Business Structure

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Human Resources Management

learning objectives After studying this chapter, you will be able to: LO10- 1

Explain the elements of human resources.

LO10- 2

Discuss the process of hiring employees.

LO10- 3

Analyze the means for retaining employees.

LO10- 4

Determine the pertinent aspects of employee probation and firing.

LO10- 5

Understand Broad Coverage Regulations and Laws.

LO10- 6

Distinguish the unique aspects of human resources within a family business.

USA GYPSUM

In 1998 Terry Weaver was working in farming and construction when a local agronomist suggested he use gypsum left over in drywall scraps for his land. This interaction led Terry to recognize a business opportunity. Gypsum (calcium sulfate) is a mineral that results from dried sea beds. The most widespread use of the mineral is to place it between paper to form insulation and the surface for most walls in buildings. The term drywall is also used for gypsum board, and gypsum is a good form of fertilizer. Historically George Washington and Ben Franklin both advocated the use of gypsum on farmland, especially for alfalfa fields. The PH neutral mineral acts to loosen tight soils.

Today approximately 90 percent of gypsum board scraps are placed in landfills, which creates a huge environmental problem. The gypsum board scraps can, however, be recycled by removing the paper and other items that may be in the scrap and salvaging the gypsum for use in agriculture and landscaping.

The firm built their first 2,000 sq ft factory in 1998 and in 2000 moved to a new 16,000 sq ft place. They added a second plant in 2003. Terry’s business today is rapidly expanding. The small plant today can recycle 100 tons of gypsum a day, but this growth did not

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come without struggles. Initially local home builders saved any leftover gypsum board and gave it to USA Gypsum if the firm would haul it away. However, this proved to be inefficient because other tradespeople often dumped their trash into the bins provided by USA Gypsum. Also, these bins took up space that the central contractor needed. To solve this problem, Terry set up a unit of the company that goes to the construction site to support the gypsum board hangers by cleaning and taking out the scraps as they hang the board. Other firms existed to provide this service, but they had no incentive to help USA Gypsum by saving the scraps. Terry’s unit prices its services very competitively, and workers also bring USA Gypsum hauling bins with them. USA Gypsum fills these bins and haul them away instantly, a service the central contractor likes. Thus, USA Gypsum provides a valuable service to the contractors and at a very competitive price. This arrangement allows Terry to create his own supplier of inputs.

Today, USA Gypsum works with more than 70 contractors, and the gypsum for Terry’s business comes from within 100 miles of the home office. The firm continues to expand and prosper, and in 2012 was named as one of the outstanding U.S. firms aiding the environment.

Questions 1. What other recycling-oriented businesses can you conceive for the building trade? 2. How would you expand this business? 3. Do you think there are regulatory issues with expanding the types of recycling?

Sources: R. Brickner, “Gypsum Wallboard Recycling: Closing the Loop in the Middle Atlantic States,” C&D World 1, no. 6 (2008), pp. 29–31; “Made in Berks: USA Gypsum,” Reading Eagle Business Weekly, April 23, 2013, http://businessweekly.readingeagle.com/history; H. Stauffer, “SCORE Names USA Gypsum Outstanding Green Small Business,” Central Penn Journal 28, no. 37 (2012), p. 2; “USA Gypsum Recognized as Outstanding Green Small Business,” C&D World 5, no. 5 (2012), p. 8.

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Friends’ Home Health was within a few days of accepting its first patients.* Betty and Joan had initially hired 22 people, of which 15 were ready to start working after their training. These 15 encompassed a range of skills and personalities. The plan was to rotate all employees through various assignments so they would get as many hours of work as they wanted. This put the entrepreneurs in a position where they recognized that all employees needed to work well together so that the handovers with patients would be smooth. Some patients needed just a few hours of care a day while a family member went out, but others needed up to 24-hour care, which required a minimum of three shifts of workers.

The two partners designed the procedures for employee interaction based on some guidelines they found on the Internet. Employees took basic training at the junior college to ensure they were certified and knew basic health-related issues, but the founders also wanted to be sure the employees were trained to act specifically in the manner they wanted in the client homes. For example, the firm required that all employees call into the central office system to inform the founders when they arrived and started work. Betty and Joan hoped this would ensure that their employees were on time to the client’s site. The new business-persons also wanted to be sure that employees knew how to record goods used so the proper client could be charged for items such as disposable gloves. Friends’ Home Health wanted their employees to be courteous, friendly, professional, and highly knowledgeable about both patient care and the procedures of the firm.

Problems with the employees started occurring the first day the employees saw patients. Several of the employees had significant problems dealing with each other, so the handoffs with the same clients were not handled well. Tardiness by several employees was also a problem. Tardiness not only reflected poorly on the firm but also resulted in detaining other employees who work the shift before them and cannot leave until the new employee arrives. The tardy employees said they were late because of traffic or automobile problems, but the end result nevertheless was that they were late.

The most difficult situation that occurred on the very first day of operation was one employee who cursed at a family member who was instructing the employee on how to get the patient into the bed. The patient was very elderly and fragile. The home health aide was in fact correct about how to get the patient into the bed, even though it was a different approach than the family had been using. Regardless, the two entrepreneurs knew that that it was never acceptable to curse at a customer even if the situation was frustrating. Thus, the employee had to be let go.

Even though letting the employee go was difficult and resulted in the firm being understaffed, it was a blessing in disguise: The fact that Betty and Joan had stood firm on the rules became a model for all the employees. The two entrepreneurs also realized then that they needed to be very clear about the rules and procedures for their employees if they were going to have to fire some of them over these issues. As a result, the entrepreneurs developed more detailed rules and policies tailored specifically for their firm rather than relying on a list of rules downloaded from the Internet when faced with a human resources issue. For example, every time an employee was late to a patient’s home was recorded and a warning was provided. An employee was allowed to be late three times in a six-month period of time; the fourth time in a six-month period resulted in termination regardless of the reason for being tardy. Similarly, the two entrepreneurs were very strict with employees who did not get along with each other and had a policy that a patient is never to be impacted or to see such difficulties. If that rule was violated, then one or both employees could be terminated.

