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15 – 1 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

CHAPTER FIFTEEN

UNION ROLE IN WAGE AND SALARY ADMINISTRATION

Overview

The first part of the chapter outlines four specific areas of union impact:

• Impact on general wage and benefit levels

• Impact on the structure of wages

Learning Objectives

• Identify the impact of unions on wage determination including union impact on general

wage levels.

Lecture Outline: Overview of Major Topics

I. The Impact of Unions in Wage Determination

A. Union Impact on Compensation

B. The Structure of Wage Packages

II. Unions and Alternative Reward Systems (and Variable Pay)

A. Lump-Sum Awards/Bonuses

III. Your Turn: Comparing Tier 1 and Tier 2 Contract Outcomes (and Explaining Them)

Chapter Fifteen: Union Role in Wage and Salary Administration 15 – 2

Lecture Outline: Summary of Key Chapter Points

Many experts believe that unions are facing their most critical challenge of the last 60 years.

• Since the 1950s when union membership peaked at 35% of employment, membership has

However, that overall trend masks an important fact: although 37.9% of public sector workers

are union members, only 6.5% are in the private sector.

From 1983, in the private sector, the number of workers in unions has dropped from 11.9

million to 7.6 million and the membership rate dropped from 16.8% to 6.5%.

Four popular explanations are usually offered for this decline:

• The structure of American industry is changing, and declining industries are most heavily

unionized, while growing industries are less so. (While this is true, research suggests this

• Management is taking an increasingly hard stance against unions in general and union

demands in particular.

o A large portion of this management opposition to unions is spurred by increasing

Competitive pressures, starting in the 1980s and continuing today, have triggered lower-than-

normal wage increases in unionized firms and even some wage concessions.

Although the statistics indicate a decline in unionism, some of the issues that are important

cornerstones of unionization continue to be important for workers.

• Fully 63% of employees say they want to have more influence in workday decisions.

• If need be, 40% of workers would vote union to achieve their needs. Workers show

strong interest in joining a union when:

Over 70% of workers who see management acting in a way that shows little concern for

employees’ welfare and is unwilling to share power, claim they would vote for a union. Unions

may be down, but not out.

15 – 3 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

I. The Impact of Unions in Wage Determination

• Despite strong management efforts to lessen the impact of unions, they still have an

important effect on wages.

o Even in a nonunion firm, compensation managers will adjust rewards (usually

A. Union Impact on Compensation

• Do unions raise wages? Are unionized employees better off than they would

be if they were nonunion?

o Unfortunately, comparing “what is” to “what might have been” is no easy

• We can look at basic differences in wages, benefits, and total compensation

between union and nonunion workers.

o Exhibit 15.1 reports the results of two surveys that collect compensation

data,

▪ One a survey of employees and

• To infer that union-nonunion wage differences are caused by union status

would require us to be confident that union and nonunion workers would have

received the same pay in the absence of a union.

o If not, there are alternative explanations.

▪ For example, the causality could be that a union organizes an employer

and negotiates a higher wage.

Chapter Fifteen: Union Role in Wage and Salary Administration 15 – 4

Education.

• The employer responds by raising hiring standards, which result in

hiring more productive workers.

• The less productive workers who would have been employed prior

to unionization might eventually disappear.

• The union did raise wages at the employer, but did not necessarily

raise wages for individual workers over time, which is the goal of

the union.

▪ Of course, it is also possible to underestimate the effect of unions on

wages.

• For example, as part of a strategy to remain non-union, a company

• One source of continuing data on unionized and nonunionized firms is the

Bureau of Labor Statistics.

o Between 1969 and 1985, the union wage premium more than doubled,

from 17.6 to 35.6%.

• The best conclusion about union versus nonunion wage differences comes

from a summary analysis of 114 different studies. Two important points

emerged.

o Unions do make a difference in wages, across all studies and all time

periods.

o The size of the gap varies from year to year.

▪ During periods of higher unemployment, the impact of unions is

larger.

▪ During strong economies, the union-nonunion gap is smaller.

