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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

12. 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

13. 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

14. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

23. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

33. 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

34. 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

36. 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