Effectively Compensation
Through Collective Bargaining

Devita R. Ewell

Compensation can be accurately defined as something, or a sort of payment, that is generally given or received, in return for a service rendered, or for any other reason. There are several different types of compensation, and one example is ‘worker’s compensation’, wherein the government forms a sort of state sponsored insurance for the workers of the state, which would provide benefits to the workers in case the worker suffers from disease, injury, or death. As far as human resources are concerned, compensation refers to the pay structures within any particular organization. Some of the primary issues regarding compensation are: how much is a company to pay a worker, in order to attract him, and then keep him, and then keep him completely motivated so that he does not move over to another company. Must the company offer to pay the employee a salary, or rewards? Must the company pay benefits to its workers, and if so, what must be the amount, and how exactly must it be paid? Can there be a distinct difference regarding the pay scale for high performers, as compared to that of lower performers? Would it be a better idea if the company were to provide stock options and stock bonuses for the employees of the company? It is a good idea for a company to create an excellent and practical compensation plan for their employees. The choices that are available are numerous, like for example, a company can choose to pay their workers a fixed salary, or they could decide to pay through commission, or pay extra rewards and benefits, or they can hold competitions, where the winner could win extra bonuses, or the company could combine one or more of these methods in their compensation plan. However, the management must keep in mind the basic factor, that the design of the plan must at all times be guided by solid economic reasoning, since the fact cannot be denied that compensation is in essence representative of a cost factor that must inevitably have the result of increasing the profit contribution from sales. When the company desires to enjoy the maximum benefit of the compensation plan, then the management has to maximize the difference between the profits from sales, and the cost of the compensation to the employees. This is because of the important fact that compensation affects effort, and effort therefore would impact the sales, bringing one back to the ultimate idea that the company does indeed exist to increase profits and sales. It must be noted that several years ago, the so-called ‘incentive plan’ was something that would be offered to top sales executives, or to piece workers, or to sales personnel. However, today, incentive plans are offered to all the employees of the firm, and this is because today, more and more companies have arrived at the conclusion that an incentive plan must make up a part of the compensation to the worker. Incentive shows the appreciation that the company has for the employee, and it also inculcates a sense of participation in the affairs of the company. Today, perhaps an incentive plan would be able to offer an employee the much needed ‘push’ in the right direction, because the extremely stiff competition from other companies is a very important factor to be considered in making up the compensation plan. One type of incentive plan that brings success is the ‘profit-sharing’ idea, wherein the company will undertake to donate a small percentage of its pre-tax profits to a savings pool, which would later on be divided among deserving employees. Most profit sharing plans are done annually, and several companies do follow the trend of putting the pre-tax profits into a retirement savings plan for the employee. However, it must be remembered that profit sharing plans do have a negative side to them, wherein the performance of the employee throughout the year is not taken into consideration at all, and this means that the employee does not really have to prove his abilities in order to avail of the benefits of the plan. Another disadvantage is that if the company has erratic earnings, then the unnecessarily high expectations that have been created because of the profit sharing plan would not be met, and this would create anger and frustration among the employees. The ‘individual incentive’ plan would perhaps work better, because it takes into consideration the talents of each employee and thereafter offers them just rewards. It can therefore be stated that the types of bonuses and incentives that the company offers to its workers, and also the salary that the company is prepared to offer its employees make the difference in the success and failure that the company faces. One of the more favored methods is the ‘equity based’ compensation plan, wherein ownership to the company is offered to the top workers of the company. However, this type of plan is largely criticized because it creates more short-term financial results and that at the direct detriment of the company, but at the same time, it has been a proven success in both small and large companies. Some popular equity based options are: inventive stock options, non-qualified stock options, restricted stock, phantom stock, and stock appreciation rights. When a worker has an accident, or suffers from a disability, then too the company would have to compensate him, and there are several different compensation and insurance plans available to the worker of today. For example, under the New Hampshire Worker’s Compensation Law, every employee is offered coverage under the insurance plan, which would pay the worker compensation if he were to be injured during the course of carrying out his duties, or even later. The Danish Commerce and Service has stated that numerous Danish employees in the service as well as in the commercial sectors chose to receive the various fringe benefits to their wage or compensation packages, like for example, bonus or incentives, or commission arrangements of mutual benefit, if they were offered by the firm. Certain additional benefits that are offered to and accepted by Danish employees, and certainly employees elsewhere, are benefits like free internet or daily newspapers, healthy food at work, childcare, share options, keep-fit exercises, a certain number of additional days off or perhaps a company-paid car. A survey revealed that bonus and incentives and other similar extra compensation plans have worked the best with workers everywhere and those companies that have not yet implemented any of these plans do indeed plan to bring them in, in the near future. This is