Chrysler CEO: 2-tier wage structure with UAW not viable over long run

Chrysler CEO: 2-tier wage structure with UAW not viable over long run
Marchionne hopes to end practice in next round of talks
Bradford Wernle
and David Phillips
Automotive News | October 28, 2011 – 9:16 am EST
UPDATED: 10/28/11 1:51 p.m. ET

DETROIT — Chrysler Group CEO Sergio Marchionne said today the automaker’s two-tier wage structure with the UAW is not viable over the long run and said Chrysler will work to end the pay practice in the next round of contract talks in 2015.

“The two tier wage structure, in and by itself, is not a viable structure upon which to build our industrial footprint,” Marchionne said. “It creates two classes of workers within the plant.”

Marchionne, who is also CEO of Chrysler’s majority owner, Fiat S.p.A., said the practice is undermining efforts by Chrysler and Fiat to “get this organization to work in unison.”

“Fundamentally we need to have one set of wage rates which clearly recognize the participation of our people in the profit generation of our people in the house,” Marchionne told reporters today on a conference call to discuss Chrysler’s $212 million third-quarter net profit.

“It’s totally consistent with the view I expressed with (then UAW President) Ron Gettelfinger at the time and more recently with (UAW President) Bob King,” Marchionne said.

Detroit automakers — seeking to become more competitive with Asian and European automakers with U.S. factories — won the right to pay new hires lower wages and reduced benefits in 2007.

Starting pay for those workers was $14 an hour, though the industry’s severe downturn prevented General Motors, Ford Motor Co. and Chrysler from hiring substantial numbers of Tier-2 workers.

In 2009 Chrysler and GM, as part of their U.S.-steered restructurings, were granted the ability to hire an unlimited number of Tier-2 workers through 2015.

During the latest talks with Detroit automakers, the UAW pressed to raise the starting wage and maximum pay for entry-level workers. At the same time, long-time UAW workers were not given annual pay raises or cost-of-living adjustments.

Equal pay, equal work

Under the contracts ratified this fall, the maximum wage for second-tier workers at the Detroit 3 will climb to $19.28 per hour over the life of the contract. Top tier workers will earn $28 an hour in wages, or $51 an hour when benefits and other compensation are included.

King suggested this week the union will also seek to abolish the practice of two pay scales for hourly workers at GM, Ford and Chrysler.

“It’s long been a value of the UAW that people doing the same job should make the same rate of pay,” King said in an interview with PBS that aired Wednesday, the same day the union ratified a new labor agreement with Chrysler.

King said the union deviated from one pay scale in order to save the companies.

“And this is the first contract where the companies are beginning to be healthy again. None of them are totally out of the woods, but they were in good enough economic shape to be able to do $3.50 base rate increases for entry level (workers),” King told PBS. “So we’re really happy with that.

“We’d like to have seen more, but we thought that was financially viable for the companies.”

Marchionne said today he and King, during the latest talks, attempted to change the two-tier system but were unable to reach a mutual agreement. Marchionne told reporters he hopes to have a new solution when a new contract is negotiated in 2015.

Marchionne said tier two workers comprise roughly 13 percent of Chrysler’s blue-collar workforce but he said that number will increase to 25 percent by 2015, when the new four-year contract expires. Chrysler has about 23,000 unionized workers.

“It’s structurally undesirable to have this sort of pay scale,” Marchionne said.

Competitiveness

Chrysler said its labor costs under the new four-year contract with the UAW will be little changed at about $51 an hour.

The total hourly cost of wages and benefits “maintains Chrysler Group’s cost competitiveness,” the company said in the earnings presentation with analysts and reporters.

Chrysler negotiated a deal that pays smaller signing bonuses to UAW members compared with those at GM and Ford, which has estimated its labor costs will rise to $59 an hour, from $58.

“It is in our collective interest to find a solution that effectively guarantees a credible way of going forward and dealing with a down cycle, while rewarding people properly on the upside,” Marchionne said.

Chrysler’s UAW contract calls for half of workers’ $3,500 ratification bonuses to be withheld until Chrysler achieves certain financial metrics.

Marchionne said the milestone is an “interest-cover calculation” based on earnings before interest, taxes, depreciation and amortization during the course of one year, without being more specific.

“We’re not there yet,” he said. “We’re sufficiently close for everybody to feel relatively comfortable that we should get there relatively quickly.”

Marchionne is pushing Chrysler, after a net loss of $652 million last year, to turn a profit this year of $600 million excluding costs associated with paying off U.S. and Canadian government loans.

IPO plans

Chrysler won’t conduct an initial public offering until there is more clarity and stability in equity markets, Marchionne said.

“I wouldn’t venture to do anything in this market today,” he said. “Regardless of how well we perform, I think it’s an ungrateful market. It’s distracted by a number of other things, some of which may be more relevant than our own issues.”

On another conference call, he said he has “no doubt” that there will be a “corporate convergence” between Chrysler and Fiat by 2014.

The U.S. Energy Department is “coming to decision time” on the automaker’s application for $3.5 billion in loans under a program to encourage production of fuel-efficient vehicles, Marchionne said. Congressional scrutiny of the program since the bankruptcy of loan-recipient Solyndra LLC has been a “distraction” to the process.

“We’ve earned the right to borrow,” he said.

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