by designing compensation contracts that maximise the value of employees' output net of costs, the firm's value is maximised and both owners and the employees of the firm are better off. Owners have incentives to design compensation packages to attract and retain employees with required skills at the lowest possible cost.
THE LEVEL OF PAY
Thebasic competitive model suppose that the labor market is characterised by:
. The labor market is competitive
. Market wage rates are costlessly observable
. Individuals are identical in their training and skills
. All jobs are identical, they don't vary in risk, location...
. There are no long-term contracts
. All compensation comes from monetary compensation, it means there is no fringebenefits
It's worth hiring a new employee when the marginal revenue product is higher than the market wage rate, graphic of the page 384
it characterises individuals as having a set of skills they can rent to employers, the value of the human capital is determined by supply and demand in the market place. It's useful to differentiate between general and specific capital.
Firmsdon't invest in general human capital but they do when it is related to specific skills.
General skills are paid by employees, not by the firm because employees have to form themselves to make more attractive the idea employers contract them.
The model studied before says that conditions of work are the same but it is not true. To attract individuals to lessdesirable jobs they must be paid an increase payment, it is called a compensation wage differential. However if you increase safety, you save money, the company reduces costs, so organizations have incentives to reduce the risk of injury in order to reduce wage premiums, to reduce labor costs,
People who take risky jobs are the more tolerant to risk because individuals can choose the job theywant, self-select based on their risk preferences, because of this compensation differential is lower than if a firm attempted to hire a randomly selected person from the population. Risk-averse employees prefer a safe environment at a low cost , low wages because they are low risk jobs.
COSTLY INFORMATION ABOUT MARKET WAGE RATES
Compensation is not readily obsevable, individuals are differentbecause they have different characteristics and generally they are not perfect substitutes so, observing the wage for one individual does not provide information on what it would require to hire another.
If the firm is inundated by qualified applicants when it advertises a job opening, the firm probably is paying above the market wage and in the other way, the firm is probably paying below themarket wage.
In choosing the rate of paying we have to consider the trade-off between incremental compensation and turnover costs: the cost of recruiting employees, training expenses and reduced productivity from employing inexperienced employees. If the employees are going to be in the company for a short time he or she are less likely to be concerned about how their actions affect the long-runcash flows of the firm. However, these turnover costs have benefits to the company, it adds new blood and fresh ideas to the organization.
INTERNAL LABOR MARKET
In contrast to this model, there are a lor of firms which help therir employees to have a MBA and reduce employee compensation but invest in general training and employees make an effort to develop firm-specific skills.
Firms withinternal labor markets establish long-term relationships with employees. Established career paths and the prospect for promotions play important roles in firms with internal labor markets and the rates of pay and job assignments are determined in the internal labor market by administrative rules and implicit understandings. Firms can have more than one internal labor market. In addition, firms...