XI. Your Turn: Two-Tiers Wages
Summary of Case
are also some automobile plants that have employees of an outside supplier as their workers, to
whom they pay even lower wages, which has in turn helped them reduce their cost per vehicle
Learning Objective
Look at compensation strategies that help in controlling costs and increasing revenue and at the
same time attract and retain employees.
Teaching Guideline
Use this case to help students apply the concepts related to external competitiveness in a real-life
situation.
Discussion of Case Questions
1. To what extent is the renewed job growth in the automobile industry in the United
States due to the use of two-tier wages?
automobile giants increase production as well as employment, without having to incur any
than that of the Tier I workers, and so every time a Tier I worker leaves and a Tier II worker
2. To the degree job growth (and increased car sales that come from more competitive
labor costs) is based on two tier-wage structures, how sustainable is this approach?
Consider, for example, that Fiat and Chrysler CEO, Sergio Marchionne stated that
“Long term, (the system) is not a viable structure. It creates two classes of workers
within the plant. It doesn’t work in the same direction we are working…to get this
organization to work in unison.” Why would Mr. Marchionne make this statement?
What are the potential drawbacks of a two-tier structure? When would we expect any
such drawbacks to materialize?
The two-tier wage structure has helped the automobile giants get back on their feet after the
unemployed. However this wage difference inevitably raises some discord, after all the
Once the demand for automobiles is back in place and the automobile giants are back on
3. What about the use of non-GM workers at the Chevy Sonic plant? What might Mr.
Marchionne feel about that approach?
might at some point also demand higher wages and benefits. Having a larger percentage of
growth.
4. Will the two-tier wage structure go away in the near future? Summarize the pressures
to eliminate it as well as the pressures to keep it. Be sure to consider labor costs and
productivity of workers and plants at other companies and in other parts of the world.
Auto worker Gary Walkowicz, a member of the UAW bargaining committee at Ford’s
Dearborn Truck assembly plant, estimates that Ford could convert its 14,685 Tier 2
workers to Tier 1 wages for $335 million per year. The UAW will likely point out that
is a small fraction of the $6.9 billion North American profit earned by Ford the
previous year. Your thoughts?
from the workers is inevitable. As for the negotiation of pay changes at Ford, student’s
answers will vary. Some students may feel that a nearly 5 percent portion of profit is not
5. You may wish to do some research on the new Volkswagen plant in Chattanooga,
Tennessee, the last one build in the United States. Also, consider that the Automotive
News estimates that the Ford Fiesta (a competitor to the Chevy Sonic) plant in
Cuautitlan, Mexico may have labor costs as low as $150 per vehicle. Recall also our
earlier discussion of where automobile production plants in North America have been
built in recent years (as well as where they have not been built).
As in the case of the new Volkswagen plant in Chattanooga, it was the first US auto
vacancies, as the economic downturn had left many experienced industrial workers looking
cutting down on the number of workers at the Orion plant.
having 500 workers from half a dozen suppliers working at the Orion plant.
Sources for the case study:
http://blogs.automotive.com/marchionne-opposes-two-tier-wage-structure-with-ua
w-not-a-long-term-fix-63059.html
http://www.autoblog.com/2011/10/28/marchionne-two-tier-wage-structure-untena
ble/
http://www.nytimes.com/2011/09/13/business/in-detroit-two-wage-levels-are-the-
new-way-of-work.html?_r=1&pagewanted=all
6. More recently, Fiat Chrysler CEO Sergio Marchionne referred to the two-tier wage
structure as “impossible” and described it as “almost offensive.” He also offered
more detail on his preferred path to eliminating the two-tier system. Specifically, the
Wall Street Journal described his plan as “freezing veteran worker wages and offering
less-senior workers more profit-sharing potential.” The Wall Street Journal goes on to
say the “UAW [United Automobile Workers] leaders agree with Mr. Marchionne’s
stance about ending the two-tier structure, but they are also under pressure from
members to win wage increases for veteran workers who haven’t had a raise in about
a decade.” Bloomberg Business summarized Marchionne’s plan a bit differently: “he
prefers phasing out the higher-wage workers and paying everyone at the lower tier
with a larger performance bonus to eliminate the gap between the two wage levels. In
good years the lower tiered worker would be paid the same as the higher level under
such as scale.”
