- An elimination for tiered compensation. Apart from a staggered rise in overall compensation rates, the UAW’s contract also includes elimination of the existing “two-tiered” pay system, which in essence penalizes workers hired in 2008 until now.
- A potential inflection point. The elimination of tiered compensation structures won by unions such as UAW could affect compensation/reward structures for organizations that have such a strategy in place going forward.
- Next steps for employers. The main challenge for employers removing a tiered compensation structure is focusing on how to rectify the existing salary inequities for employees who were hired at those lower rates years ago, when the two-tiered compensation program was in effect.
After six weeks of uncertainty and drama, the United Auto Workers (UAW) union has reached a tentative contract agreement with General Motors, the last of the Big Three automakers involved in the contract dispute. That means the strike will end as soon as union members vote on the final contract, which is expected to pass.
Regarding compensation, the union’s gains include a 25% raise in base wages spread over approximately 4 1/2 years, according to a recent UAW statement.
Also, tucked into the overall agreement is the guarantee that automakers will jettison an existing “two-tiered” benefit and wage structure system. In such a system, autoworkers who joined their employer in 2007 or earlier earn an average of roughly $33 an hour. Workers hired after 2007, however, have been classified as “lower tier” and earn less — up to approximately $17 an hour for the same work.
In addition, lower-tier employees don’t receive defined benefit pensions, and less comprehensive healthcare coverage.
An Inflection Point for Tiered Compensation?
David C. Miller, a labor and employment attorney with the Miami office of Bryant Miller Olive P.A., said union actions concerning tiered compensation structures could affect compensation/reward structures for organizations that have such a strategy in place going forward.
“Unions find tiered comp proposals attractive because, typically, current employees lose nothing while they agree to shift all the concessions to future employees who have no voice at the bargaining table or inside the union,” he said, adding that later rollback efforts — as in the UAW case — result when new hires under the disadvantaged tier gain numbers and power within the union.
“Employers must be aware of this dynamic and not count on tiers to result in permanent restructuring of labor costs,” he said.
David Lewis, CEO at HR consulting company OperationsInc, added that under a tiered system a worker has “two hills to climb” where most only have one: to perform at a high level, resulting in regular increases in pay.
With a tiered system like the one the UAW has followed since 2007, the outcome can — and likely will — work against the employees at the lower tiers, Lewis said. He added that specifically it serves as a means to limit the amount one can make per tier. The only way to increase income is to make it to the next tier, regardless of performance.
“In a tiered system like this, performance helps, but systematic tiers keep salaries at max levels,” he said.
In assessing the landscape, Miller noted that tiered wage or benefit structures are, in fact, extremely common — typically the result of collective bargaining situations in which the employer is trying to realize structural reductions in labor costs.
“The employees that are represented by a union get to vote on whether to ratify a contract reached by the union at the table,” he said, adding that employees are understandably loath to ratify any pay cuts. However, there is no constituency — no current voters — to vote against a pay or benefit cut that only affects employees hired after some future date.
“With that, it’s easier to get agreement to future reductions that will not affect current employees. That results in ‘tiers’ of employees with differing pay or benefits based on hire date,” he said.
Miller said top takeaways for employers that may still have tiered structures within a unionized workforce is to be continually transparent. Make clear that the tiered structure was put in place with the full cooperation and consent of the union through bargaining and that the tiered structure allowed the organization to stay in business without the need for layoffs or even bankruptcy, depending on the circumstances.
A Potential Morale Boost
Liz Bernaiche, regional compensation practice leader at OneDigital New England, described the two-tiered compensation system that went into effect in 2007 for UAW members as “inequitable,” because it allowed hiring at much lower rates than existing staff for the same or comparable jobs.
“I can imagine it also wasn’t great for employee morale and motivation,” she said. “Eliminating that program will allow for new hires to be paid in line with current staff.”
Bernaiche said that now the main challenge is how employers rectify the existing salary inequities for employees who were hired at those lower rates years ago, when the two-tiered compensation program was in effect.
“There will definitely be pay compression issues that will likely be costly to resolve as new staff come on at current rates,” she said. “Hopefully, this was a consideration in negotiations, but it should be a positive for workers going forward with more consistency, fairness and transparency in pay practices. It should also improve/increase employee retention.”
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