• Part of the explanation for this time-based phenomenon is related

B. The Structure of Wage Packages

15 – 5 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

• The second compensation issue involves the structuring of wage packages.

o Results from the employer survey in Exhibit 15.1 show that the union

effect on benefits (a 2.04 union/nonunion ratio) far exceeds the union

• A second dimension of the wage structure issue is the evolution of two-tier

pay plans.

o Basically a phenomenon of the union sector, two-tier wage structures

differentiate pay based upon hiring date.

o A contract is negotiated which specifies that employees hired after a given

o Two-tier pay plans initially spread because unions viewed them as less

painful than wage freezes and staff cuts among existing employees.

▪ The tradeoff, however, was a bargaining away of equivalent wage

treatment for future employees.

o This is a radical departure from the most basic purpose of unionization.

C. Union Impact: The Spillover (or Threat) Effect

• Although union wage settlements have declined in recent years, the impact of

unions in general would be understated if the spillover effect were not

accounted for.

Chapter Fifteen: Union Role in Wage and Salary Administration 15 – 6

rewards already obtained by their unionized counterparts.

D. Role of Unions in Wage and Salary Policies and Practices

• Perhaps of greatest interest to current and future compensation administrators

is the role unions play in administering wages.

o The role of unions in administering compensation is outlined primarily in

the contract.

Basis of Pay

o The vast majority of contracts specify that one or more jobs are to be

compensated on an hourly basis and that overtime pay will be paid beyond

a certain number of hours.

o Further, many contracts specify a premium be paid above the worker’s

base wage for working nonstandard shifts, such as double time.

o Alternatively, agreements may specify a fixed daily, weekly, biweekly, or

monthly rate.

o Much less frequently, contracts specify some form of incentive system as

the basis for pay.

▪ The vast majority of clauses specifying incentive pay occur in

manufacturing (as opposed to nonmanufacturing) industries.

Occupation-Wage Differentials

o Most contracts recognize that different occupations should receive

different wage rates.

▪ Within occupations, though, a single wage rate prevails.

▪ Example in the text shows the occupational code, classification, and

15 – 7 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

Education.

rate per hour from the agreement between John Deere and Company

and International Union United Automobile Aerospace and

Agricultural Implement Workers of America

o Although rare, there are some contracts that do not recognize

occupational/skill differentials.

Experience/Merit Differentials

o Single rates are usually specified for workers within a particular job

classification.

o Alternatively, agreements may specify wage ranges.

o The vast majority of contracts specify seniority as the basis for movement

through the range.

▪ Automatic progression is an appropriate name for this type of

movement through the wage range, with the contract frequently

o A second, and far less common, strategy for moving employees through

wage ranges is based exclusively on merit.

▪ Employees who are evaluated more highly receive larger or more rapid

o The third method for movement through a range combines automatic and

merit progression in some manner.

▪ A frequent strategy is to grant automatic increases up to the midpoint

Chapter Fifteen: Union Role in Wage and Salary Administration 15 – 8

Other Differentials

o There are a number of remaining contractual provisions that deal with

differentials for reasons not yet covered.

▪ A first example deals with different pay to unionized employees who

are employed by a firm in different geographic areas.

• Very few contracts provide for different wages under these

▪ A second category where differentials are mentioned in contracts deals

with part-time and temporary employees.

• Few contracts specify special rates for these employees.

Vacations and Holidays

o Vacation and holiday entitlements are among the clauses frequently found

in labor contracts.

o They, too, use very specific language.

▪ Example in the text is a very specific list of observed holidays and

Wage Adjustment Provisions

o Frequently in multiyear contracts, some provision is made for wage

adjustment during the term of the contract. There are three major ways

these adjustments might be specified:

▪ Deferred wage increase—negotiated at the time of initial contract

negotiations with the timing and amount specified in the contract.

• Example in the text is of the COLA section of the bargaining

agreement between American Postal Workers Union, AFL-CIO,

and U.S. Postal Service

15 – 9 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

E. Role of Unions in Discipline, Job Security, and Assignments

• One of the most important purposes of a labor union is to protect its members

from arbitrary and capricious treatment by management in the form of unfair

discipline, including discharge.

o In contrast to nonunion workers, who can be fired at will, most union

workers cannot.