QUESTIONS 1. What other standards beyond tardiness and working well with fellow employees do you think Friends’ Home Health

will need for employees? 2. In your proposed business what would be the key human resources issues you might need to consider? 3. If you have two employees who cannot get along and it is disrupting patient care, how would you work out a solution? 4. If there is no solution, how would you determine whom to let go?

__________ * Recall as noted earlier that the activities in each chapter are laid out to imply sequential behaviors.

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Human resources management includes the hiring, inspiring, and managing of personnel, which is one of the toughest and yet most important functions for an entrepreneurial firm to develop.1 For example, hiring personnel who are consistent with your business strategy and style is critical to business success, since without them it is unlikely that you will be able to implement your strategy. Similarly, managing the firm’s personnel so that you increase employee skill development allows the firm to develop a key resource. This type of resource is one that other firms cannot easily copy and one that may, in turn, lead to better firm performance.2 The business of simply meeting the basic legal requirements of your human resources function can be daunting—yet is insufficient for the firm to be successful. This chapter will explore the rich set of issues, both legal and nonlegal, that a start-up business must consider.

The Elements of Human Resources Human resources has been defined in economics as the quantity and quality of human effort directed toward producing goods and services. What this means to an entrepreneur is far more than simply having the right number of people with the right skills for a particular job. As Friends’ Home Health discovered, you can hire people and train them well but still have problems. The success of entrepreneurial firms pursuing new opportunities requires a number of deliberate actions by the business founder concerning human resources issues.3

The elements that this chapter will explore include hiring employees (job descriptions, job advertisements, discrimination, job interviews, testing, job offers); retaining employees (compensation and benefit systems, wages and hours requirements, performance reviews); and dealing with difficult employees (probation, firing). After dealing with these issues, the chapter will also examine several other issues specifically relevant to dealing with family in a business. We specifically address family business in this chapter. One of the most important differences between a typical entrepreneurial start-up and one that is a family business are issues related to human resources as some of the employees are family.

LO10-1 Explain the elements of human resources.

human resources

As defined in economics, the quantity and quality of human effort directed toward producing goods and services.

The Process of Hiring Employees To visualize how important hiring is to an entrepreneurial firm, compare the impact of one person in a large organization to that of one person in a small organization. If a large organization has 1,000 employees, one problem employee represents only 0.1 percent of its workforce. In a small entrepreneurial firm with five employees, one employee causing problems represents 20 percent of the workforce. An unhappy person not working at full capacity will result in the entrepreneur spending an inordinate amount of time dealing with the problems caused by the troublesome employee. Thus, a poor employee has a triple impact on the entrepreneurial firm: (1) the owner’s time is lost; (2) the organization does not fully benefit from the employee; and (3) the problems may bleed over to other employees. Where larger firms can absorb the resulting difficulties due to their built-in slack (excess resources), an entrepreneurial firm can be devastated by a bad hiring decision. The process of finding and hiring new employees is critical and should involve a series of deliberate steps.

LO10-2 Discuss the process of hiring employees.

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Job Description A job description describes the job that is to be filled. In an entrepreneurial business, this document is not meant to be a formal, highly structured document as it might be in a large corporation.4 Nonetheless, we highly recommend that all positions that are hired into the business have a written job description. Too often entrepreneurs say they know what they want in an employee, but they never write it down. The reason is probably multifold, including a lack of time, an unclear picture of the new position, or a desire to remain flexible for the right individual. However, the process of generating a job description will assist the founder immensely as he carefully considers the skills, background, and ability of a potential new hire. All too often, the entrepreneur who fails to develop a job description ends up hiring someone because he “likes” the person.

job description Document that describes the job that is to be filled.

Taking the time to write down those skills and capabilities will go a long way toward ensuring that all dimensions of the job are considered. For example, today the operation of a computer and the ability to do word processing is widespread. However, if you do not ask the job applicant if she has those skills, you may be unpleasantly surprised after hiring the person. You may even need to be more specific than simply saying you want those general skills. For example, you may need someone who can work particularly fast at typing or entering data into and using an Excel spreadsheet. However, the skills that the average person may have in these areas may not reach the level you need for the specific software program you are using. You will need to determine what skills are critical at the stage of hiring and those that you are willing to help develop after you hire someone.

In a similar vein, there is information you need to share with the potential employee. For example, if you require uniforms, will they be provided or are they an employee’s responsibility? This kind of information may be seen by the founder as a small matter, but it may be enough to impact whether or not an employee will be happy in the job. Imagine the impact if an employee arrived on the first day only to be told that he was responsible for bringing in his own tools, but no one had mentioned that to the employee. When making a hiring decision, the new businessperson needs to consider whether there are skills not required today, but which may be needed in the near future. Putting the job description in writing helps in this process by ensuring that all the elements of the job are considered, as well as forcing the business owner to consider changes as the firm grows. A brief example of a job description is shown below: Job Title: Furniture Refinisher Salary: $26,500–$32,400 per year Benefits: Medical for employee is provided at no cost to the employee. Medical for family is provided whereby the

employee pays a premium equal to the difference between the family-policy premium and the employee- only premium.

Vacation: Two weeks of vacation will be earned after six months of employment. Sick Days: The individual will accrue one sick day for every two months of employment. Description: This individual will be responsible for evaluating, repairing, and refinishing a variety of office furniture,

including desks, cabinets, file cabinets, bookcases, and chairs. Skills: Skills needed in woodworking, metal fabrication, upholstery, as well as general carpentry skills. Having

completed a carpenter apprenticeship program is a plus.

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Many businesses today are virtual, whereby the employees all work remotely and stay connected via the Internet. There can be a tendency in the fast-paced, Internet-based society to not take the time to write up such items as job descriptions. In that setting, however, it is critical that the entrepreneur be even clearer on expectations and sharing information since the direct interpersonal connection is reduced.

