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Unionized workers and management may negotiate a contract that specifies certain pay rates and a program of pay increases. Rising prices affect a firm's pay rates by forcing them upward because management wants the company to seem fair and attractive to applicants and to hold on to current employees. Occasionally managers find that skilled workers or professionals who are in short supply (such as computer analysts) can demand higher than normal pay and competitors' pay scales need to be closely matched if a firm wants to attract and retain the best applicants.

How Compensation Is Set

Organizations use job evaluation to rank each job in order of importance in the organization to establish its proper compensation. Factors such as responsibility, education, skill, training, and working conditions may be examined to help management decide where each job fits. The result is a job ladder, or hierarchy, that reaches from the company president to the lowest level of workers.

Once jobs have been evaluated and placed in their order of importance, management—taking into account such previously mentioned factors as legal requirements and supply and demand—creates pay grades. These are pay categories that relate dollar values to the job ladder developed through job evaluation. Each job may have a pay range of several thousand dollars, so jobholders do not have to be promoted to get a raise.

Types of Compensation

Compensation for a job is based on either time put into a job or what is produced on the job. Wages are compensation based on hours worked, while salary is compensation based on weeks or months worked. Salary is intended to provide pay for the time worked and not for what is produced. An hourly wage is the means of compensation generally provided for lower-level jobs in the organization. Managerial, professional, clerical, and secretarial employees normally are paid by salary.

After the base method of compensation is determined, management may also choose to provide bonuses, profit sharing, stock options, or fringe benefits. Let's examine each.

v Bonus. A bonus is incentive money paid to employees in addition to their regular compensation. It may be based on superior production, effective cost control, company earnings, or other performance factors. Some salespeople, for example, may receive a bonus for exceeding sales goals.

v Profit Sharing. Profit sharing refers to paying a portion of company profits to employees as a performance incentive in addition to their regular compensation. Firms such as Kaiser Aluminum & Chemical. Xerox, and IBM have long realized that sharing in a company's profits can give employees greater feelings of belonging and commitment, with a corresponding in: crease in motivation, morale, loyalty, and productivity.

v Stock Option. A stock option is a plan that permits employees to bu; shares of stock in the employee's firm at or below the present mark' price. Some firms have payroll deduction plans to encourage employ participation, and occasionally top managers receive stock options, b nuses, and salary in a total compensation package. Companies may -aside large blocks of shares to sell directly to employees.

v Employee Fringe Benefits. In addition to direct compensation for thejoS being performed, organizations build into the work environment Jrings benefits—nonfinancial rewards provided for employees. Most of them-ffl into one of the following categories.

ü Life, health, and dental insurance

ü Paid vacations

ü Sick pay

ü Holidays, funeral leave, and emergency leave

ü Discounts on merchandise or services

ü Paid lunch and rest periods

ü Tuition reimbursement

ü Child care

Fringe benefits typically have averaged between 29 percent 35 percent of a company's payroll.