• What is the basis for the greater protection of union members from discipline?

o A formal grievance procedure must be followed to discipline an employee.

o If an agreement cannot be reached between union and management, the

• What types of issues most commonly reach arbitration?

o Using data from the FMCS on a total of 2,473 grievances

▪ Discharge and disciplinary issues topped the list with 913 cases.

▪ Other frequent issues include the use of seniority in promotion,

II. Unions and Alternative Reward Systems (And Variable Pay)

• International competition causes a fundamental problem for unions.

Chapter Fifteen: Union Role in Wage and Salary Administration 15 – 10

o If a unionized company settles a contract and raises prices to cover increased

wage costs, there is always the threat that an overseas competitor with lower labor

• About 20 % of all U.S. collective bargaining agreements permit some alternative

reward system (e.g., lump sum, piece rate, gain sharing, profit sharing, skill-based

pay).

o Willingness to try such plans is higher when the firm faces extreme competitive

pressure.

o In the unionized firms that do experiment with these alternative reward systems,

though, the union usually insists on safeguards that protect both the union and its

workers.

▪ The union insists on group-based performance measures with equal payouts to

members.

▪ This equality principle cuts down strife and internal quarrels among the

A. Lump-Sum Awards

• Lump-sum awards are one-time cash payments to employees that are not

added to an employee’s base wages. They are variable pay.

o These awards are typically given in lieu of merit increases, which are

more costly to the employer.

o This higher cost results because:

• In recent years, a stable one-third of all major collective bargaining

agreements in the private sector have contained a provision for lump-sum

payouts.

o The elements related to compensation, including fixed and variable,

15 – 11 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

Education.

of the four years of the contract.

▪ Most of the compensation “action” will be in the form of variable pay.

• Lump sums of 4% in two of the four years

• Modest sized competitiveness bonuses

• Inflation protection payments

• And profit sharing payments

B. Employee Stock Ownership Plans (ESOPs)

• An alternative strategy for organizations hurt by intense competition is to

control base wages in exchange for giving employees part ownership in the

company.

o Southwest Airlines has an ESOP plan that, together with its profit-sharing

plan, is aimed at aligning employees interests with those of the company.

C. Pay-For-Knowledge Plans

• Pay-for-knowledge plans pay employees more for learning a variety of

different jobs or skills.

o By combining this new wage system with drastic cuts in the number of job

classifications, organizations have greater flexibility in moving employees

D. Gain-Sharing Plans

• Gain-sharing plans are designed to align workers and management in efforts

to streamline operations and cut costs.

o Any cost savings resulting from employees’ working more efficiently are

split, according to some formula, between the organization and the

workers.

• While unions are not always enthusiastic about gain sharing, they rarely

directly oppose it, at least initially.

o Rather, the most common union strategy is to delay taking a stand until

Chapter Fifteen: Union Role in Wage and Salary Administration 15 – 12

Education.

real costs and benefits are more apparent.

o As exhibit 15.3 illustrates, there are numerous possible costs and benefits

to union members for agreeing to a gain-sharing plan.

o Until the plan is actually implemented, though, it is unclear what the

impact will be in any particular firm.

E. Profit Sharing Plans

• Unions have debated the advantages of profit-sharing plans for at least 80

years.

o In years past, the primary goal of unions was to secure sound, stable

income levels for members.

o Coming out of the great recession, saving and creating jobs is rapidly

becoming the top priority.

▪ The Big Three U.S. automakers have been in constant struggle to

contain their labor costs, especially fixed labor costs, which typically

• As Exhibit 15.4 shows, these profit-sharing payouts have been substantial in

recent years as the Big Three have rebounded from some lean years.

o Note the substantial variance across companies and years, which coincides

with ability to pay/profitability.

▪ For example, profit-sharing payments at GM have ranged from as little

III. Your Turn: Comparing Tier 1 and Tier 2 Contract Outcomes (and Explaining

Them)

Summary of Case

Earlier in this chapter and in Chapter 7, we discussed the two-tier wage system at Ford

and the other Big Three automakers. News reports on the contracts ratified in late 2015

by UAW members often seemed to suggest that the two-tier wage system had ended and

students are tasked with determining whether that is the true.