EXERCISE 1 1. What jobs will be necessary in your new business during the first year? 2. Briefly outline the skills needed to handle each job. 3. Based on your cash flow statements, how much do you expect to invest in salaries and benefits during the first year?

Job Advertising Once the entrepreneur has generated the job description, she needs to try to attract the largest pool of applicants possible for the job. Although word of mouth is a means to advertise for a job, we suggest that it is but one of many possible methods for attracting a wider audience. There are a variety of ways to advertise and a large number of organizations that can help promote information on your job opening at little or no cost. These include:

College placement offices Trade associations Employment agencies

Similarly, if the business is in a very visible location, then a sign can be posted outside the office. If the business is a virtual business, then placing a notice on discussion boards where people with the specific skill set you desire visit.

A more expensive means to locate potential employees is a traditional help-wanted ad, placed either in a newspaper or on a formal Internet website dedicated to such businesses. These advertisements vary widely in cost and ability to reach the audience you desire. Information from the advertising location on readership or viewership, statistics on reply rates, and rates charged are all important pieces of information for the entrepreneur seeking to place an advertisement.

Finally, for very unique skill requirements, there are companies that do an extremely good job recruiting and placing people. These companies traditionally charge the company seeking to hire the employee, and that fee can range from a set fee to a significant percentage of the placed employee’s first-year salary. This can be very expensive, so the new business owner needs to clearly think through the benefits of casting a more professional net.

In writing the advertisement for the new hire, the entrepreneur should keep it concise and oriented toward the basic information needed for a potential applicant to evaluate his qualifications for the position. However, there are thousands of generic advertisements placed every week that look identical to one another. You will want your advertisement to be distinct enough to stand apart so it will draw the attention of potential applicants. If possible, your ad should communicate the culture of the firm and your desire to have the right person join your organization. The advertisement should also express excitement about the business. Overall, remember to write the ad to sell the job and the business honestly to the potential employee. Even though many people who read the advertisement may decide that they are not qualified, you would like them to walk away with a positive view of the business from their reading of the advertisement.

The advertisement should ask applicants to submit a résumé and a short list of references. Virtually all potential candidates will have résumés prepared unless they are applying for jobs at the very lowest skill levels. A deadline should be established for applying in order to fairly evaluate the applicants

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in comparison to each other. A typical wording might state, “The application deadline is January 15, 201X, or until the position is filled.” This allows a comparison across candidates after January 15, and also allows for the possibility that no one will meet all of your requirements by the deadline.

discrimination In the workplace, hiring, dismissal, level of pay, or promotions based on race, color, gender, religious beliefs, or national origin of the employee. Such actions are prohibited by federal and state laws.

Discrimination. It is important in designing the advertisement that the firm use nondiscriminatory language. Title VII of the Civil Rights Act prohibits discrimination in hiring, dismissal, level of pay, or promotions on the basis of race, color, gender, religious beliefs, or national origin. This law currently applies to all firms with more than 25 employees. However, there are also state laws that may apply to firms with fewer than 25 employees, plus other federal laws that put the entrepreneur at risk even if the firm has fewer than 15 employees. Therefore, the entrepreneur should avoid any discrimination or even the appearance of discrimination. The adherence to a nondiscrimination posture takes effort by the entrepreneurial business.5

Supreme Court rulings have played a huge part in how human relations function in modern business.

The entrepreneur should write job descriptions and advertisements in a nondiscriminatory manner. Terms such as salesman, handyman, young, or counter girl should be avoided. Antidiscrimination laws do not require that you hire any one particular person; however, you must give everyone an equal opportunity to be considered. The wide advertising of a job and the establishment of a job description will help the entrepreneur establish that he or she acted in a nondiscriminatory manner. If you advertise widely, you have not prevented anyone from applying. The job description helps to ensure that all individuals are judged on the same basis.

EXERCISE 2 1. Pick a position in your new business and outline the needs for the business. 2. Write an ad for this position in your new business. 3. Have your fellow classmates evaluate it for effectiveness and proper language.

Interview Regardless of whether the candidate has or does not have a résumé, you should ask each one to fill out an application for employment. It is important to establish set criteria for every applicant and to have the ability to track exactly who applied for each position. A variety of generic forms are available at any office supply store or via any one of several software packages. We believe that at a minimum, the following information should be obtained in the application and interview process:

Name, address, telephone numbers (home, cell), e-mail address (if applicable) Other addresses for the past three years Social Security number (SSN) Driver’s license number and state of issue

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Work history

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Date available for work Position for which the candidate is applying How the candidate heard about the job Education and training Professional organization memberships Any record of conviction and, if so, details of that conviction If not a U.S. citizen, the appropriate documentation authorizing the candidate to work. (Note that sometimes very good people

will come and apply for a job and ask you to sponsor them. This typically requires several thousand dollars, which the applicant may be willing to pay. You as a business owner will have to be willing to take the time to act as a sponsor. You will also have to verify that this job requires some unique set of skills that only this person has.)

References Once the candidate pool has been set, the founder must winnow the candidate list down to a group to be interviewed. If possible,

we recommend that you sit with the applications and the job description at one set time period, so that a direct comparison of the applications and job needs can be completed. Many businesses use some type of video feed program (e.g., Facetime or Skype) to interview candidates without having to incur travel costs. Those candidates who do not have the minimum requirements for the position should be rejected immediately. Those who closely match your job description should be the ones where you focus your next effort. Those that appear to be the best fit in that group should be considered for an interview.

During the interview process (whether it is in person or done electronically), it is important that the entrepreneur not discriminate against any given individual. There is a short list of topics that should not be asked about in any interview. You should not ask questions about, nor can you consider in the hiring decision, any of the following:

Age Race Disability Gender National origin Religion or creed

Note that you can ask about prior convictions, but you may not ask about the candidate’s arrest record. An arrest is not the same as a conviction. In summary, the discussion during the interview should be based on the needs of the job.

