7

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Education 3




9 Quality Assurance Analyst 2.475 Communication Skills 4



Education 2




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RankPosition CF Points

Total Points

1 Senior Fellow 5 Communication Skills 5



Education 5


Leadership Experience 5

Graphics Design Experience 5


2Software Users Interface Architect 4.775




Education 4





3Senior Quality Assurance Technician 3.75




Education 2





4 User Interface Designer 3.6 Communication Skills 5

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Education 3





5 Visionary Champion 3.575 Communication Skills 5



Education 4





6 Software Engineer 3.525 Communication Skills 5



Education 3





7 Graphics Designer 3.125 Communication Skills 5



Education 3 Health Care Industry 2

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Knowledge Leadership Experience 1



8 Programmer Analyst 2.425 Communication Skills 3



Education 3





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Fairness and Acceptance/Communication Plan

Considerable resources have used to design a fair and equitable system that has is intended to attract and retain top talent and to motivate FastCat’s employees. In order for this new compensation structure to be successful, it must be effectively communicated to all employees at FastCat. The communication plan will be administered to employees in a three steps:

1. The objective of the communication plan will be explained. The objective of the plan is to ensure that employees fully understand all components of the compensation system. This will be achieved by making the all objectives, structures, hierarchies, and compensable factors are made publicly available throughout the company through a mass email and open communication between managers and subordinates.

2. Information will be gathered from executives, managers, and employees to assess their current perceptions, attitudes, and understanding of the compensation plan in the form of a survey.

3. Any questions or objections will be addressed and explained as to the details, practices, and the way pay is determined.

After enacting the communication plan to employees, an appeals process will be established to address any objections to the new structure. The following steps will be included in the appeals process:

1. If an employee has a problem with the compensation system, he or she can talk to their immediate supervisor. After clearly stating the problem, a meeting will be set up with the supervisor and employee.

2. Before the meeting, both supervisor and employee are expected to review the current compensation structure. This will ensure that both the employee and supervisor are clear and up to date on all current policies at FastCat.

3. During the meeting, the supervisor and employee will attempt to solve the problem. If it can be resolved, they will set up a meeting with Human Resources to explain why a policy should be changed to solve the issue.

4. If the supervisor and employee don’t agree that an issue exists, the employee can then go report the problem directly to an HR representative.

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A Manual for New Hires on the New Compensation System:

The Six Sigma Group designed this pay structure with intentions of creating an open, honest and understandable compensation plan in order for employees to understand what job they are working and how they are being evaluated. It is completely reasonable to add new jobs and positions within these structures. If a situation arises where a new set of jobs are created or altered, The Six Sigma Group recommends the following steps in order to best fit those positions into the compensation plan:

1. Carefully examine the job’s responsibilities, requirements, and competencies.

2. Evaluate compensable factors for those positions.

a. If those compensable factors align with the current structures place them in the respective structure

b. If the compensable factors do not align with the current structure use those compensable factors to create a new structure

i. With the new structure, evaluate the compensable factors and designate a weight to each factor with more important factors having more weight

ii. With the compensable factors weighted, designate a scale in which to apply a degree to grade those factors

c. With the new or changed position’s compensable factors weighed and graded, apply the weights and grades to assign a point value to that position.

The Steps Explained:Step 1- The Six Sigma Group determined a job focused pay structure

would best fit in FastCat’s company model. If a new job arises or if a change is needed in a current job, you would first need to examine the job’s responsibilities, requirements and competencies. What is expected of this job? How many years of experience should be required for this position? Is it an entry-level position or does it require a person with years of experience in the industry? What level of education best fits? These are all examples of things needed to be determined for a position.

Step 2- Examples of compensable factors are, Communication Skills, Education Required, Years of Experience in a Specific Field, Leadership Experience. It is up to you to determine the number of compensable factors for the new or changed positions. For example, a position that requires a

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high level of communication and work with clients should have Communication Skills and possibly Customer Service as its compensable factors.

Step 2.a- Luckily for you The Six Sigma Group has already done this for over twenty positions so, if a new position shows up with similar compensable factors within the existing structures, feel free to place that job in the structure it corresponds with.

Step 2.b- If, unfortunately, the positions you are examining do not fit within the existing structures, a new job structure would be required. This job’s structure would include the compensable factor determined in Step 2.a.

Step 2.b.i- The next step would be to evaluate the jobs compensable factors and assign a weight to them for the point system. Questions you could ask yourself to determine the weights of the compensable factors could be: What Factor is the most important in this structure? Is one compensable factor more important than the other factor? When added together the weights of each of the compensable factors should add up to 1 or 100%.

Step 2.b.ii- After assigning a weight to the compensable factors, a degree to grade those weights is required. It is usually easiest, though not required, to give each compensable factor the same number of degrees. If you were to look at The Administrative Structure exhibit, you can see that The Six Sigma Group chose five degrees to weigh those positions. This was done to allow enough variation between the first and last degree to be significant without overcomplicating the point system.

Step 2.c- The last step is to apply all of the previous work to assign a point value to the new position. Simply look at the position and grade each compensable factor. When you are done with grading, multiply each compensable factors weight to the grade given. After that, add up all of the points and that is that position’s point value. For example, with the Support Structure, the Clinical Liaison position has a grade of 4 under the Communication Skill compensable factor so it has .45 points. After adding all of the other points, the Clinical Liaison position has 2.875 Points. These points will become relevant when comparing against multiple positions within a structure.

