Well, for everyone you give an EX who could possibly have been an O, that means you can bump someone else from an E to an EX...
Say you have a team of 40 people. 10 are getting an IE because they suck. Say your merit budget is such that for the other 30 people, you could afford to give 10 O, 10 EX, and 10 E. It would cost the same amount of money (not accounting for the fact that people are starting at different amounts, but whatever, you get the point) to instead give 30 EX and no E and no O. I think that would actually be better for morale overall, don't you? I'm basing this on the following theory: Considering how crappy the raise is for an E, the amount of "happy" that you create by bumping a person from an E to an EX is greater than the "happy" you create by bumping someone from an EX to an O. Thus, if facing the choice of TM1:O/TM2:E or TM1:EX/TM2:EX, you should always choose to give them both EXs if you're interested in doing the best thing for store morale.