The interviewer should also use the interview to provide a realistic preview of the job and the company to the interviewee. You should not overpromise what the job will be or the relevant job security present in the firm. Too often firms try to sell the employee on the job by overprom-ising what the job is or underselling the expectations the firm has of the employee. Instead, you should provide a valid and realistic perspective that promotes the firm but also sets appropriate expectations for the potential employee.

Although it is a tedious process, the founder needs to check as many references as possible. However, the entrepreneur should balance the checking of references with the nature of the job. If the job requires very low skills, then perhaps the need for references might be a bit less important. However, if the job is more central to the organization and has higher

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required skill levels, then the importance of the references increases. The entrepreneur should also closely check references if the employee might be in a position to put either the business or its customers at risk. Thus, someone mowing lawns for you in a lawn mowing business might require only a simple employment check. In contrast, a new plumber, who will have access to clients’ homes and must be covered under your liability policies, requires a more rigorous background check. The references proposed by the interviewee and any others that the founder believes would have knowledge of the person should be contacted. If the job requires driving, as it does for many salespeople, then the entrepreneur should inform the job candidate that he will be checking the candidate’s driving records. In order to make these contacts and receive information, the person hiring must have signed permission from the candidate.

The interview process and the checking of references is a time-consuming process. It is for this reason that the screening of résumés or applications prior to beginning this course of action is important. However, the entrepreneur does not want to shortchange the interview and reference process. As a result, you should keep your mind open about which candidate to hire after an initial interview and background check, and then conduct a second round of interviews.

Some organizations go even further in making sure that the person is right for the firm and the firm is right for the person. For example, several organizations that we have worked with over the years require the candidates to spend a full day at the company. During the day the applicant will work with other members of the team, have lunch with the other workers, and get to see and be seen in the day-to-day environment. An evaluation by the employees of the company and the candidate at the end of the day provides the needed feedback to management prior to a hire decision. The entrepreneur should keep continuous records of all advertisements that have been run whether a physical publication or on Internet, who responded, and the criteria for the job. If there are ever questions and/or if discrimination is charged, this type of record keeping will be quite helpful in defending your actions.

Testing Ultimately, the entrepreneur should choose the employee that best meets her needs. Testing can be a part of that decision process, and testing comes in many forms and in response to many concerns. Some business owners wish to assure a drug-free workplace, and the founder has the right to insist on testing.6 In fact, some states, such as Florida, offer a reduction in the rates of workers’ compensation insurance if the business has a drug-free workplace program. This can be encouraged by requiring all new employees to submit to a drug test as well as requiring all employees to periodically submit to random drug testing. Most entrepreneurial businesses choose not to have drug testing, and they face risks in conducting such tests. The privacy rights of employees can come into conflict with the desire to have a drug-free workplace. Entrepreneurs are encouraged to consult a local lawyer before beginning such a program. An interesting question that faces many entrepreneurial firms in a state like Colorado or Washington is how to deal with a drug-free workplace when marijuana is legal in the state.

Another level of testing consists of testing candidates on the basic requirements of a position. For example, we know of one business that requires all of its potential employees to pass a 10-question, multiple-choice basic mathematics test to be eligible for an interview. The founder’s explanation for this is that every employee is handling cash, and

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basic mathematics is a fundamental need of the organization. A number of companies extend this testing to include personality testing or work behavior testing. All of this is perfectly acceptable if a direct link between performance on the test and the skill set necessary for success on the job is made.

EXERCISE 3 1. Prepare a set of questions for an interview of the potential employees you identified in Exercise 2. 2. What types of testing might be appropriate for your business?

The Offer Once you have selected your top candidate, you need to extend an offer. We suggest that all of the details of the offer be developed prior to any conversation with the candidate. Consideration should be given to the possibility that the candidate might wish to negotiate the deal. You should decide on your negotiation position and how much you are willing to offer for this particular candidate. While this negotiation is primarily an art, we do recommend that once an offer is made, you allow the candidate the opportunity to accept the offer or return to you very quickly with a counter position (establish the amount of time that the offer will remain in effect before you withdraw it and offer the position to another candidate). At that point, you can make whatever concessions you think are appropriate and then respond to the candidate. Once an offer is agreed upon between the parties, it should be put in writing by the founder, signed, and sent to the candidate. Only when the candidate returns a signed original of the offer letter should you consider the position closed. We don’t wish to be too formal with this process, but we have watched many entrepreneurs be frustrated by employees who thought their agreement differed from that actually offered by the firm.

LO10-3 Analyze the means for retaining employees.

The Means for Retaining Employees Once you have actually hired each new employee, you’ll want to retain the employees that perform well. The above process takes a lot of time and effort. If it is done poorly and you don’t retain the employee, then this process can simply be a waste of valuable time and money, not to mention the loss of productivity as each new employee has to be brought up to an acceptable level of performance. Therefore, the entrepreneurial business needs to retain those employees that add value. The key issues here are the compensation and benefits offered as well as the method and means of reviewing performance.

Compensation is going to be a hot topic among employees, which makes equitable treatment in an employer’s best interest. Are there ever instances in which paying two employees a different amount for the same job and experience might be a good idea?

Compensation The compensation system chosen by the firm is the aspect that is often highest in the minds of employees. In building the compensation system, the entrepreneur needs to maintain a fair and equitable system for all employees, both now and as the firm progresses into the future. Salary and benefits may appear to be a private matter between you and your employees; however, history would suggest that all information quickly becomes public knowledge among fellow employees. Even if the firm is a virtual one and no one works in the same office, the employees will easily communicate with each other on issues of compensation.

Equity theory is helpful to understand how to avoid problems with compensation. This theory argues that we all judge how we are treated relative to how we see others being treated. Thus, employees have a

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powerful need to feel that their compensation given their level and performance is equitable relative to that of other employees in their firm or other individuals in similar situations. As a result, all employees need a clear rationale for how their compensation stacks up against that of others in the organization. Employees can accept that someone who has been in the organization longer has a better overall package; however, they will have difficulty accepting it if they are hired at the same time as another employee and do the same job but receive less pay. The owner might have a reason for that difference, but the presence of the difference would be difficult for the employee to understand.

equity theory

The theory that we all judge how we are treated relative to how we see others being treated.