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Executive Summary – Phase II

In this section The Six Sigma Group has taken the time to develop an external competitiveness policy, design and conduct a market survey of FastCat’s competitors, and utilize and analyze the data from that survey into an understandable compensation model.

The competiveness policy created has been broken down into two parts: pay level and mix of forms. In the pay level section The Six Sigma Group presents the different market rates suggested for each structure previously listed on pages 10-18. This includes a discussion on why paying at or above the market rate is important to each structure and how it will affect the overall productivity of the structure. The mix of forms sections goes more in depth on the types of compensation The Six Sigma Group recommends FastCat offer. Including a breakdown of pay mixes for all three structures, this section is a beginning recommendation for what will be discussed more in-depth in Phase III.

The next section discusses and creates a market survey of FastCat’s competitors. Focusing on the Technical Structure, The Six Sigma Group chose the bench mark jobs in the structure and compared them to the other market jobs in the database. After determining which jobs to focus on the next section discusses the selection process for FastCat’s competitors, going into detail as to why each consideration was taken and how it will affect the overall survey. This information is backed up in the next section, which discusses the numerical evidence concerning the difference between whether to use mean, weighted mean, or the 50th percentile when conducting the market survey. The final part of this section explains why certain firms were not chosen and presents empirical data to show the difference between each sampling.

The final section walks through the data manipulation and statistical analysis of the market survey conducted in the previous section. Fist, a regression analysis was conducted and explained in order to give full disclosure as to the success of the market survey. This analysis is explained in detail in order to give the reader a full understanding of the purpose and meaning of the graph. The next section creates the pay grades The Six Sigma Group recommends FastCat utilize. These grades and ranges are explained and visually represented throughout this section. The next part of this section goes through the policy line decisions and includes a graph for easy understanding. The next two sections act as comparisons for the differences between using mean and weighted mean, and the differences between using total cash and total compensation as the compensation metric. The second to last section discusses the importance of pay grades and ranges and the ways around using grade/range midpoints. Finally, the

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last section in this part of Phase II is a graph that represents the jobs, minimum pay, midpoint pay, and maximum pay rates for each grade.

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External Competitiveness Policy

The Six Sigma Groups recommendation for FastCat’s external competitiveness policy to is to offer pay levels above the market line that will attract future employees to the company and away from the competition. Combining above market pay with a pay mix that is aimed at self-motivated, risk taking, hard-working individuals both alone and in a team environment, will retain employees and keep their attention aimed upon providing innovation to FastCat and away from the competition.

Pay LevelThe Six Sigma Group believes the pay level at FastCat should lead

competitors in the external market by paying above market rates in total compensation so that FastCat can attract and retain top level employees as well as minimize dissatisfaction with pay. Paying above market rates will counterbalance the not so attractive features of the work such as the long hours. For the technical job structure, The Six Sigma Group recommends paying 10% above the market rate. In order to have the most effective engineers and technicians possible to support the backbone of FastCat’s company, it is recommend that FastCat incur the tradeoff between higher fixed labor costs and increased productivity and innovation. For employees under the support structure it is recommended to pay them 5% above the market rate. Since FastCat is a company that is technical based, but still needs to attract the top level of employees for the support system, incurring the higher labor costs for the support structure should help mitigate the lagging innovation and productivity levels FastCat is currently facing. Keeping the positions in the Support Structure competitive is essential considering those positions are predominately FastCat’s problem solvers and keep things running smoothly. As for the Administrative Structure, employees will be paid at market rates because there is not a high level of involuntary turnover with positions in this structure as well as these positions do not require the high level of skills that are required in the support and technical job structures.

Mix of FormsFastCat’s recommended business strategy is to pay at or above

market rates. The market uses a mix of all four forms of compensation, yet The Six Sigma Group recommends that the best option for FastCat to be competitive is to use a pay mix of base pay, benefits, and stock options. Having benefits as part of the pay mix allows employees to take vacation or paid time off to be home with their children and families and gives some flexibility to the amount of base compensation paid. Offering stock options would be a good idea for FastCat to encourage employees to feel a part of

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the company and help it succeed. In addition, by offering stock options it should increase the motivation and drive of employees to work harder to increase the company’s value thus increasing their own pay out.

Through the Market Survey, it was found that, on average 35% stock options as compared to base pay. The Six Sigma Group recommends reducing that to around 25% and increasing benefits to approximately 20% of total compensation to remain competitive in the market. This gives FastCat the opportunity to reduce labor cost by decreasing base wage by making it only 55% of the total compensation package while also attracting innovative risk takers, the individuals who are going to push FastCat to grow through calculated risk by offering a quarter of the total compensation in stock options. Finally, by making a fifth of the total compensation benefits it will allow the employees the freedom and responsibility to conduct their jobs with precision while also giving them the time and space they need to be more creative.

This mix is only recommended for the Technical Structure. As for the support structure where less innovation is needed and more long-term commitment, a mix of 55% base pay, 25% benefits and 20% stock options would be ideal to encourage long-term company support while also attracting innovative risk takers to the positions that require them. The Administrative Structure however requires minimal innovation and more long-term commitment than the other structures. Thus, it is recommended that the pay mix be along the lines of 55% base, 35% benefits, and 10% stock options. It is still important to encourage company commitment through stock options in this structure but more important to find less risk taking individuals and more solid, secure employees who will stay with the company for a long time.

