Two-Tier Wages: Same Job Different Pay

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The economic recession in 2008 forced many employers to focus on the cost-cutting strategies, including costs of labor in the form of benefits and wages. Thus, the companies applied different wage systems to survive in the recession. One of them, two-tier wage system, enables employers hiring new workers at less compensation than those employees hired before a particular date in the higher-tier system. This system reduces the entitlement of benefits and wages to newly hired employees and creates significant equity issues between a new class of workers and the older generation of employees. Hence, the two-tier system raises concerns about treating new employees in different aspects of recruitment where the workers cannot raise their voice; in turn, such aspects establish unacceptable ways of discrimination. The current study examines how implementation of two-tier wages system can offer advantages or benefits to the company and what role it plays in attracting, developing and maintaining a talented workforce. Further, the paper discusses what challenges the two-tier wage plans pose to the future in industry, and how should the stakeholders address the issues of a two-tier system. The paper attempts to answer these questions by analyzing the present status and operation of two-tier plans.

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Organization Staffing Implications and Employee Value Proposition

The two-tier wage system divides the employees into two classes. Specifically, it creates distinction among employees based on hiring date; two categories of employees will be doing same tasks, but receive different wages and benefits, which would lead to frictions and resentment among them. Consequently, these implications often lead to strikes and lockouts.

Employee Value Proposition is a set of benefits offered by the employer in exchange for skills, talent, and knowledge of an employee. These benefits are different for two categories of workers when an employer installs wage-tiers. Employees in higher-tier receive more benefits and enjoy bigger salaries than the workers belonging to the lower-tire. Besides the difference in salaries, employees in two-tier scheme will be devoid of defined benefits such as pension, healthcare, vacation, holidays, and promotion opportunities.

In most cases, job satisfaction of an employee is driven by salary and benefits offered by the employer. The differences at levels render serious negative consequences: for example, yet-to-be-hired workers will not be attracted, thus the amount of talented workforce cannot be maintained. This fact would produce unfavorable impact on organizational performance. Specifically, the organization will not be able to retain workers for a long run if it fails to offer Earned Value Professional (EVP); besides, other implications such as mass turnover, absenteeism, decreased productivity, discontentment and development of new products and services will negatively impact the operations, productivity, and profits of the organization. The employees in two-tier face discrimination and discontentment, experience discouragement and feel themselves as second class citizens because of this system (Catalan & Villanueva, 2014).

Moreover, the employer will face difficulties in recruiting new workers according to the two-tier wage scheme because the applicants who have more talent, skills and qualification may demand even better wages and benefits than current employees working in a higher-tier. The organization needs skilled employees in production, marketing, accounts, and development of new products in order to maintain a competitive edge in the marketplace. Hence, offering Value Proposition in terms of rewards, promotion opportunities, and attractive benefits would help the company in retaining new employees for a long period (Freeman, 2014).

Challenges in Two-Tier Wage Plans

Organizations encounter some major legal challenges while negotiating a two-tier wage scheme. First, if an employer wants to hire workers from a particular racial group, for example youth or only women into the lower-tier, he or she may be guilty in violating the norm of “equal pay for equal work” as well as employment standards legislation. The second challenge is that the workers in the lower-tier may lodge a complaint against their union for having failed to protect their rights at the bargaining table as the legal requirement of the employment act states that union must represent all workers fairly for equal pay for the same work.

Further, employers are likely to be challenged by a class of younger employees with diminished benefits compared to the class of workers in higher-tier. The more experienced workers can protect their interests through the collective bargaining process, but the class of new hired workers has no voice, and is subject to inequitable conditions of work. These conditions cause discontentment, decrease workers productivity and lower efficiency and active participation of workers in two tire-wage system (Jimeno & Thomas, 2013).

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The Approach of Management, Employees, and Unions in Addressing the Issues of a Two-Tier Wage System

Nevertheless, some unions and management of the company emphasize that two-tier wage systems are the alternative approach helping to avoid plant closure and protect the organization from incurring losses. They argue that the employer must hire few workers in a lower-tier system; otherwise, all employees, irrespective of seniority, may lose their jobs.

Since the performance, level of output, talent, and skills differ from one worker to another, the above mentioned arguments do not hold credibility. The employer should design an attractive compensation and benefits package that match individual capabilities, knowledge, and experience instead of exploiting and employing all workers in the two-tier system. This system will not only reduce costs and maximize profits but will also attract talented and skillful workforce in the organization.

The duty of fair representation developed by judicial policy-makers is the result of the system of collective bargaining rights. A trade union which has obtained exclusive bargaining rights is obliged to represent all workers in the bargaining unit. Besides, it is the responsibility of the union to genuinely execute the power bestowed upon it by all members, without discrimination against them. It also has to ensure that employers implement single-tier wage system by offering wages and benefits in accordance to individual capabilities. (Bonhomme & Hospido, 2012).

Pros and Cons from the Perspective of Management, Employees, and Union

The two-tier wage system presents certain advantages and disadvantages. They are as follows:


· In a two-tier wage plan, the employer can negotiate with the trade unions to implement two separate structures of wages for current and new employees. The current employees continue to receive wages and compensation as stated in the previous agreement while new employees who join the union receive lower wages and less-substantive benefits.

· The two-tier wage system enables employer a short-term cost reduction for all new employees who join the union. The total budget for compensation and benefits reduces, while production activities remain consistent.

· The business also enjoys long-term labor cost reductions. As higher-tier employees retire, the employer can replace them with two-tier employees that will reduce the budget of wages and benefits.

· Two-tier wage scheme offers an advantage of divided workforce. While employees receiving compensation under the higher-tier agreement may remain less satisfied, new employees in two-tier tend to be loyal in producing results and often resent their better-paid coworkers.