Owing to the level of complication within the workforce of most large firms, these firms require a systematic program that evaluates comparable employees both in the region and around the country. This systematic review of the employees will often include the following: (1) how they performed relative to their objectives; (2) plans for future employee growth through experience and training; (3) defined objectives for the next year; and (4) pay raise being awarded.

An entrepreneurial business needs a significantly less developed system than does a Fortune 500 company. The entrepreneur should decide on a basic form of compensation. The options might include the following:

Hourly wage Salary Commission Hybrid/profit-sharing system

hourly wage The amount paid per hour for work performed.

salary A set amount of compensation for a given time period.

commission Payment by the entrepreneur of some percentage of sales, typically associated with the compensation of sales representatives.

An hourly wage is simply the amount paid per hour for work performed. A salary is similarly straightforward, as it is a set amount of money for a given time period. A commission is involved when the entrepreneur pays an individual a percentage of sales, and is typically associated with the compensation of sales representatives.

A commission compensation system can be abused and may be a source of frustration for employees and the entrepreneur. Abuse of the system can occur when the salespeople are so focused on their commission that they fail to watch for the overall good of the firm. For example, a commission can be based on sales made, and those sales could involve financing instead of immediate payment. A difficulty might occur with a particular salesperson who books a large number of clients who are financially weak and who later default. The salesperson got the commission, but the firm is stuck with bad accounts.

Another potential for frustration with commissions comes when the firm either does, or does not, change the commission program to reflect the growth of the firm. To illustrate, when the company is young, the first salesperson may be paid a commission of 20 percent on sales. As the firm expands and hires more salespeople, the business would suffer if the owner attempted to continue paying a 20 percent commission. At this stage the firm is more established, with customers contacting the firm directly. Yet, the founder would have difficulty telling the new salespeople that he would be making less per sale than the existing salesperson. Similarly, the founder would have difficulty in cutting the existing salesperson’s commission. Therefore, when you set the first salesperson’s commission, realize that you may be establishing the standard for a long time in the organization. Any change will be viewed by those already in place as a negative.

hybrid compensation system A compensation system where there is a salary along with commission.

profit sharing An example of a hybrid compensation system. The firm may set some relatively low level of salary but offer to share a percentage of the profits at the end of the year or some other period of time with the employees.

The entrepreneur can also build a hybrid compensation system, where a sales commission can be paid in addition to a basic salary. Profit sharing is another example of a hybrid system. The firm may set some

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relatively low level of salary but offer to share a percentage of the profits at the end of the year or some other period of time with the employees. A bonus system is similar to profit sharing; a bonus is offered to the employees based on their performance. Typically, bonus systems are not as well defined as profit sharing; instead, the level of reward is left to the discretion of the entrepreneur. The time period for which such profit sharing or bonuses are given should be relevant to the individuals in the firm and within the realities and constraints of the business. It is important that the entrepreneur provide bonuses in a timely manner. An entrepreneur may visualize a year as a relevant time frame, whereas workers may be looking for monthly or quarterly feedback on their performance through a bonus. It is very useful for the entrepreneur to consider the industry standards in developing her compensation system. Those in your industry who have developed a compensation system that works have the potential to provide information not only on the level of total compensation but also on how to structure it.

bonus

Similar to profit sharing, a reward offered to the employees based on their performance. Typically, bonus systems are not as well defined as profit sharing; instead, the level of reward is left to the discretion of the entrepreneur.

Legal Issues with Pay. The Fair Labor Standards Act (FLSA) establishes a minimum wage for workers. Virtually all workers (other than workers on small farms and administrative employees) are covered by the act. This law requires that employees be paid a minimum wage, which in 2014 was $7.25 per hour. However, states or cities may have higher minimum wages. For example, in 2014 the minimum wage in Seattle became $15.00 per hour. It is even possible for local governments to pass their own minimum-wage requirements as long as they exceed the federal requirement. Many major cities have what they call “living wages”; a living wage is an index wage that requires the minimum wage to be at least what someone who works 40 hours a week needs to stay out of poverty. If your business is covered by the FLSA, it is also covered by the Equal Pay Act, which requires that an employer not discriminate in pay to men and women who do the same job.

The FLSA requires that all nonexempt employees who work over 40 hours a week be paid at the rate of time and a half. Compensatory time is not typically allowed from one pay period to the next. Therefore, if the pay period is only one week and you have employees work overtime this week, then you must pay the overtime rate for those hours. You cannot give them time off next week as compensation. If, however, the pay period is two weeks, then time off in one week can be used as compensation for time worked in the previous week. Thus, the firm needs to be very clear on its time frame for issues such as pay. Another legal issue related to pay is child labor. The government closely regulates the use of children under age 16. The entrepreneur would be well advised to seek out legal advice if he plans to employ children, even his own, in the business if they are younger than 16 years of age.

Fair Labor Standards Act (FLSA)

The act that established a minimum wage for workers.

Benefits There are a wide variety of benefits that any business can choose to offer. For example, benefits can include the following:

Paid vacations 401(k) plan Paid holidays Medical care Retirement plans Sick leave Life insurance

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The package of benefits the firm chooses to offer can have as much impact on the success of the entrepreneurial business’s human resources efforts as the compensation offered.7 Some benefits represent costs to the entrepreneurial business but are relatively easy for the entrepreneurial business to provide. For example, a two-week vacation after an individual has worked at a firm for a year can be provided by most firms. There is an expense since you are paying an employee that is not working; however, calculating when the benefit is due and managing the process is relatively easy. The same may be said of paid holidays and sick days; the sick days build up over time as the employee is working with the entrepreneurial business.