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Job Structure Explanation

The Six Sigma Group chose to use the Technical Structure to conduct a survey of FastCat’s competitors for two reasons. First, the Six Sigma Group wants to recommend that Fast Cat, in order to meet the objectives previously mentioned of remaining competitive in the market, to offer above the market value salary to this job structure. Seeing as the positions in this structure are in charge of creating, testing, and formulating the product FastCat is selling, it is important to attract and retain the best talent possible into these jobs. Thus, offering a higher than market value compensation package will help give a competitive advantage over competitors that are sticking to the market. Secondly, the technical structure offers a balanced compilation of both benchmark and non-benchmark jobs that allow The Six Sigma Group the opportunity to accurately depict how compensation decisions should be made regardless of position.

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Job Matching Strategy Explained

The Six Sigma Group was very careful in choosing the best corresponding market jobs as compared to FastCat’s positions. The process started by going through each position and listing out the basic requirements and duties. After that, a comparison was made between the Technician positons and all of the FastCat positions. Two of the FastCat positons matched well in job description with the market positions, Programmer Analyst (Technician 3) and Senior Quality Assurance Technician (Technician 5). After that, the remaining six positions were compared to the Engineer positions. Three of the positions matched well, Software Engineer and Engineer 2, User Interface Designer and Engineer 3, and Software User Interface Architect and Engineer 4. This meant that the Graphics Designer, Senior Fellow, and Visionary Champion positions were left unmatched. After careful deliberation and comparison to the other market positions, it was decided that these positions were not benchmark jobs and thus did not have a corresponding position in the market job structure.

There were however some challenges with the previously assigned point values corresponding to the correct positions. One position, Senior Quality Assurance Technician, was valued at 375 job evaluation points prior to the matching. After some consideration, it was determined that, based on the qualifications and duties, this position was grossly overvalued. The Six Sigma Group then went back through the job evaluation process and determined that the position was actually valued at 300 job evaluation points.

The point comparison goes as follows:

Fast Cat Job Point ValueJob From Market Survey

Programmer Analyst 242.5 Technician 3Senior Quality Assurance Technician 300 Technician 5Graphics Designer 312.5 No MatchSoftware Engineer 352.5 Engineer 2Visionary Champion 357.5 No MatchUser Interface Designer 360 Engineer 3Software Users Interface Architect 477.5 Engineer 4Senior Fellow 500 No Match

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External Market Competitors Explained

The Six Sigma Group took great measures to ensure that the competitors chosen for the market survey were relevant to FastCat’s industry. It was decided that, since FastCat has a limited number of employees at 200, but has plans for expansion, that the survey would focus on small to medium sized companies. Large companies would not be a smart choice due to the cost of labor differences incurred. Furthermore, the competition search was shortened to just companies in the software labor market. FastCat’s direct competition is in the software market and thus would be logical to include. Other markets such as the hardware, semiconductor, and financial markets may not include the specialized positions FastCat is looking for in its Technical Structure. Seeing as these are the positions that will make the company the most profitable through increased innovation and production it is important that, when comparing to the market, companies with similar positions and requirements be found.

Mean VS Weighted Mean VS 50 th Percentile

Utilizing data from the nineteen small and medium software companies chosen, The Six Sigma Group must now choose which metric to use to make accurate comparisons. First, it was decided that FastCat should choose a Total Compensation metric to give employees and potential employees more options and variety in their compensation packages. After applying this data into the Access software, the salary data for Engineer 2 looked like this:

As one can see, the total compensation has the highest spread between metrics at approximately $6,800. This is a large sum. However, it is important to know how these figures were derived. For example, the weighted mean was calculated by placing higher weights on companies with

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more of a specific position. This means that a company with four Engineer 2’s is going to have more weight than a company with only one. It is important to note that, since companies larger than FastCat have been included in the survey, these numbers may be skewed toward a figure that is larger than the amount of the compensation FastCat may wish to pay, however, would allow for competitive compensation rates should FastCat grow into that larger market. The 50th Percentile represents the exact center of the data. Since it is recommended FastCat pay above market in the technical structure, this data shows the exact center of the pay scale but is not representative of either end of the pay structure and thus would not be where FastCat would focus its efforts in determining compensation levels. Finally, the mean is the average of all the pay levels in the survey for that position and gives us an accurate representation of where the market is most likely to be. It is pulled slightly higher due to the fact that it includes the highest of the pay levels for that position; however, to remain competitive it would be smart not to forget about those high levels. It would not be prudent to immolate them however, because then labor costs would be out of control and there would be no promise of increased productivity.

In order to remain competitive in the market, The Six Sigma Group recommends the use of Total Compensation weighted mean as the compensation metric of choice. This will give FastCat an idea of what other companies are paying as well as the amount at which they value their employees.

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Sample of Firms Not Used

To satisfy curiosity, The Six Sigma Group has compiled a list of firms not used in the market survey for comparison. As a reminder, the original compensation data for small and medium software firms looked like this:

The focal points for this exercise are going to be the number of incumbents, which indicates how many individuals are in the position in those selected companies, and the monetary differences in total compensation. To begin with, here is a sampling of all of the medium and large software companies in the database and their compensation metrics:

As one can see, the number of incumbents jumps from 225 to 1761. Both compilations of firms only include twenty separate firms so the average number of positions per firm jumps from 11.25 to 88.05. The total compensation at all levels dramatically increases as well. Seeing as FastCat currently only has 200 employees, it is very improbable that almost half of those employees hold the same position. Including the large software firms in this case artificially inflates the total compensation rates to a level that FastCat has not yet reached. It would not be wise to include these firms in the market survey first, because FastCat is not in direct competition with them, and second, because as larger firms they can afford to pay higher salaries than FastCat and inflate the compensation rates.

