How do you handle this delicate situation with the employee who received the wrong letter?

You are a middle manager working for a Fortune 500 technology company.  To improve productivity and profitability, the organization has moved to a dispersed model with many individuals working from home-based offices.  Travel restrictions are strict and team meetings are held by audio and video conference.  One-on-one interactions are primarily through instant messaging, email, video chats and phone calls.

You manage a dispersed team of 10 technology professionals located in seven different cities in the U.S.   Compensation structure (salary ranges) are adjusted so that employees living in high-cost cities such as Los Angeles and Chicago have higher salary ranges than those living in lower cost cities.  Compensation adjustments are made once per year using strict guidelines issued by Human Resources (HR).  The formula for base salary increases uses approved budget (pool of dollars available); performance rating; and, position in salary range to calculate each individual’s salary increase.  The rating system is as follows:

• Category 1 – Greatly exceeds expectations
• Category 2 – Exceeds expectations
• Category 3 – Meets expectations
• Category 4 – Does not meet expectations

The company uses a forced distribution model that allows only 5% of employees to be in the highest rating category, “1 – Greatly Exceeds Expectations”.  Only those who are in Category 1 are eligible for a personal bonus (which can be as much as 10% of annual salary).

There is always a lot of ‘executive intervention’ in how ratings are allocated and several of your employee’s ratings and recommendations for personal bonuses were changed by your boss so that he could make his budget balance.  There were issues with the HR technology this year and you were late in receiving the letters which must be provided to employees before their scheduled ‘meeting’ with you.   In your haste to get the letters to each employee before your scheduled calls, you realize that you have sent one employee the wrong letter.  She now knows that one of her peers makes significantly more than her (the peer is based in Chicago and is lower in his salary range and she is based in Springfield, Missouri and near the top of her salary range) is receiving a higher base salary increase for the same performance rating and is also getting a personal bonus.  To make matters worse, you know that these two employees have had a lot of friction over the years.

How do you handle this delicate situation with the employee who received the wrong letter?  What, if anything, do you say to your boss?  Do you address this issue with your Chicago employee (who’s letter was sent to the peer?)  Do you discuss it with the whole team?  Do you notify Human Resources of the issue?  How do you ensure that this does not happen again? Support your positions with facts, theories or reasoning.