Benefits that are more difficult to effectively manage include medical care and retirement plans. Medical care is one of the most expensive costs for any business, and yet it is also one of the most desired benefits by employees. On average, private businesses spend in excess of $4,000 per person per year providing health care for their employees.8 However, historically, the plans most entrepreneurial businesses provide are not the full-coverage plans provided by large businesses. In fact, at one time many small businesses did not offer any insurance to employees. Now under the Affordable Care Act, firms with more than 50 employees are required to offer their employees insurance. Federal and state governments have established exchanges grouping individuals and small firms together in an effort to seek to lower the health care insurance expense. There are also tax incentives for small entrepreneurial firms to encourage them to offer health insurance to their employees, even if it is not required. One of the biggest beneficiaries of this act, in fact, are the entrepreneurs in a business that employs only themselves and their family. Now under the exchanges these individuals can obtain a more reasonably priced health care product.

The impact of such costs to the entrepreneurial business compared to the large business cannot be overestimated. One of the biggest differences in the cost of auto plants for such large American auto manufacturers as General Motors versus those from Japan, such as Toyota, who have plants in the United States, is health insurance. The Japanese-owned plants’ pay is equivalent to that of GM, but the Japanese auto plants are all new, and they have hired young, healthy workers. The American auto plants, on the other hand, are staffed by older workers, a trend that only gets more severe with every layoff, since workers with seniority get laid off last. The result is that the health benefits cost GM far more than they cost Toyota. Health insurance can be a competitive disadvantage when U.S. companies have to compete against companies from countries where health care is provided by the government.

For the entrepreneurial business, the cost of health insurance per employee will be more than that for a large firm. Large firms have the advantage of spreading losses across a large number of people, whereas the entrepreneurial business can be dramatically impacted by a single significant claim. To illustrate, out of 100,000 employees you may expect 23 heart bypass operations and can budget for that with insurance. In an entrepreneurial firm, you may have only 10 employees—but what if one employee needs a bypass? The insurance company has likely not charged you enough to cover the costs of the bypass, no matter what it has charged you in the past. The result is that the entrepreneurial firm is a much greater risk than the large firm. This leads to higher deductibles, user copayments, and out-of-pocket costs for employees of an entrepreneurial business. The entrepreneurial businessperson will need to investigate the costs and packages offered by a variety of insurance companies. The sources for such insurance can be located through other entrepreneurial businesses in the area, the chamber of commerce, national trade associations, and the Internet. The entrepreneurial businessperson would be well served to investigate and compare various medical programs closely before choosing one. One option that is now also available to entrepreneurial firms is simply to have employees sign up under the health care exchanges created under the Affordable Health Care Act passed in 2010 and affirmed by the U.S. Supreme Court in 2012. The entrepreneurial firm can either provide the employees some funding, which they can apply to the cost of buying insurance from such exchanges or simply tell the employees to join them.

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ETHICAL CHALLENGE You were part of a two-person team that was assigned to interview candidates for a new sales position. The new employee will be on the road five days a week and will need to be able to work with a wide variety of people. The main client companies that the salesperson will have to work with are filled with former military officers.

During the interview, your partner starts asking a series of questions that make both you and the candidate very uncomfortable. After the first interview you talk to your partner about the questions that he asked. They included these: (1) Are you married? (2) Do you own a car? (3) When did you graduate from high school? (4) Do you have any small children at home? (5) What church do you attend on Sundays?

Your partner explains that knowing these answers will really improve the chances of choosing the right candidate and will make it more likely that you will keep that person. He tells you that if the candidate is bothered by the questions, then he or she doesn’t have to answer, and that will tell you all you need to know.

QUESTIONS 1. What should you do? Is there any justification for asking these questions? 2. What if the candidate doesn’t mind answering the questions? 3. What if the candidate does mind answering the questions—how should you respond?

Although traditional retirement plans have fallen out of favor, some types of personal retirement plans have become quite popular. Referred to generally as 401(k) and Roth 401(k) programs, they are usually offered by an employer so that employees can contribute to their retirement on a tax-free basis. Most entrepreneurial firms do not provide any matching, although many larger firms offer matching funds for these accounts.

Performance Reviews No matter the size of an organization, whether the business is brick and mortar or virtual, performance reviews should be a part of the management system.9 In a performance review, the entrepreneurial business owner reviews the employee’s goals and outcomes on those goals over some given period. Workers are motivated by more than salary. The formal conversation with a worker who is doing a good job, showing that her work is appreciated, is another form of compensation. If the worker is not performing as expected, then the employer should also be very clear about that fact. Although we recommend that all performance reviews be done in writing, we do not suggest that a complex form need be used. Providing effective feedback can be handled in a number of ways but should cover each of the areas of the employee’s responsibility.

performance review

Review by the entrepreneurial business owner of the employees’ goals and outcomes on those goals over some given period.

During this feedback, the founder is well advised to provide praise where it is warranted and detail any deficiencies and areas that need to be developed. As will be discussed in the next section, it is critical that the employee know exactly how his performance is compared to

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expectations. Too often the entrepreneur does not want the confrontation, so will give only positive feedback but then later fire the person. The result is a surprised employee who may seek legal representation to get compensation for being unfairly fired. As will be discussed in the next section of this chapter, if you have not provided accurate performance reviews, the individual may win if the parties do go to court.

Central to being able to do any review is the setting of goals for the employee. The setting of such goals allows the entrepreneur to judge how well the employee is performing. These goals should be realistic, tied to the performance of the company, based upon some measurable outcome, and reset periodically. Again, the time frame for these goals should be one that is relevant for the employee. Thus, for some jobs it may be weekly or biweekly, a time period that relates to the pay period. For most jobs, the relevant time frame will be quarterly or perhaps longer.

The Pertinent Aspects of Employee Probation and Firing Despite your best efforts, you will at some point hire the wrong person. At times you may find it necessary to fire that person. The entrepreneur has the right to hire and fire employees. However, you still must have legitimate, well-documented reasons for the firing. If you do not, you are opening yourself up to a lawsuit by the dismissed employee. Furthermore, you should provide all employees (short of their having done something illegal) the opportunity to rectify their performance.