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The next comparison made was between all of the small firms in the given market. This comparison was made to show that not all small companies have similar positions and thus it would not be wise to include small companies outside of FastCat’s industry. Here is what the small companies in the database and their compensation metrics look like:

As can be seen, even including the small software firms, the number of incumbent’s drops by over 130. The compensation rates also drop considerably. This is not an accurate representation of the industry, or the market in general since there are so few people working in that position even though there are 21 firms represented. It would not be wise to use this as a base of comparison.

The third and final comparison made was between all of the small and medium non-software firms. This was done to show that, although the companies are the same size, there are large differences in positions based on industry. A financial firm is not going to have their software engineers creating the same kinds of products as FastCat’s will be, nor will they have the same level of responsibility since FastCat’s product is software whereas a financial companies product in financial advice. Here is the sample of what the small and medium non-software companies compensation metric looks like.

As can be seen, there are many similarities in the compensation metric and the number of incumbents. The difference in this comparison lies solely in the purpose of the position. In this case, the elevated weighted

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mean indicates that companies who rely on more software engineers are more likely to pay them more. Since many of these companies do not rely on this position to make their main product, although similar, the compensation metrics are incorrect and do not accurately reflect FastCat’s industry.

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Data Manipulation and Statistical Analysis

Regression AnalysisAfter choosing FastCat to be competitive on a Total Compensation

plan, The Six Sigma used the weighted mean of the Total Compensation in the industry to compare with. With the benchmark jobs that The Six Sigma Group chose, the data regression matched the industry with an R-Squared of .941. This number is an example of FastCat job similarity within the industry. A low R-Squared value is not necessarily a bad thing, but if the data regression was ran and the R-Squared value was lower than .85, The Six Sigma Group believes that the comparison of FastCat’s jobs would not adequately reflect similar jobs in the industry. This however, was not the case for the data regression and with such a high R-squared value, The Six Sigma Group is confident that FastCat can proceed to provide a Total Compensation plan that is above average in the software industry. A graph of the regression line, including The Six Sigma Group’s recommended 10% policy line in shown below.

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Pay Grades and Ranges The grades that The Six Sigma Group created for FastCat’s Compensation Plan are as follows: Grade 1 ranges from 200-300 Job Evaluation points, Grade 2 ranges from 301-400 JE points, and Grade three ranges from 401-500 JE points. The grade ranges were chosen because The Six Sigma Group believes that they adequately break up the compensation of different levels of employees in the Technical Job Structure. Breaking the employees up into more than three grades would make the compensation system unnecessarily complex and difficult to manage. With more than three grades the JE points, the grades could become specific to a single job or two, but, with wider JE points, this allows more jobs to be placed into the grades with similar JE points and thus supports the compensation objective of increasing productivity by offering opportunities for employee advancement. Three ranges also will allow employees to improve their compensable factors and move up within their own grade without making frequent jumps to higher pay grades. Three ranges effectively breaks employees up into low-level, mid-level, and high-level employees at FastCat.

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As previously stated, The Six Sigma Group have decided to create a policy line that leads the market by 10 percent. By leading the market in Total Compensation, FastCat’s compensation plan will be able to act on its mission to retain and attract top talent in the market, which will lead to more innovation and revenue. The software itself does an adequate job showing how benchmarked jobs within the market are paid according to their JE points. One potential flaw in the software is the inability to eliminate outliers in the job market. However, ultimately it is up to the user to define their grades and decide whether to include those outliers in their Statistical Analysis. An example of the 10% policy line is shown below.

Grade 1 has a salary range is $65,203-$79,693.73; Grade 2 is $108,342.40-132,148.50 and Grade 3 is $151,266.20-$184,881.00. There is no overlap in the jobs in this particular survey and the differences in the ranges increases from Grade 1 to Grade 2 and again from Grade 2 to Grade 3. The sizes of the ranges reflects well on the JE points chosen for the

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grades. For example, the middle grade positions such as Software Engineer and the Graphics Designer would be placed in the second pay grade and those positions can increase their compensable factors and earn more JE points but would be capped at a total compensation of $132,148.50. This prevents them from stepping into the higher grade seeing as positions such as the Senior Fellow have more pay and more responsibility.

Base Wage: Mean VS Weighted Mean

When using the base wage compensation metric, there is a slope of 433.57 with an R square of 0.941. However, changing to a base wage (weighted mean) the slope is changed to 310.1 with an R square of 0.935. Changing to a base wage (mean), there is a slope of 309.58 and an R square of 0.937. By changing to a weighted mean, the statistical outcome is that one JE point is now only worth $310.10 instead of $433.57. By using the mean, one JE point is worth $309.58. The differences in the dollar per JE point between mean and weighted mean are not significant in this case, but could be in other regressions with more jobs. The significance of this is that by using weights and means that there is a larger number of jobs with lower wages than there are with high wages. Using a weighted mean to conduct the survey may prove to be more accurate to use when analyzing the outside job market. The changes in the R square values are not statistically significant because changing these metrics does not affect FastCat’s compensation correlation with the market.

Regression with weighted mean:

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Regression with mean:

Total Cash VS Total Compensation

Using the total cash metric, shows that one job evaluation point is worth $322.62 with an R square of 0.949. Using the total compensation metric shows that one job evaluation point is worth $412.60 with an R square of 0.962. These differences between total cash and total compensation are significant because with cash, only base salaries and bonuses are included, which results in lesser value. In total compensation however, base salary, bonuses, profit sharing, and benefits are all included. It is important to note that not all companies will offer these other forms of compensation and if they do, some employees may not be eligible to receive them. Setting either of these compensation metrics, especially total compensation, as the metric for FastCat’s survey may result in high fixed costs.

