Labor Unions and Executive Compensation

One issue that I think deserves more play is the role the collective bargaining process does (or does not) play in executive compensation and how that impacts inequality. Here’s a good illustrative example (via Erik Loomis) from a Machinists Union press release about a contract dispute with Caterpillar:

Nearly 800 members walked off the job on May 1 after rejecting an initial offer that froze wages, doubled health care premiums and eliminated key pension and seniority rights. The latest offer contained few changes and was rejected by members 504-116.

“Both offers from Caterpillar included deep cuts to members’ pay and benefits in addition to unprecedented language that would allow the company to ‘modify’ wages according to their own assessment of market conditions,” said District 8 Business Representative Steve Jones. “There is no good reason for a company that made $4.9 billion in profits last year and $1.5 billion in the first quarter of this year to try and shake down their own employees like this.”  

One reason may be to pay for increased compensation for Caterpillar CEO Doug Oberhelman, whose pay jumped by 60 percent in 2011, to nearly $17 million.

The causal mechanism being posited here by the union doesn’t necessarily stand up, but the bargaining logic makes perfect sense in terms of basic human psychology. A firm can sometimes benefit by doing something that its rank and file workers strongly dislike. But workers and employers have somewhat aligned incentives and all else being equal will do better if the firms they work for prosper. It is, however, extremely difficult to persuade workers that some proposed change is necessary for the long-term prosperity of the enterprise if the givebacks are occurring simultaneously with a 60 percent pay hike for top managers. In a country like Germany where labor unions are very strong in some sectors and have formal representation on corporate boards, firms don’t magically stop wanting givebacks and wage restraint from unions. But successful managers operating in that context need to display considerable discipline in terms of their own compensation in order to get the concessions they want. A firm whose CEO is paying himself a ton of money is going to have a much more difficult time bargaining with unions, which is going to be a big problem in a country with strong unions.