Thus, you must develop a paper trail regarding all employees and must be particularly diligent in your efforts to assist a poorly performing employee. Recall that in discussing reviews, we argued that an employer needs to be honest about an employee’s performance and document those times when she is not performing as desired. This can form part of your paper trail. You specify over time what is expected of the employee and then document how she is or is not performing to expectations. Firing someone for poor performance that has been documented over a time and in which you have offered a means to correct the problem will go a long way toward providing a defense in any legal proceeding and a proper justification for the employee. If there are concerns about firing an employee, the entrepreneur should not hesitate to contact a lawyer for advice.

When hiring an employee, an entrepreneur typically does not consider issues such as a non compete agreement or a secrecy agreement (one designed to protect the competitive advantage of the business). However, when you dismiss an employee these issues may become critical. If you are a restaurant owner and have several secret recipes that are central to your success, then you do not want a disgruntled kitchen worker to post that information on the Internet. Therefore, at the initial hiring, you can limit later problems if you consider having your employees sign the appropriate documents. These documents are available via many software packages and are relatively easy to understand.

LO10-4 Determine the pertinent aspects of employee probation and firing.

Struggling employees are a reality that most entrepreneurs will have to deal with at some point.

Broad Coverage Regulations and Laws There are a series of issues related to employees that all entrepreneurs must be concerned about, although not all companies may be directly impacted by each in the same way.

LO10-5

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Understand Broad Coverage Regulations and Laws.

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Now that the business was up and running, Chris and his wife had a number of family members who wanted to help them and who had skills related not only to a bar and restaurant, but also to the running of an entrepreneurial business. Chris had originally planned to run the business without any aid from his family, but he rapidly found that he needed all types of help. He and his sister had always been close. She was within a month of earning a degree in accounting from a national career school and wanted to work with her brother. As a result, Chris hired her to maintain all of the books, which included keeping track of every item that came into and out of the business. Unfortunately, Chris originally had no idea how much he should pay her or how he would interact with her in the business.

Chris and his sister sat down together at a local coffee shop one morning to talk about her coming on board. He desperately needed someone. Even before the business was formally opened, he was struggling to keep track of his expenses with so many vendors to work with. He knew it would only get worse when he actually opened for business and there were customers to take care of. Therefore, he asked her how much she wanted to make and what she thought would be reasonable. She told him that she was willing to take a minimal salary and virtually no benefits if she could participate in the profits of the business. She suggested that if she really did her job well, then the whole company would do well. Chris liked the idea of sharing the business’s fortunes with his family, since they were so central to his life and to starting the business. He also liked the fact that she would be taking very little from the business unless it did well. Thus, Chris and his sister decided that she would start the next day and that she would work whenever she wasn’t in class. They established a set of company milestones, which, if achieved, would lead to her taking home 5 percent of the profits of the business. However, she would not have an ownership stake.

The relationship between Chris and his sister worked very well. With her help, Chris was able to push the business toward opening more aggressively. Inasmuch as his sister was such a big help, he started to think about other relatives to bring into the business in some manner. He needed bartenders, servers, another hostess, more cooks, and a dishwasher. Chris shared his ideas about hiring more family with his father. Chris’s dad suggested that he especially consider hiring one particular cousin to help manage the restaurant side of the business. This cousin had almost 20 years of experience in restaurants, but he had been in some legal trouble. His personality was a bit rough and, while he was talented, he did not seem very motivated. This suggestion proved very troubling. Whereas Chris was open to hiring family, as shown by hiring his sister, he was not sure if he should hire his cousin. Chris had extensive cash flow coming through the business, and he worried about the cousin’s interaction with the customers. Even though Chris could not imagine his cousin stealing from him, he was not sure of his cousin’s friends. Finally, how could he ever fire his cousin if it did not work out?

On the other hand, he was also not sure how his father and other family members would respond if he did not hire the cousin. Although his father did not say so, he was almost certain his father had made the suggestion because Chris’s uncle (his father’s brother) had made the request.

QUESTIONS 1. What would you do in terms of hiring the cousin if you were Chris? 2. What alternatives would you suggest in staffing?

workers’ compensation

Laws designed so that employees who are disabled or injured while on the job are provided with some type of compensation.

Workers’ Compensation. Workers’ compensation laws are designed so that employees who are disabled or injured while on the job are provided with some type of compensation. Workers’ compensation insurance is regulated by each state, with some states running their own insurance funds, whereas others use private firms. The rates of the insurance can differ widely in the various states, depending on the regulations and generosity of the state legislature. However, the rates for individual firms within that state are fairly standard and are generally based on the industry and size of the firm. The payments are typically given to the employee if he qualifies, whether or not the entrepreneurial business owner was at fault for the injury from an unsafe workplace. However, the payments to the

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employee are limited to partial wage replacement and medical bills. The employee cannot receive workers’ compensation for pain and suffering. The employee usually cannot sue the entrepreneur for his injury if he accepts workers’ compensation payments.

OSHA The Occupational Safety and Health Administration, which is charged with protecting the health of workers.

The Occupational Safety and Health Administration. The Occupational Safety and Health Administration (OSHA) is charged with protecting the health of workers. OSHA has attempted to shape its regulations to be more lenient toward small business. For example, whereas all employees of any size firm are covered by OSHA, firms with fewer than 10 employees do not have the record-keeping regulations that apply to larger businesses. Additionally, any fines are lower for entrepreneurial businesses with fewer than 25 employees than they are for large businesses. Effectively, OSHA will not impact many new entrepreneurial businesses, such as small retailers. However, other entrepreneurial businesses, such as manufacturing firms, need to pay specific attention to OSHA requirements regardless of their size. We would advise an entrepreneur to consult with industry associations and your local chamber of commerce to judge the potential impact on your firm. If the impact looks to be significant, then a visit with your attorney is merited.