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Total Cash

Total Compensation

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No Grades or Ranges

There is an option to skip the grades and ranges; however, it is much more difficult and complex. The CEO can interpret the data from the regression analysis and evaluate each position's compensation one at a time, comparing it to the market and deciding FastCat’s standing. This is similar to what was discussed in the previous section, but in this scenario there would be no grades. The compensation plan would have to describe in detail each position's pay and why that position is being compensated. This becomes more complex when an employee does not neatly fit into the JE Points. The Compensation Plan would have to be described on a person-by-person basis. In addition to going person to person for each position, the compensation plan will also need to take into account that every time the employee in that position receives a raise or adds more to their compensable factors the compensation plan will need to be revised for that person. With a company of over 200 people, this will require a lot of attention, organization and will be time consuming. The whole point of the grade system is to prevent the company from needing to evaluate each person’s individual compensation plan in each position.

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Grades and Ranges Table

Grade 1

Policy: Policy1 JE Points Salary Jobs – JE Points Low 200 Low 65203.96 Programmer Analyst – 242.5 Mid 250 Mid 72448.85 Senior Quality Assurance Technician - 300 High 300 High 79693.73 Range 10 %

Grade 2

Policy: Policy1 JE Points Salary Jobs – JE Points Low 301 Low 108342.4 Graphics Designer – 312.5 Mid 350.5 Mid 120380.5 Software Engineer – 352.5 High 400 High 132418.5 Visionary Champion – 357.5 Range 10 % User Interface Designer - 360 Grade 3

Policy: Policy1 JE Points Salary Jobs – JE Points Low 401 Low 151266.2 Software Users Interface Architect – 477.5 Mid 450.5 Mid 168073.6 Senior Fellow - 500 High 500 High 184881 Range 10 %

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Strategy Justification

The Six Sigma Group believes that this structure helps FastCat achieve internal alignment, external competitiveness and links well with the proposed four prong competitive strategy. For internal alignment, the hierarchical structure FastCat has created is represented through the pay grades illustrated on page 32. By having non-overlapping pay grades, FastCat is clearly separating the different positions that belong in each pay grade and emphasizing that hierarchical structure. There is a concern that, as the company grows, there will be struggles promoting people from one pay grade to another, however, the first grade represents the technical side of the technical structure. The second grade is more of the lower level engineering positions and the final grade is the managerial level engineering positions. There is a significant gap between pay grades but The Six Sigma Group believes that that will foster a competitive atmosphere as well as be indicative of the amount of responsibility associated with positons in those grades.

The external competitiveness policy set forth by The Six Sigma Group states that FastCat is to remain competitive in the technical structure by offering a total compensation package above that offered by the competition. By offering a compensation package worth 10% above the weighted mean for that position on the market line, FastCat is committing to be industry leaders in pay in order to attract the top talent needed to grow FastCat into a major industry competitor.

The main compensation objectives The Six Sigma Group suggested were to remain competitive by offering compensation similar or above industry levels of compensation, promote open and understandable compensation scales, encourage flexibility, innovation, and excellent customer service through retention of top talent, and to increase productivity through increased opportunities for employee advancements. The pay structure recommended fulfills the first three prongs of this competitive strategy by providing competitive compensation that is understandable and open to the company and by providing pay incentives to retain top talent. The argument that could be made would be that the non-overlapping pay ranges do not promote increased opportunities for employee advancement. As of now, there are two positions in the first pay grade, four in the second pay grade, and two in the third pay grade. The justification for this is that the positions in this structure are very specialized and although there are some positions that could be considered

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“feeder positions” to others, many of these positions have specific requirements that are very different from the others in the structure.

Overall, the compensation structure created achieves internal alignment, is externally competitive, and links well to the overall strategy. There are some concerns; however, the uniqueness of the positions in this structure lead to a more structured, divided pay range and The Six Sigma Group believes that it will be successful in the long run.

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Executive Summary – Phase III

In this section, The Six Sigma Group will discuss the implications of hypothetical situations dealing with green and red circle employees, design and discuss the intricacies of a merit plan, discuss group based pay and how the external market effects it and provide an overall evaluation of FastCat’s pay-for-performance system.

Green circle employees are those whose compensation falls 10% below the range minimums for their pay grade. Red circle employees are those whose compensation falls 10% above the range maximums for their pay grade. Great detail was taken to explain the policy recommendation for both sets of employees as well as discuss the rational and implications of these recommendations.

The next part of this section goes into detail on the design of a merit pay play utilizing a 4% budget increase, a 7.2% budget increase, and a forced distribution system. For the 4% budget increase, The Six Sigma Group makes sure to explain why allocations were made the way they were and what implications it could have on the overall cost of labor and employee motivation. The 7.2% budget increase part explains not only why the allocations were made but also compares them to the 4% budget increase. This allows FastCat to understand how a small 3.2% increase in the merit budget can have high cost implications. Finally, this part includes a discussion on forced distribution and its advantages and disadvantages in the merit pay allocation system.

Next, this section discusses group based pay utilizing the “balanced scorecard” approach. This approach focuses on rating FastCat on a scale in order to accurately assess the success of FastCat. The Six Sigma Group goes into detail about the metrics that should be used to score FastCat as well as the purpose of these metrics. Then, how the weighted score related to each employees bonus allocation is discussed. This leads into how the stock option program is effecting certain positions within FastCat, target size, eligibility factors, and a discussion on the potential disadvantages of the program.

