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

Quick Review: The Numbers that Matter 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 individuals compensation relative to the mid-point of base compensation within the companys 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 individuals compensation relative to the 50 th 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 Analysis begins with an assessment of internal compensation rates to identify any aberration (via the compa-ratio) and external equity (via the market-ratio)

External Compensation Review: Market-Ratios Nearly 70% of XYZs employees earn more than the current market rate (at the 50 th percentile) for their positions, as defined by the market-ratio 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? Position CategoryNumber of Incumbents Positions with a Market Ratio less than Positions with a Market Ratio greater than 0.8 and less than Positions with a Market Ratio greater than 1.0 and less than Positions with a Market Ratio greater than % of XYZs workforce earns base salaries above the 50 th percentile of the market

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) Position Grade Incumbents Market Ratio > % with MR > 1.041%83%96%68%63%56%88% Overall workforce % with MR > 1.068%

Internal Compensation Review: Compa-Ratios Approximately half of XYZ Manufacturing Companys 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?

Potential Cost Savings Ideas 1.Re-evaluate the current market rates for all new hires (replacement and new positions) to avoid the overpayment tax in current and future years 2.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 3.Institute/reinforce a pay-for-performance approach to salary reviews, increasing salaries only for individuals with stellar performance, thus reducing annual performance increase costs 4.Create rigorous salary limits for certain positions/grades (entry level positions may be a place to start) 5.Refresh data on current market rates at least every 6 months to ensure that XYZs pay ranges are not inconsistent with current market rates 6.Others?