15 – 13 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

• Revisit Exhibit 15.2, which summarizes some key elements of the contract agreement

at Ford pertaining to Tier 1 workers.

• Compare that with the corresponding agreement (in the text) reached regarding Tier 2

workers at Ford

o Are the contract terms the same for Tier 1 and Tier 2 workers?

Next, consider the additional information on Tier 2 workers base wages going forward (See

graphic in the text).

• Based on this information, is the two-tier wage system going away? If not, why not?

o Think of why Ford and the Big Three want this system and also think about why the

• How much would Ford’s labor costs increase if all workers were immediately

converted to Tier 1? What about going forward?

Learning Objective

Teaching Guideline

Use this case to discuss the challenges of staying competitive in the U.S. auto industry.

Discussion of Case Issues

1. Are the contract terms the same for Tier 1 and Tier 2 workers? If there are

differences, document what they are and comment on how important or unimportant

they are from both the perspective of a Tier 2 worker and from the perspective of a

company like Ford, which has an ongoing goal of containing labor costs, especially

fixed labor costs.

Tier 1 workers receive 3% base wage salaries in two of the four years of the contact and

lump sum bonuses of 4% in alternate years. There is also a yearly $250 competitive bonus

Chapter Fifteen: Union Role in Wage and Salary Administration 15 – 14

Education.

The Tier I payout schedule allows the company to contain their fixed costs by knowing

ahead of time what lump-sum payments are coming due and when. The Tier II workers

are likely to build resentment during these times as they are ineligible for any of the

bonuses even though they put in the same amount of work time and effort a Tier I

employees on a daily basis.

Tier 2 workers are phased into the traditional wage system within 8 years for new hires.

Tier 1 workers receive a 6% combined increase in base wages over the four years of the

contract and Tier II workers will receive an increase of between 14% and 30% in their

base wages during that same time. However, Tier II workers will not share in any of the

bonuses or profit sharing payments available to Tier I workers. Tier II workers will still

make less than Tier I employees and individuals are likely to get angry or frustrated over

the length of time of assimilation, eight years. From the company perspective, the longer

assimilation of workers allows the company more time to recoup their finances and

strengthen the company. Plus, the high cost of assimilating all workers at the same time

could put the company back on to shaky financial ground.

2. Based on additional Tier 2 employee information, is the two-tier wage system going

away? If not, why not?

The UAW did eliminate the two-tier system with the 2015 contract and made provisions to

phase those workers into the general wage system within eight years, sooner for earlier tier

3. How much would Ford’s labor costs increase if all workers were immediately

converted to Tier 1? What about going forward?

An estimated 15,660 (29% of hourly UAW workers (54,000)) tier II workers moving from

between $17-28 / hour to full pay would be a relatively minimal cost but the

Answers to Review Questions

1. What is spillover? How does it lead to underestimation of the impact unions have on

15 – 15 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

wages?

Spillover effect, specifically, involves employers seeking to avoid unionization by offering

workers the wages, benefits, and working conditions won in rival unionized firms.

2. Why don’t many public sector unions have the right to strike, a weapon almost

universally guaranteed in the private sector? Make your explanation based on

compensation.

Whether unions raise wages, or if unionized employees are better off than they would be if

they were nonunion, is not easy to identify since several measurement problems are

difficult to overcome. The ideal situation would compare numerous organizations that

were identical except for the presence or absence of a union. Any wage differences among

3. If merit pay is supposed to increase individual equity and unions are very concerned

about equity, why do unions frequently oppose merit pay for their membership?

Merit pay is traditionally based on individual performance. Unions prefer administrative

rules that apply to the entire union membership equally. Further, unions are very

Education.

4. It is probably true that, if given a choice, unions would prefer to implement a skill–

based pay system rather than some form of gain-sharing plan. Why?

Unions prefer wage increases linked to objective measures over which employees have

control. Seniority is a prime example. Anyone checking employment records can calculate

seniority for employees. Years of service with a company are objective. Employees, as