Finally, a short recommendation on how to assess the functionality of the pay-for-performance system is given to help FastCat assess the success of the program in the future.

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Green and Red Circle Employees

Adjusting Green Circle Employees:The Six Sigma Group feels that green circle employees who ‘fall

between the cracks’, become an outlier in the compensation plan. The main objective is to render a solution to the problem.

There is the option of bringing the individual up to the minimum pay range. This would be quick and easy. This would also certainly make the individual receiving the pay increase feel more important to the company. However, this would have an immediate high financial impact on budget. To try to gain a balance between correcting this outlier and cushioning the impact on the budget it is recommended that raises be distributed based on where the individual is in their pay grade. Green circle employees will receive a percentage increase higher than individuals who are at or above the market rate. This will steadily bring the green circle individual up to range minimum while cushioning the cost effected on the budget. This method is to compensate employees on the going market rate for their positions.

The Six Sigma Group believes that this will be the most cost effective and efficient solution to the issue. Employees who are compensated below their pay grade will feel disgruntled, disenfranchised, and are more likely to leave the company. It is important with the open compensation policy in place that all employees meet at least the minimum allocation of their pay range. This will increase labor costs over time however, by increasing the pay in the short run FastCat will be less likely to incur the costs of hiring a new employee whom they will have to pay the higher rate anyway and pay sourcing costs. Thus, this is the most effective option.

Adjusting Red Circle Employees:When first looking at the situation, it seemed obvious that there was

only one option to take: freeze base pay for the employees who fall above range maximums until the market catches up. This means that base pay increases for red circle employees would be discontinued until they were no longer above the range maximum. However, The Six Sigma Group felt that this would bring a high risk of turnover for red circle employees, especially top performers when they discovered that they were no longer receiving pay increases.

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Upon looking further into the options and weighing the pros and cons, it was decided that the best method to dealing with red circle employees is to freeze base pay while offering performance based bonuses. It is important to reward top performers by offering clear incentives for a lump-sum bonus based on performance. This will reduce the risk of turnover for red circle employees among top performers. There will still be a moderate to high risk of turnover among underperformers but it is hoped that they either will work harder to achieve more or should be replaced anyway.

This policy will be applied consistently throughout the organization for all employees. It is possible that the affected individuals will react negatively upon hearing that they will not be receiving any base wage increases for a while. The Six Sigma Group expects that the lump sum performance based bonus will help decrease their ire and encourage them to become and/or remain a top performer. It is expected that the red circle employees coworkers will be upset that these individuals are paid above the range maximum and receive a bonus for top performance. Which is why the bonus will be available to all employees who earn them, thus promoting health competition. This should address FastCat owner’s concerns directed towards cost, retention, and employee morale.

A potential disadvantage of the recommendation is the red circle employee could seek employment elsewhere, such as at a larger company that can pay above market rates higher than FastCat is able or willing to pay. Another potential disadvantage is that this individual will feel that they is being penalized for how much they are currently making and their morale could decrease. One other disadvantage is the cost to retain this employee at their current base wage, 10% above maximum range. The Six Sigma Group believes however, that the positives of this plan outweigh the negatives and that, the culture and new found openness of the companies compensation system will encourage red circle employees to stay with FastCat.

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Merit Plan Explanation

Distribution of employees in range quartiles:

Max Q4: 30.00%Q3: 22.00%Q2: 21.00%

Min Q1: 27.00%

Total:100.0

0%

Distribution of employees in performance categories:

Far exceeded requirements 25.00%Exceeded requirements 55.00%Met requirements 14.00%Met some requirements 6.00%Did not meet requirements 0.00%

Total:100.0

0%Pay Allocation in Merit Grid:

Max

Far exceeded

Exceeded Met

Met some

Did not meet

Q4 5.00% 4.00% 3.00% 2.00% 0.00% 7.50% 16.50% 4.20% 1.80% 0.00%

Q3 5.00% 4.00% 3.00% 2.00% 0.00% 5.50% 12.10% 3.08% 1.32% 0.00%

Q2 5.00% 4.00% 3.00% 2.00% 0.00% 5.25% 11.55% 2.94% 1.26% 0.00%

Q1 5.00% 4.00% 3.00% 2.00% 0.00% 6.75% 14.85% 3.78% 1.62% 0.00%

Merit increase allocated (do not exceed budget): 3.99%

1.1970% 0.8778% 0.8379% 1.0773%

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The above table represents a merit pay budget increase of 4%. The Six Sigma Group finds that, in order to meet the goals previously stated and instill a sense of fairness and equality into the merit pay system, it is important that increases are uniform across the quartiles. This is done specifically for two reasons. First, although the increases will be slightly different due to the amount of base wage paid per quartile, all employees in a certain performance category will receive the same percentage increase. This will help to create a sense of consistency and fairness as all employees, no matter their base wage, will know what reward they will receive if they perform at a certain level. Secondly, this will allow the calculations of merit pay to be simpler and thus encourage more focus on which individuals belong in what category.

As is shown above, the percentages increase marginally as an employee enters a higher performance category. The Six Sigma Group believes that it is an important part of the merit pay strategy because it provides incentive to perform better by giving those in higher performance categories greater rewards. There is however, a few concerns that may arise from having the percentage increase marginally. As shown, there are more employees who are within the far exceeds and exceeds categories than there are in the other categories. This means that, by offering higher percentage increases for those categories, the overall cost is going to increase. This expense could potentially increase labor cost exorbitantly based on the base wages provided. This is a price worth paying however, as its motivation effects should encourage employees to increase profits hopefully enough to cover the increased labor cost.

