Screening

Compensation Issues

 
Compensation takes two forms: (1) direct compensation (wages and salaries) and (2) indirect compensation (fringe benefits).

 
Direct Compensation

 
Wages and salaries are the compensation people receive on a regular basis (monthly, biweekly or weekly). Workers are paid on the basis of time (by the hour, day, week or month) or on the basis of output (an incentive plan).

Some of the legal issues regarding wage and salary compensation include

 

• Wages and hours -- The Fair Labor Standards Act of 1938 introduced the minimum wage and the 40-hour work week. As of April 1, 1991, the minimum wage is $4.25 an hour. The law also specifies that workers must receive time-and-a-half pay for time spent on the job in excess of 40 hours. (Not all employees are covered by this act; managers, professionals and sales personnel may be excluded.)

• Eligibility to work -- The Immigration Reform Control Act of 1986 was intended to reduce the number of illegal immigrants seeking jobs in the United States. Under the law, employees hired after November 6, 1986, must show proof of their identity and eligibility to work. There are sanctions against employers who do not comply withthis act.

• Child labor -- The minimum age for children in most jobs is 16 years old. Fourteen- and 15-year-olds are restricted to a few jobs, such as filing and sales. Persons under 14 years of age may work only under certain conditions.

• Social Security -- The Social Security Act passed in 1935 provides a minimum guaranteed income to retired and disabled persons. This system is funded by a tax on both employees and employers. In 1990 employees were required to pay the system an amount equal to 7.65 percent of the first $51,300 earned. Employers are required to match that amount.

• Unemployment benefits -- Each state has a program for providing protection for those who lose their jobs (usually through no fault of their own). While programs vary from state to state, each program must comply with certain federal guidelines. Employers pay a tax to the state, which maintains these funds for use by the unemployed.

Indirect Compensation

 
Fringe benefits are an important part of the overall compensation package in most small businesses. Employee benefits now account for about 40 percent of payroll costs. The profitability of the small firm is one of the primary determinants of what benefits are offered by the firm.

 Cafeteria Planning

 
One successful approach to providing benefits to employees of a small business is to allocate a certain amount of money per employee for benefits. Each employee then chooses the package of benefits that suits his or her current needs. This approach is called cafeteria planning because it is similar to going down a cafeteria line, where each customer chooses what he or she wants to eat. It has been suggested that employees perceive this approach as highly equitable because it (1) allows freedom of choice and (2) does not impose a single package of benefits on all employees.

For example, a young employee with several small children may be interested in dental insurance for his family. He is not really interested in or motivated by a pension plan at this time in his life. Another employee in this same company is in her late forties, has no dependent children and is planning for retirement. To force the same benefit on these two employees is not an effective use of benefit money. To allow some choice on the part of participants is a major advantage of the cafeteria approach to benefit planning.

Small businesses face difficult challenges when they try to match benefits with big firms. Nevertheless, the small firm can enjoy the benefits of greater flexibility and innovativeness by offering a cafeteria plan.