2-Tier Pay More Common Amid Mergers, Cost Cuts


Between corporate takeovers and energetic cost-cutting, more workers than ever are finding themselves on the same runway as the pilots of American Airlines and its subsidiary Reno Air: They’re working the same jobs for the same employer but taking home vastly different paychecks.

This is not the much-argued gender wage gap, wherein women are believed to earn less on average--at last count about 74 cents on the dollar--than men doing similar work. And this is not illegal pay discrimination. This is the growing practice of adopting different pay scales for separate groups of employees at the same company.

Whether a “two-tier” wage system is the result of a formal union contract, a merger of two companies with different pay practices or an increasing use of temporary workers who tend to be paid less, such wage differentials create a veritable caste system in the workplace, critics contend. This generates tension among workers and between employees and management, they say.

But employers consider such wage policies a valuable tool for keeping payrolls under control, allowing companies to compete better in the global economy and therefore keeping more employees on the job.

As with the American pilots, whose 10-day sickout in early February disrupted travel for more than 500,000 people, many workers are demanding an end to wage tiers either through union contract negotiations or through the sort of individual pay haggling that has gained more juice thanks to today’s taut labor market.


American Airlines and the Allied Pilots Assn. said last Wednesday that they had agreed to hold two direct-bargaining sessions over the salaries of the pilots at Reno Air, a small carrier bought by American in December. If the talks are unsuccessful, the two sides will submit to mediation.

The American pilots are demanding immediate raises for the Reno pilots, who make about half of the $136,000 a year that American pilots earn. American’s pilots are concerned that they will lose jobs if the airline shifts work to the lower-paid pilots. American has agreed to raise the pay of the Reno pilots, but not as quickly as the APA wants.

Most rank-and-file workers probably have trouble finding sympathy for pilots who earn $136,000 a year or even $68,000 a year.

But the concept of tiered wages, which became something of a fad in the 1980s, has become decidedly unpopular among employees.

Transportation companies and manufacturers were in the forefront then, winning in union contracts the right to pay less to newer workers than to other employees. Those same companies have faced strike threats in recent years as unions struggle to regain what was lost during leaner times.

Pilots at Northwest Airlines went on strike for nearly a month in 1998 and won a phasing-out of a two-tier wage scale that paid new pilots at a lower rate.

Eliminating the lower pay scale for part-time workers at United Parcel Service was at the heart of the successful Teamsters strike in mid-1997 that disrupted shipping for weeks.

A proposal to tier wages and medical benefits at a Honeywell factory in Minneapolis early last year prompted a brief strike that surprised management, which had thought union members would not mind reducing wages and benefits for new hires in exchange for raises for veteran workers and improved company profits, which would preserve jobs.

“If there’s one big area where we screwed up, it was this one,” Honeywell Chairman and Chief Executive Michael R. Bonsignore said at the time. The company withdrew the tiered medical benefits proposal but the union ultimately agreed to the wage tier plan.

Only 4% of union contracts settled last year contained wage-tiering provisions, down from a high of 11% in 1985, according to the Bureau of National Affairs Inc., a private information service in Washington that tracks employment data.

Still, plenty of tiered contracts continue to exist, such as the one between the Metropolitan Transportation Authority in Los Angeles and its 4,200 bus drivers, signed in 1997, in which new drivers earn about half what veterans make per hour. The MTA expected to save $20 million over the three years of the contract.

An even greater influence in recent years has been the increasing number of part-time, temporary or contingent workers on corporate payrolls, labor experts say. These workers, even if they put in full workweeks, tend to receive lower pay and fewer benefits than permanent full-time employees, said Edith Rasell, an economist with the Economic Policy Institute, a liberal research group in Washington.

Although no one formally tracks the number of Americans who work at companies with tiered wages, a 1997 EPI study found that 35 million U.S. workers hold “nonstandard” jobs as part-timers, independent contractors, temporary workers or self-employed workers. Many of them often earn lower hourly wages and receive fewer benefits than full-time permanent employees.

This can create animosity among workers when the haves and have-nots work side-by-side doing the same jobs but for vastly different wages, Rasell said. It can create tension between workers and management and hinder the much-desired goal of teamwork, she said.

“These people are seen in a different light than full-time workers,” Rasell said. “It’s not just that they’re paid less--they are less likely to get training. This could be detrimental to the employer in the long run.”

One large bank that Rasell studied adopted a tiered policy because management believed it would make the bank more competitive. Part-time workers were paid less and trained less than full-timers and began making errors and were less reliable. That cost the bank even more money than the equal-wage policy had, Rasell said.

“The bank went back to its previous policy,” Rasell said. “Some of these practices can be pretty shortsighted.”

But employers argue that they need the flexibility of wage tiering to compete with countries where workers are paid much less. It keeps jobs in the U.S., they say.

Levi Strauss & Co., for example, was not competitive in the global economy. It announced last week that it was closing several North American factories filled with relatively well-paid workers to shift production to cheaper factories overseas. Although this isn’t a formal two-tier system, it in effect becomes one with the use of inexpensive foreign labor.

Most manufacturers “have the old one-tier system,” said Pat Cleary, vice president of human resources policy at the National Assn. of Manufacturers. “Clearly, in any contract that has a seniority scale in it, you’re going to have people working side by side making different amounts of money. But for most of our folks, the jobs pay what the jobs pay and people move up in seniority, and usually move up in pay and responsibilities,” Cleary said.

“I think the two-tier [arrangement] is probably much more hyped than real,” he said.

Companies often find after a merger that various parts of the operation use various approaches to pay. “A lot of companies reevaluating their pay programs are finding that the old one-size-fits-all doesn’t work for them anymore,” said Luellen Lucid, a compensation expert in the Los Angeles office of Watson Wyatt Worldwide, a consulting firm.

“It doesn’t always make sense to have the same pay system in all the different businesses,” she said.

But Greg Tarpinian, executive director of the Labor Research Assn., a New York-based consulting group that tracks labor trends, said he thinks the current tight labor market is reducing wage differentials through union negotiations and individual haggling.

“The labor market demand is such that more workers are able to call the shots,” Tarpinian said. “The tight labor market is making this go away to some extent.”