Distribution of employees in range quartiles:

Max Q4: 30.00%Q3: 22.00%Q2: 21.00%

Min Q1: 27.00%

Total:100.0

0%

Distribution of employees in performance categories:

Far exceeded requirements 25.00%Exceeded requirements 55.00%Met requirements 14.00%Met some requirements 6.00%Did not meet requirements 0.00%

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Total:100.0

0%Pay Allocation in Merit Grid:

Max

Far exceeded

Exceeded Met

Met some

Did not meet

Q4 7.25% 6.90% 6.50% 6.25% 0.00% 7.50% 16.50% 4.20% 6.50% 0.00%

Q3 7.25% 6.90% 6.50% 6.25% 0.00% 5.50% 12.10% 3.08% 1.32% 0.00%

Q2 7.25% 6.90% 6.50% 6.25% 0.00% 5.25% 11.55% 2.94% 1.26% 0.00%

Q1 7.25% 6.90% 6.50% 6.25% 0.00% 6.75% 14.85% 3.78% 1.62% 0.00%

Merit increase allocated (do not exceed budget): 7.19%

2.3615%

1.5164%

1.4474%

1.8610%

The above table represents a merit pay budget increase of 7.2%. Similarly, to the 4% increase, The Six Sigma Group wanted to ensure that the pay allocation percentage increased with performance category. The percentages however, no longer increase marginally but by .25%, .4% and .35% respectively. Once again there is no percentage increase for those who failed to perform to standards. As can be seen, the percentages increase by quite a bit over the 4% budget with the “met some” category increasing from 2% to 6.25%. This is likely to greatly increase labor costs as those in the “exceeded” performance category, who make up 55% of employees, are now being paid a 6.9% bonus. That being said, The Six Sigma Group recommends that the 4% merit pay budget be put into effect to both increase motivation while mitigating rising labor costs. Although the increased merit pay in the 7.2% budget sound nice, the overall increase in labor costs could cause some serious financial issues in the long run, especially when faced with difficult economic conditions, that could hurt the

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company. Thus, having a consistent, manageable, and reasonable merit pay budget of 4% is the recommendation of The Six Sigma Group.

Adjusted Unadjusted

The above tables show an adjustment to a forced performance distribution. To show how this change effects the pay allocations, the table on the right contains the same pay allocation percentages as the 4% merit increase budget shown on page 43. The forced distribution caused some employees to be included in the “did not meet” performance category, thus decreasing the amount of employees in all other categories. This decreases the overall merit pay allocation shown previously, considering that The Six Sigma Group does not recommend merit pay to those that do not meet standards. One of the positives of a forced performance distribution is that, if the “did not meet” category remains at 0%, then all other categories can gave a higher percentage allotted to them as can be seen in the table on the left. However, although this may seem positive, forced distributions tend to invoke confrontation in the work place and ignite competition that fosters an “all about me” attitude. The Six Sigma Group wants to inspire teamwork, cooperation, and healthy competition that leads to innovation and does not believe that a forced distribution will allow that to happen. For these reasons, it is recommended that FastCat continue with the 4% merit budget increase and not have a forced distribution system.

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Group-Based Pay

Objectives

The objective of a group-based pay-for-performance system is to give awards that are based on team or group performance goals. Using a pay-for-performance plan signals a movement away from individual entitlements and toward team performance. Employees focusing on group-based goals instead of individual goals will result in teamwork, a team identity, increase generation of new ideas and promote problem solving. Other objectives are to minimize distinctions between team members and to better reflect how work is generated within a team.

Eligibility

Eligibility for the group-based pay-for-performance system is for employees that are on teams and have group based tasks and goals. Employees that do not perform in a group will not be eligible for group incentives.

Cost Effects The cost effects for the group-based pay-for-performance system will be variable. For example, employees can receive additional pay on top of their base pay, but only if their team goals have been achieved. This will increase the cost of labor at FastCat, but if a team goal was to decrease costs, then FastCat should reward that team for saving the company money.

Performance Metrics

The recommended performance metrics and their weights are as follows: Revenue - 25%

o It is important to consider a team’s revenue under their performance review because it gives the employees a numerical goal to strive towards. If the team increases revenue through any means it is beneficial to FastCat, whether it be gained through increasing customers, selling more products to existing ones or cutting costs and working more efficiently.

Customers see FastCat representatives as responsive and knowledgeable - 25%

o Part of FastCat’s mission is having a partnership among its customers and employees. The customers of FastCat must view the employees in a positive manner. The team

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members also have to be willing to cater to the customers’ needs quickly and wholeheartedly.

Customers value FastCat solutions - 20%o One of the objectives of a group-based pay-for-

performance system is for teams to be able to generate new ideas quickly and to solve problems. Customers should find that employees have developed adequate software and services that help their day-to-day business be simpler and more efficient.

Employees take pride in working for FastCat - 15%o Employees should take pride in working with other

FastCat employees and for the company as a whole. It is in FastCat’s mission that the employees are the heart of the company and that they work together as a team.

Employees understand how to make teams successful - 15%o Being part of a team requires that employees do

everything they can to promote the success of the team. Employees need to look beyond their individual ambitions to help other members of the team achieve team goals.