· Increased turnover proves to be an advantage to some employers because they can recruit lower paid new workers. It also helps the employer in replacing the less productive employees with new talented workers (Boeri, Ichino, & Moretti, 2014).


· The low-tier employees will have a higher rate of absenteeism and be less productive than the workers in high-tier plans. Besides, the low-tier groups may fail to receive benefits such as life insurance, health care, vacations, and holidays. Therefore, the attitude to the cooperation with older employees may be neglecting among new workers.

· Friction between the two categories of workers as well as discontent may destabilize the company and impede the overall growth.

· Two-tier wage system incites problems with trade unions which would hinder the collective bargaining process, thus preventing all employees from receiving fair benefits. It may even lead to lockouts and formation of different hostile groups in the organization.

· The inequality aspect in a two-tier system may lead to discontent and conflict with the employer, which may damage the reputation of the company in the marketplace and may prove to be more harmful in the long run rather than maintaining a single-tie compensation system (Freeman, 2014).

Interviews with Managers, Workers, and Unions about the Recent Developments in the Two-Tier System

On May 8, 2016, Automotive News reported that Ford Motor Company had dropped two-tier wage system but it would increase labor costs. In an interview, Joe Hinrichs, Ford’s president told the press that it was necessary to abolish this long disputed system in order to eliminate anxiety and distraction in workers so that they could better concentrate on their jobs rather than on the paychecks of their colleagues (Bunkley, 2016).

Further, UAW president Dennis Williams on November 4, 2015 informed Automotive News that employees at GM were dissatisfied with four-year labor deal which the management had offered them. The legacy workers comprising 80% of GM’s workforce supported a deal in two-tier wage system. UAW was able to increase hourly remuneration for tier-two workers from $16 an hour to $28 an hour. The agreement, designed after ratified by employees at FCA, ends the two-tier scheme by putting tier-two employees on an eight-year ladder of annual increases until full pay-scale is achieved. Dennis Williams also informed that UAW members wait when their agreements with Big Three expire. The next focus of negotiations would be elimination of tier-two wage scheme, which has been in practice for seven years (Barkholz, 2015).

According to Journal Sentinal, Kohler Company reported that the abolishment of two-tier remuneration system would lead to the reduction in the number of jobs. Furthermore, the CEO David Kohler argued that production facilities at Sheboygon County units that formed 6% of its total workforce could be shifted elsewhere but the company could not eliminate two-tier system at least for another 5 years (Journal Sentinel, 2015).

Two-tier employees of General Motors and Ford Motor Company in their interview for Automotive News informed that installation of two-tier systems had affected their career growth, discouraged workers, and reinforced their family concerns. The employers have devoid them of their basic rights offered to workers in the higher-tier. Thus, these employees expect that the expiry of UAW contract with The Big three will lead to elimination of two-tier system, and all employees will receive equal (Barkholz, 2015).

The employees in higher-tier also recognize unfairness on the part of the employer in installing different wage system but they cannot raise voice in the organization. Moreover, they also argue that they can learn much more from younger generation of workers and incorporate their talent and ideas while working together on different operational processes. However, the sense of jealousy in two-tier workers leads to the conflicts with older workers and negatively affects their efficiency and productivity, as well.

A Report on the Current Status and Future of Two-Tier Wage Systems from the Perspective of Stakeholder Concerns

Two-tier wage environment causes resentment in employees and creates opposition movements within trade unions as two categories of employees perform the same tasks at work, but they are on different wage plans. Since the world economy has considerably recovered after 2008 global recession, such systems are becoming impractical, and their implementation has rendered negative consequences on many employers. The unions, for example, UAW also favor elimination of two-tier system due to the reason that six years ago it had to agree with Big Three auto makers Ford, GM, and Fiat-Chrysler for hiring workers in two-tier because of their financial crisis. Now, these companies have recovered from crunch and are making substantial profits as well as have also found other means of reducing costs and increasing profits including globalization and outsourcing. As such continuation of two-tier systems would entail injustice and discrimination to new workers and violation of human rights (Boeri, Lucifora, & Murphy, 2013).

Recent downfall in unions’ activities and the growth of human resource practices such as performance pay, raise ethical concerns for managers and employers aiming at balancing efficiency and equity. The legitimacy of different wages for similar work also incites issues of value propositions. Performance-based pay systems including rewards and promotion opportunities can justify wages differentials by considering the productivity of each employee. However, two-tier systems create differences on the basis of the date of employment and do not agree with such justifications. The employer has to choose efficiency as the justification for an inequitable arrangement because in future, diversified, talented and skillful workforce that will demand better opportunities and attractive compensation packages will evolve; this fact will force employers to forgo the two-tier wage system (Jimeno & Thomas, 2013)

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To summarize, the economic conditions are becoming less favorable to concession bargaining. The employers who favor two-tier wages system in future will encounter increasing resistance from workers and union negotiators. This would result in an unequal increase in wage dispersion, and this contradicts with the union’s value of equal pay for equal work. Mass criticism of two-tier settlements by the activists of human rights has made such bargaining less attractive to unions; thus, unions will start withdrawing their support to employers for existing concessions, and single-tier wage system, being more effective, will take place of the two-tier wage system.

Moreover, as the world economy continues to expand, which results in the decrease of the unemployment rate, the diversified labor force with different family concerns as well as scarce labor market seeking highly skilled and educated workers, begin to arise. These developments recommend employers to create a match-up of flexible compensation and benefits packages in order to attract and retain these scarce workers. Additionally, traditional approaches of the two-tier wage system should be eliminated. In their place, employers, either through collective bargaining or unilaterally should try to offer wage packages that can be tailored to individual requirements while exploring other ways to control labor costs.

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