Collective Bargaining Michael R. Carrell & Christina Heavrin Labor Relations and Collective Bargaining Seventh Edition www.prenhall.com/carrell PART III: Cost of Labor Contracts CHAPTER 6 Wage and Salary Issues © 2004 Prentice Hall Inc. All rights reserved

Chapter Outline Union Wage Concerns Management Wage Concerns Negotiated Wage Adjustments Wage Negotiation Issues Wage Surveys Costing Wage Proposals Union Wages and Inflation Public Employee Wage and Salary Issues

Labor News Donald Fehr: Avoiding Strikes in Major League Baseball Called most power labor leader in America because of the success of players’ strikes Fans put economic pressure on both sides Owners unable to hire replacement workers Issues in the 2002 negotiations included: Revenue sharing Luxury tax Number of teams Drug testing Salary arbitration Competitive draft Worldwide draft

Wage and Salary Issues Wages considered most important and difficult bargaining issue Employees consider pay the primary indicator of employer goodwill Wages and benefits are largest single cost factor on employer’s income statement Total wage and benefit package often negotiated as a complete item rather than treated individually Permits both sides to estimate accurately the total cost of the settlement on wages and benefits

Wage and Salary Issues (cont.) Pay may be defined as: Pay for time worked Hourly wage Annual salary (usually expressed in pay grades) Pay for units produced Piecework More agreements provide annual salaries expressed in pay grades

Union Wage Concerns Dissatisfaction with pay will be brought to the bargaining table Pay equity - “equal pay for equal work” Obtaining pay equity is difficult As long as pay grades are fairly structured and evenly applied, workers will accept differential pay based upon job classification and internal wage levels Longevity is accepted as a basis for providing higher wages

Union Wage Concerns (cont.) Union wage objectives 8 dimensions of the effects of unions on wages Union goals in wage bargaining Achieve the maximum level of wages and benefits Maintain all the jobs possible within a viable industry Union-nonunion wage differentials - on average is 15% Union wage differentials over time - modest decline since the 1980’s Union wage rigidity and wage concessions - no give-backs Wage structure - flatten wage structure Form of compensation - prefer wages based on time or hours worked Employment effects - try to create or maintain more jobs Pattern bargaining - try to obtain similar wage gains from separate employers

Union Wage Concerns (cont.) Industrial differentials Relationship between labor and production costs affects wages Labor-intensive industries less able to provide wage increases than capital-intensive industries Union wage gains generally highest where: Employer’s ability to pay is high because of discretionary pricing power and profitability Unions practice centralized bargaining Unions avoid fragmentation

Management Wage Concerns Management must consider how wages affect its pricing policy and ability to compete Must maintain competitive labor costs Critical to assess accurately the competitors’ wages and total payroll costs Pay comparable wages necessary in labor-intensive industries Pattern bargaining - national unions negotiate equal pay increases among employers in the same industry Renewed interest in pattern bargaining due to 9/11 uncertainty Value added - theory that wages should equal the contribution of labor to the final product Determining labor’s share of value added to the product is difficult and contentious issue during bargaining

Management Wage Concerns (cont.) Wage laws Fair Labor Standards Act (1938), as amended Minimum wages Exemptions based on size of business and geographic scope of business operations Overtime compensation Pay must be 1 and 1/2 times normal rate for work over 40 hours per week Exemptions based on actual work performed and series of salary tests executives professionals administrators outside salespeople 98% of collective bargaining agreements contain some premium pay above FLSA requirement Pyramiding of overtime pay Mandatory overtime is a major concern of unions

Management Wage Concerns (cont.) Wage laws (cont.) Davis-Bacon Act (1931) Regulates employers who hold government contracts of $2,000 or more for federal construction projects Workers must be paid the prevailing wage rate Prevailing wage generally defined as union scale Opponents state that the Act increases the costs of public construction projects Walsh-Healey Act (1936) Covers employers with federal contracts of over $10,000 Overtime must be paid for any hours worked over 8 per day at a rate of 1 and 1/2 times the normal rate

Negotiated Wage Adjustments Standard rate, pay range systems Flat rate of pay for each job classification Some agreements provide a pay range for each job Contains several steps within a range Permits recognition of different performance levels Unions typically distrust merit increases Claim that performance appraisals are subjective and imperfect

Negotiated Wage Adjustments (cont.) Piece-rate systems Straight piecework - most common Employee paid a given amount for each piece produced Falling piece rate - has standard time and rate of production For pieces beyond the standard, gain shared between worker and employer Rising piece rate - has standard time and rate of production For pieces beyond the standard, worker receives greater proportional increase in hourly earnings Standard hour plans - similar to piece-rate plans Involves a “standard time” to complete each project

Negotiated Wage Adjustments (cont.) Deferred wage increases Specify increases in base pay to take effect on future dates during a multiyear contract Front-end loading - larger proportion of total percentage increase in the first year of the agreement Unions may demand wage reopener clause to revisit wage rates during the life of the contract Back-loaded contracts - provides lower wage adjustments in the first year, with higher increases in later years