OSHA Assistant Secretary Dr. David Michaels holds an “All Hands On” meeting for members of the OSHA Team in Washington, DC.

unemployment compensation Financial assistance for some period of time to those people who lose their jobs through no fault of their own; provided in every state by law.

Unemployment Compensation. Every state has an unemployment compensation law, which was put into place to provide financial assistance for some period of time to those people who lose their jobs through no fault of their own. Unemployment compensation pays to the former employee some set amount of money for a given period after she loses her job. During the time she receives these payments, she is required to look for a job. The entrepreneur is required to pay an unemployment tax to help fund this system. That tax will vary by state depending on the unemployment benefits that state provides, as well as the experience rating (the history of unemployment) of the company.

The Americans with Disabilities Act. The Americans with Disabilities Act (ADA) generally covers those firms with 15 or more employees and provides that each and every business must provide unfettered access to all disabled people. This means at a minimum that ramps or elevators and Braille signs must be provided in the business. The entrepreneurial business may also be required to offer special accommodation to employees who need physical adaptations to work at the firm. Some states and cities have additional requirements beyond the ADA that may impact the entrepreneurial business in this regard.

LO10-6 Distinguish the unique aspects of human resources within a family business.

The Unique Aspects of Human Resources Within a Family Business

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Chris and his experience at the bar/restaurant illustrates a situation that occupies a special category of human resources management, that is, family businesses.10 A family business is one that is generally run by and for a particular family. Human resources in such businesses are still critical, but since family members make up many of the significant employees in the company, everything becomes more delicate.11 The combination of father,

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mother, uncles, aunts, and children all in the business has impacts well beyond the standard human resources practice. The introduction of family brings new issues into the business that must be considered. One difference that arises in such businesses is that hiring does not always occur in the manner described previously in this chapter. Instead, the family member is simply hired. You should recognize that this does not eliminate issues of discrimination if the firm is large; placement of family members because they are family members into positions in a large business can still result in charges of discrimination. The key issue in discrimination is that everyone is not given a fair chance at a job.

Managing family members can be difficult, as these individuals know all of the “hot buttons” that make a fellow family member angry. However, there is no effective way to fire or truly discipline the person without causing major ruptures in the family structure. The result is that family businesses and the human resources in them have more in common with family counseling than they do with the legalistic methods described in the earlier part of this chapter.

One especially tricky human resources issue that occurs in family business is succession. The business may have been founded by the father or mother. He or she is ready to retire and has a son and daughter in the business. Who in the next generation becomes the leader of the business? Too often the parent will put off the tough choices. The parent dies and a battle results in the family. To avoid this situation, the parent needs to choose a successor and prepare that person for the position by ensuring that he or she has all the contacts and understanding necessary to be successful. If the parent then decides to leave the business early, that parent needs to step back and let the designated son or daughter lead the business as he or she sees fit. Firms struggle to survive with two leaders of the business. The fact that the other child is not selected can result in difficulties in the family. Again, part of the means to overcome these difficulties is to work with professionals who act almost as family counselors to help the family see the rationales for the choices and how to deal with them positively.

SUMMARY This chapter examined the wide range of issues involved in the human resources aspects of hiring, rewarding, and compensating employees. Many legal issues are involved in this arena, which explains why there are books devoted exclusively to the topic. We have endeavored to develop a basic checklist for the new entrepreneur to use in the process of developing the firm’s human resources requirements.

The chapter examined a number of complex issues related to human resources and the hiring process, including the following:

1. Hiring 2. Job descriptions 3. Job advertising 4. Discrimination 5. Interviewing 6. Testing 7. Making an offer

The chapter also examined the means by which companies retain employees, including these: 1. Compensation 2. Legal issues 3. Benefits 4. Performance reviews

Human resources is intimately tied to keeping businesses within the legal structures that affect all companies. These include the following:

1. Workers’ compensation 2. OSHA standards 3. Unemployment compensation 4. ADA—the Americans with Disabilities Act

The chapter finished with a short discussion about how human resources actions are changed by being in a family business.

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KEY TERMS bonus commission discrimination equity theory Fair Labor Standards Act (FLSA) hourly wage human resources hybrid compensation system job description OSHA performance review profit sharing salary unemployment compensation workers’ compensation

REVIEW QUESTIONS 1. What means would you suggest to improve the process of hiring the right people for a new business? 2. What elements should a good job description contain? 3. What are the various ways to advertise a job opening? 4. What means would you suggest to help avoid job discrimination? 5. What techniques improve the interviewing process? 6. How can testing be used to improve the hiring decision? 7. What is the best method for making an offer to a candidate? 8. How does compensation impact the ability to retain an employee? 9. What legal issues are related to the retaining and firing of employees?

10. What benefits might be offered to new employees? 11. How are performance reviews related to employee retention? 12. Describe the impact that OSHA could have on a new restaurant operation. 13. How does ADA affect retail organizations? 14. What is the impact on hiring decisions when the business is family owned and run?

BUSINESS PLAN DEVELOPMENT QUESTIONS Develop a human resources plan for your new business that consists of the following items: 1. Pay scale plan 2. Benefit plan 3. Advertising plan 4. Interviewing and hiring plan

INDIVIDUAL EXERCISES Identify an entrepreneurial business in your area and ask the entrepreneur the following questions: 1. How do you recruit new employees? 2. What is your turnover among employees? 3. How do you compensate individuals to try to retain them at the firm a long time?

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4. Do you employ family members? Why or why not?

GROUP EXERCISES Rewrite the following poorly worded job descriptions

1. JOB TITLE: Coffee Room Lady She has to do everything to keep the coffee room running smoothly: ordering and stocking merchandise, as well as collecting money and controlling credit. She is told what to do by verbal instructions from the supervisor. If she has any problems she tells him about it and he tells her what to do.

One of the things she does is to order the merchandise from various vendors. When it arrives she puts it on the shelves for the employees. When they buy the stuff she collects the money or IOUs using a calculator or paper and pencil. Every day she has to clean the coffee room. This includes the coffeepot.

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