Of the metrics used, “Revenue” and “Customers See FastCat Representatives as Responsive and Knowledgeable” deserved the highest weight of 25% because The Six Sigma Group believes they are the most relevant according to the mission. “Customers Value FastCat Solutions” received a weight of 20% because in the survey data, customers valued FastCat’s ability to be flexible and adapt to their problems. The “Employee’s Sense of Pride” and “Understanding of How to Make a Team Successful” earned lesser weights as they are more easily controlled.

Threshold

The performance metrics listed above will be rated on a 1-5 scale. The ratings are as follows:

Rating Rating Anchor 5 Far exceeded requirements 4 Exceeded requirements 3 Met requirements 2 Met some requirements 1 Did not meet requirements

If a group at FastCat is in the threshold below 3 then their performance in that metric is not high enough to receive any additional pay increases. Additionally if a group is below a 3, that group should go under review as to receive feedback for why they did not meet their goals. For

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teams that receive scores of a 3 or above, employees of that team should expect to see an increase in their total compensation.

Caps

In previous years, FastCat cap has been 15% of base-pay. In the employee survey, only 45% of employees feel they are justly compensated for their performance. Because of this, The Six Sigma Group recommends raising the cap to 20% of base pay to give employees in groups more opportunity to have their performance rewarded.

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FastCat as a Whole

Revenue – 5/5Revenue for Fast Cat has increased to $36.5 million from $30.4 million. This is a 20% increase in revenue.

Customers see FastCat representatives as responsive and knowledgeable – 4/5

In Exhibit 8 “What FastCat Customers Think”, customers gave an average 5.9/7 to FastCat in this category.

Customers value FastCat solutions – 4/5 In the same survey, customers gave 5.1/7 in the Overall satisfaction with FastCat software and a 5.8/7 in that FastCat software adds value to their job.

Employees take pride in working for FastCat – 3/5In an employee engagement survey FastCat fell below the national average in most categories such as, “I would recommend my organization as a good place to work”, “My organization is well managed”, and “I feel a strong sense of commitment to this organization.” However, FastCat did meet the national average of employees would be willing to go above and beyond to make the company feel successful.

Employees understand how to make teams successful- Not applicable given the information from the surveys

Employees were not surveyed on how they feel that teams operate at FastCat. Since this was not surveyed we feel we cannot give an accurate rating on how employees view that they know how to make a team successful.

Based on the information given, FastCat has earned a 3.35/5 even without the “Employees Understand How to Make Teams Successful” metric. This score is above the threshold and therefore the employees of FastCat do deserve a bonus, though it is difficult to tell precisely how much based on the information given.

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Stock Options

The purpose of a Stock Option in an employee’s compensation is to incentivize the employee buy giving then shares and ownership of the company. If the employee has stock in the company, they are more likely to feel a sense of belonging in the company as one of its owners. This ownership in turn, gives the employee incentives to work harder. If they do well, the company does well, and they see an increase in compensation through the stock price.

Most Stock Options currently in the market have a wide range of an employee's total compensation. However, typically the larger stock option plans are seen with employees with more responsibilities and control over what goes on in a department. Employees such as the Senior Fellow typically can see a mean Stock Option of $30,800, 27% of their base pay. Of all positions in the market relating to the Senior Fellow, 65% elect to receive a stock option.

The Six Sigma Group recommends a stock option for the Senior Fellow of 30% of their base pay. This matches with FastCat’s mission to retract top talent by giving a total compensation plan that matches with or is above the industry level. 30% is above the industry average for jobs that relate to the Senior Fellow. In order to be for the Senior Fellow to be eligible for a Stock Option, the Senior Fellow will have to agree to hold the Option for a minimum of five years. This is to prevent the Senior Fellow from cashing in on the Option after a particularly good year, and ensuring he sticks with the option in years where the company may not perform as well.

Electing into a Stock Option plan may also affect other jobs with similar JE points as the Senior Fellow as those employees are likely to have a high level of responsibility as well and would like to opt into a compensation plan. This is definitely understandable and can be accomplished, though with caution. Higher level jobs in the market can spend upwards of $85,000 in stock options. Stock Options provide great incentives for employees to do well but can be very costly and have to be treated carefully.

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Pay-for-Performance Evaluation

In order for a pay-for-performance system to work properly in the long-term, it is important to regularly reevaluate the system to see how it is performing. Based on the data the The Six Sigma Group has gathered, the recommendations given are what is believed to be the best pay-for-performance system to allow for success. However, no system is perfect and The Six Sigma Group has established how to evaluate the system in the upcoming years.

The pay-for-performance should be reevaluated every year for the first three years in effect. At the end of each year, both employees and customers should be given the same surveys as before the new system was implemented. The employees should also receive a more in-depth survey on how they work with their peers and team members. The employee metrics that should be focused on are “I understand how my pay is determined,” and “When I do a good job, my performance is rewarded.” The customer metrics that should be focused on are “Overall satisfaction with the FastCat software,” “FastCat Representatives are trustworthy,” and “FastCat products are worth their cost.” Lastly, FastCat should pay attention to the company’s revenue by year and revenue from new customers. These factors all come into play and will relate to how well FastCat is performing to its mission and the goals that The Six Sigma Group has recommended for FastCat.

Adjustments can be made after the surveys have been conducted to see if recommendations made by employees can make the new system more successful. After the three years are over, the entire system as a whole should be evaluated to see if it had been a success or failure, and, at that point, FastCat should decide if the new system should be continued.

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FastCat Project - 2016

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Transcript of FastCat Project - 2016