because of the fact that it has been proven beyond doubt that such incentives increased employee motivation, and thereby increased productivity for the company. According to a small company owner, when he took over the company, there were several open positions left to be filled, and these had been filled and vacated many times over. Upon research, it was discovered that perhaps the low salaries, and minimum benefits being offered for those positions were the reason. The employer then decided to reevaluate and adjust the salary and benefits structure, so that he would be able to attract and retain the type of skilled employees that he thought were needed to operate his company, and bring in profits. Soon, a competitive bonus and compensation plan based on performance was created, and to this plan were added several other attractive benefits, like for example, a long term disability insurance package, which the employees would have to contribute to. The result was that several employees, who would have moved on to better proposals and more attractive compensation packages, stayed on, and there was therefore more employee satisfaction and motivation, and a great increase in productivity. This is one success story, where a few small changes in the compensation for employees brought about a great difference, and it can be taken as an example of how important a compensation plan and package are to the success of an organization, and if every employer were to realize the importance of a perfect compensation plan, then there would be better employee motivation, and increased efficiency and output and productivity. The rising rate of executive salaries increases is unethical in light of problems facing American business including the threat of global competition. Among the problems is the fact that executives are getting wealthy and receiving huge compensation packages while jobs are being eliminated by automation or my moving operations offshore. Another reason many executive compensation plans are unethical, is that they are fundamentally unfair. Specifically, it is not uncommon for a CEO of a publicly traded company to earn 200 to 300 times what the average employee in their company earns in a year. Another ethical problem is the fact that many compensation demands by CEOs are essentially rubber stamped by the Board of Director’s compensation committee. It is also both ill advised and unethical to pay CEOs without respect to the financial performance of the company, which suggests that far more compensation to senior executives should be variable compensation and much less should be fixed compensation. According to an article written by Jason Gabrielli and published in Business Insight (online), the term greed evokes images of ruthless corporate executives plundering companies and ruining lives to support a lifestyle marked by excess. However, applying this label to all corporate executives is not accurate despite the fact that corporate corruption has been front page news ever since well known companies including Global Crossing, Enron, WorldCom and Adelphia filed for bankruptcy protection shocking creditors, banks, shareholders, employees and the public. Many critics of corporate America believe that one issue remains excessive executive compensation. According to Gabrielli, executives of large, publicly traded companies are usually highly compensated for their services even when performance measures such as stock performance make it seem like they are not capable of doing what they were hired to complete. In 1982, the average CEO earned 42 times the average worker. By 2001, the ratio had ballooned to 411-to-1. To put that in perspective, by late afternoon on January 1, in many companies the top executive has already earned more than the average worker will earn for the entire calendar year. The previous paragraph implies that corporate executives are being excessively compensated. The issue of executive compensation boils down to essentially one premise: executives should be compensated based on their job performance as determined by financial measures such as stock market performance, revenues, or profits. Some aspects of executive performance, like knowing when to cut costs through layoffs, necessitate making tough decisions. Therefore, to base a CEO’s compensation solely on stock performance when the company is undergoing fundamental change resulting in short-term losses to ensure long term success, it would be unfair to look only at stock price or profits when determining the rate of increase for the CEO or senior executive because in this scenario the CEO’s real value lies in their ability to properly manage change. By 2002, average executive compensation was about 200 times that of the average employee. On the surface, this appears excessive. However, if most of the executive compensation is centered in stock options the changes in compensation during the boom of the 1990s can be attributed in large part to a hot stock market. As a result, stock options issued during these years rose in value right along with the general stock market. Thus, a large share of the rise in executive compensation can be directly traced back to the issuance of stock options. However, stock options are not as popular for middle managers and lower level employees. Leo Jakobson and Jeanie Casison writing in Incentive (2004) explain that many companies are cutting back on stock options, at least among middle managers and workers. Reporting on a recent survey of 336 companies, the authors report that the number of lower-level employees receiving stock options dropped from 37 percent in 2002 to 27 percent in 2003 (Jakobson, Casison, 2004, 9). According to Jason Gabrielli in Business Insight, up until recently, stock options represented an irresistible financial instrument for companies to pay both their executives and employees. In 1995, the Financial Accounting Standards Board issued FAS 123 that established the financial accounting standards for the expensing of stock options. These standards do not require that a company expense the cost of these options on their annual income statements. This measure effectively allows companies not to report the cost of stock options to stockholders. Therefore, companies are free to enrich executives at very little cost. Therefore, it is easy to understand how and why stock grants and stock options have become a desirable form of compensation to key executives (Gabrielli, 2005). According to an essay published on the Center for Corporate Policy website (online), median pay among the top 100 executives rose from 35 times that of