Negotiated Wage Adjustments (cont.) Cost-Of-Living Adjustments (COLA) Escalator clause to keep wage rates on pace with inflation Percentage of union workers covered by COLAs most likely to increase following periods of inflation Recently, COLAs not a prime negotiating target for unions Low CPI increases in the 1990s Administrative expense for employers to make frequent adjustments Annual base wage adjustments in multiyear contracts are an effective substitute

Negotiated Wage Adjustments (cont.) Cost-Of-Living Adjustments (cont.) Elements of a COLA Inflation index - most provisions use the Consumer Price Index (CPI) Schedule of adjustments - most provisions specify 4 per year Change in base pay - COLA treated as a component of base pay or as a benefit COLA maximums - some contracts specify a cap on COLA increases during the life of the contract

Negotiated Wage Adjustments (cont.) Profit sharing (or bonus plan) Workers receive a lump-sum payment in addition to regular wage Management favors lump-sum payments because: Payment does not automatically carry over to future years Payment does not automatically increase cost of benefits Payment only made if company makes a profit Payments not tied to inflation Pay is related to productivity Workers feel more a part of the company

Negotiated Wage Adjustments (cont.) Scanlon group incentive plans Basis for labor management cooperation Committees meet to consider cost-savings suggestions Actual cost savings divided among workers and the company

Negotiated Wage Adjustments (cont.) Two-tier wage systems Pays newly hired workers less than current employees performing the same or similar jobs Unions have accepted two-tier systems in order to help preserve job security Violation of union position on pay equity Initially, unions claim that they have saved jobs 5 to 10 years later, resentment builds among lower paid workers Contract may or may not provide for the eventual merging of the two tiers Decline in the use of two-tier systems

Negotiated Wage Adjustments (cont.) Lump-sum payments Increasingly popular with management Total cost during the contract is easier to predict Do not increase hourly wage rates Do not preclude the negotiation of a wage rate increase

Wage Negotiation Issues Productivity theory Employees should share in increased profits caused by their greater productivity Problematic to determine what percentages of productivity and profitability increases are attributable to employees’ labor as opposed to machinery, equipment, and managerial ability

Wage Negotiation Issues (cont.) Ability to pay Unions contend that if the company is experiencing high profits, it can better pay its employees who have contributed to the good financial fortune Management perceives many limitations, including: Unions seldom willing to take pay cuts in bad times Higher profits should be reinvested in the company Negotiated wage rates do not co-vary with profit levels Companies reluctant to share financial data with unions Estimated total profits available during the term of the new contract is an important number

Wage Negotiation Issues (cont.) Job evaluation Process of systematically analyzing jobs to determine their relative worth within the organization Creates a pay system with a rate for each job commensurate with its status within the hierarchy of jobs in the organization Union and management can use job evaluation to guide negotiations Job classification common in labor agreements Employer may not unilaterally change job classifications

Wage Surveys Provide information on external labor market conditions Helps assure that negotiated wage rates are justified by market conditions Often difficult to agree which source of wage information contains jobs and data applicable to a particular firm U.S. Department of Labor Industry wage surveys Employer conducts own survey Provides ballpark information to negotiators

Costing Wage Proposals Determines the financial impact of a contract provision change Economic provisions can be reduced to dollar estimates Non-economic items more difficult to reduce to dollar estimates Accurate costing procedures accepted by both sides with little disagreement

Costing Wage Proposals (cont.) Because labor costs are the single largest cost incurred, wage proposals require accurate costing Methods used to cost union wage provisions Annual cost - total sum expended over a year on a given benefit Cost per employee per year - total costs of a benefit divided by either: Average number of employees for the year Number of employees covered by a particular program Percent of payroll - total cost of the benefit divided by the total payroll Cents per hour - total cost of the benefit divided by the total productive hours worked by all employees during the year

Costing Wage Proposals (cont.) Elements in determining compensation costs Base compensation - employee’s annual salary Total cost per employee is base plus cost of benefits Essential for negotiators to be aware of how much a 1% wage increase will cost in thousands of dollars per year Roll-up (add-on or creep) - increase in the cost of benefits caused by a negotiated wage increase Roll-up percentage computed by dividing the cost of the directly increased benefit by the cost of the wage increase Benefit costs that increase include: Social security and unemployment insurance Life insurance Overtime pay and shift premium Pension benefits

Costing Wage Proposals (cont.) Elements in determining compensation costs (cont.) Total negotiated costs - both sides must maintain their estimated costs of wage and benefit agreements Both sides know the total cost when new items added to the contract

Union Wages and Inflation Wage-price spirals often blamed on negotiated union wage rates Critics contend that union wage increases affect wages in nonunion sector Management response in nonunion company depends on size of company Difficult to prove that union wage increases cause a large proportion of employers to raise nonunion wages There may be several other good reasons for raising wages Outcome might be similar without union pressure

Public Employee Wage and Salary Issues Title VII - federal statute governing employee rights Excludes wages and benefits from purview of collective bargaining Unions may bargain about distribution of legislatively-determined salary budget among: Classes of employees Base wages, benefits, bonuses, incentive pay Collective bargaining still is a strong determinant of earnings in the public sector Unions pressure management with community campaigns built on their positive public image Not all wage and salary issues are resolved in favor of public sector unions