7. How do you think the UAW and the workers it represents will react to Mr.
Marchionne’s plan? Consider the global competitive market forces we have identified
and consider also the degree to which worker interests in keeping and creating jobs
and achieving higher wages (and/or total compensation) are in line with Fiat
Chrysler’s interests. How large have profit-sharing payments for workers been at
Fiat Chrysler and at Ford and GM in recent years? Why would the companies wish
to raise pay levels using these sorts of payments rather than via increases to base
wages? How will the UAW and workers likely react? Explain.
UAW workers with high seniority are not going to like Mr. Marchionne’s plan. Currently,
Answers to Review Questions
1. Distinguish policies on external competitiveness from policies on internal alignment.
Why is external competitiveness so important?
External competitiveness refers to the pay relationships among similar jobs in different
organization’s ability to attract and retain a qualified work force.
2. What factors shape an organization’s external competitiveness?
3. What does marginal revenue product have to do with pay?
Marginal revenue product is the additional revenue associated with the output of one
supply of human resources determines the market pay level.
4. What pay level does the efficiency wage predict? Does the theory accurately predict
organization behavior? Why or why not?
Efficiency wage theory predicts that high wages may result in more productive workers and
predicts an organization would pay above-market wages.
employees, an employer’s high labor costs will either reduce profits or, if the high labor
costs are passed on to the consumer in terms of higher prices, the competitiveness of an
5. What is a relevant market? What difference does it make when determining people’s
pay?
The appropriate labor market is defined by three factors:
markets)
If the market is not defined correctly, the estimates of competitors’ pay rates will be
required skills).
6. Can you think of any companies that follow a lag and/or lead policy? Why do they
believe it pays to pay differently? Can you think of any companies that follow
performance driven and/or work/life balance policies?
If efficiency wage theory is correct, a lead policy results in higher productivity but also
North Carolina, includes free onsite child care centers, subsidized private schools for
children of employees, two doctors on site for free medical care, and recreation facilities.
(Still) Your Turn: Whole Foods
Summary of Case
This asks students to return to the Whole Foods Your Turn in Chapter 5. Using the NAICS
Learning Objective
Become familiar with NAICS codes and discover the information available through the
Bureau of Labor Statistics, and the inherent limitations.
Discussion Questions
1. What pay level (e.g., 50th or other) would you recommend be used for the Whole
Foods Jobs? Would you use the same pay level for all jobs? Explain.
Students should understand that market pay data (from product market and labor market
explain how they will still be able to attract and retain a sufficient quantity and quality of
may have different percentile targets for different forms of compensation. For example, a
providing incentives for strong performance.
2. How strongly do relative job evaluation points and relative survey pay correspond?
For example, what is the ratio of job evaluation points you assigned to Job B
(Cashier) and Job F (Team Member, Stock and Display) in the Chapter 5 Your Turn?
What is the ratio of survey pay from Occupational Employment Statistics for 41-2011
Cashiers and 43-5081 Stock Clerks? Are the two ratios the same? (In Chapter 8, we
will discuss why these ratios, one based on internal worth and the other based on
external worth, may differ.) If these two ratios or other ratios you compute using
other Whole Foods/pay survey jobs differ, which ratio (internal, based on job
evaluation, or external, based on the pay survey) would you recommend be
emphasized or receive priority in setting actual pay?
This is just asking students to describe what they see and asking them what to do when job
organization (thus, paid more) than jobs in other organizations.
3. What are the limitations of the Occupational Employment Statistics data?
The job descriptions in the OES (market pay survey data) are not detailed enough in terms
jobs does it make sense to pay the Whole Foods job based on what the most similar OES
staffs and stores. Without more detailed data on these characteristics, it is difficult to match