the average worker to more than 500 times as much. Shareholder activism around this issue has exploded in recent years, forcing some executives to take a pay cut. Collective bargaining lies at the very foundation of today’s industrial relations. It is the relationship between employers and employees via which contracts of employment are negotiated, under the aegis of a labor organization such as a trade union. The union tries to highlight the collective demands of the workers under its auspices, and the employer tries to negotiate a suitable contract that does not contravene existing labor laws. As has been rightly pointed out, “The result of collective bargaining procedures is a collective agreement. The main body of law governing collective bargaining is the National Labor Relations Act (NLRA). It explicitly grants employees the right to collectively bargain and join trade unions. The act prohibits employers from interfering with this selection. The NLRA requires the employer to bargain with the appointed representative of its employees. It does not require either side to agree to a proposal or make concessions but does establish procedural guidelines on good faith bargaining. Proposals which would violate the NLRA or other laws may not be subject to collective bargaining. The NLRA also establishes regulations on what tactics (e.g. strikes, lock-outs, picketing) each side may employ to further their bargaining objectives. State laws further regulate collective bargaining and make collective agreements enforceable under state law.” (Legal Information Institute) It is thus clear that ‘good faith bargaining’ lies at the crux of the collective bargaining procedure. This basically means that “The employer is not required to agree to any particular contract provision, no matter how reasonable or fair it appears to the union. However, refusing to meet at reasonable times; refusing to discuss grievances; refusing to discuss wages, benefits, or other mandatory subjects of bargaining; "take it or leave it" bargaining; or attempts to make deals behind the backs of the negotiating committee would be unfair labor practices.” (Center for Labor Education and Research). Certain mandatory subjects that need to discussed on the collective bargaining table include "wages, hours, and other terms and conditions of employment." This, in particular, encompasses wages and fringe benefits, grievance procedures, arbitration, health and safety, nondiscrimination clauses, no-strike clauses, length of contract, management rights, discipline, seniority, and union security. Before taking to the table, the employer, if requested, must supply the union with relevant information needed for bargaining, including information about the above mandatory subjects of discussion, and even personnel records. Interestingly, a company claiming financial inability to meet a union's demands (or, say, laying off workers or closing down a plant) may be required to prove its claim by showing its financial records to the union. If, during the course of these negotiations, any unlawful practices are noted by either party, then they can legally bring the case to the attention of the relevant authorities. The union has the legal obligation to fairly, and equally, represent all workers in the bargaining unit. Often, collective bargaining contracts that cannot be settled due to some disagreement on contract interpretation or enforcement are settled via ‘arbitration’, providing an alternative to litigation. To resolve the dispute, the parties select a neutral third party (an arbiter) to hold a formal or informal hearing on the disagreement. The arbiter then issues a decision which is binding on the parties. Of course, as has been already pointed out, strikes, lock-out, picketing and other ‘work stoppage’ practices are legal, unless otherwise stated in a company’s contract, to obtain the best bargain for both parties. Finally, a contract is reached, be it via mutual negotiation and agreement, or via arbitration, and the contract terms are binding on both parties for the period specified in it. The long road to this collective labor agreement, termed as a ‘historic’ agreement, has been a prime subject of discussion in recent months. Through the efforts and co-operation of both negotiating committees, various off-the-field issues were brought to the table and resolved, without any games being lost. Arbitration was not called for. As the deal was negotiated within the legal framework, it was a successful collective bargaining agreement. As is evident from the above discussion, collective bargaining is, indeed, the most fruitful way of negotiating a contract in the backdrop of today’s society. The powers wielded by labor organizations is never underestimated, and employers are always mindful of them and their demands, and try to work out a mutually beneficial package as best as they can. It is collective bargaining that has given employees, over the past few decades, a collective and unified voice to accent their grievances, needs and compensation demands, under the protection of law.

References
Center for Labor Education and Research, ‘Collective Bargaining FAQs’, Internet on-line, http://homepages.uhwo.hawaii.edu/~clear/CB-FAQ.html, (October 24, 2002).
Failing the "Acid Test". (2004). Retrieved Feb. 17, 2005, from Executive Compensation Faletra, R. (2005). The Government May be the Only Way to Rein in Executive Compensation. CRN, 1132: 64.
Gabrielli, J. (2005). Taking the Money: The Issue of Excess Executive Compensation. Insight Business, Retrieved Feb 17, 2005, from http://www.usc.edu/org/InsightBusiness/articles /article4.htm
Gubbins, Ed. (2005). Investors Question CEO Pay. Telephony, 246.2: 14.
Jakobson, L., Casison, J. (2004). Bogus Bonus: Companies cut Stock Options to Non-executives. Incentive. 178.2: 9.
Legal Information Institute, ‘Collective Bargaining and Labor Arbitration: an overview’, Internet on-line, http://www.law.cornell.edu/topics/collective_bargaining.html, (October 24, 2002).
Liberman, V. (2004). Are You Worth It? Across the Board, 42.1: 59. Policy Statement on Corporate Governance. (2005). Retrieved Feb. 16, 2005, from On Line Publications
Tyco and Corporate Excess. Christian Science Monitor, Retrieved Feb 17, 2005, from http://www.csmonitor.com/2004/0329/p08s02-comv.html.

Zingheim, P., & Schuster, J. (2000). “Pay people right: Breakthrough Reward Strategies to Create Great Companies” 1st ed. San Francisco: Jossey-Bass Publishers. (2004, Mar 29). http://www.corporatepolicy.org/issues/comp.html. http://www.tiaa-cref.org/pubs/html/governance_policy/exec_ compensation.html.