How the UAW may have quietly negotiated profit-sharing increases for their members at GM and Ford
First, I will recap a few concepts from a previous blog. As lead company in 2011, GM modified the old, complicated profit-sharing formula and in the process satisfied the UAW’s desire to have a profit-sharing formula that was easy to understand, linked directly to audited financial statements and more transparent to members. The formula was quite simple – basically employees would receive $1 for every $1 million (or $1,000 per $1 billion) of GM’s North America profits. Both Ford (second company to bargain) and FCA (third company to bargain) accepted the GM profit-sharing formula pattern with minor administrative modifications.
In effect, by structuring the profit-sharing formula and setting the economic pattern this way, GM may have inadvertently advantaged FCA (or disadvantaged themselves) due to FCA’s smaller size along with a scalability issue that is inherent in the GM formula. The best way to explain this issue is by providing an illustrative example as follows. If GM had 48,000 employees at the time and the company was able to generate North American profits of $7 billon, then the 48,000 GM-UAW employees would receive profit-sharing checks of $7,000 ($1,000 per $1 billion formula). In contrast, all else being equal including profit margins, etc. – if the smaller FCA had 24,000 employees (50% of GM), in theory, one may expect that FCA could achieve $3.5 billion in North American profits (again 50% of GM). However, in this case the 24,000 FCA-UAW employees would only receive profit sharing checks of $3,500 ($1,000 per $1 billion formula), half of what their GM counterparts would receive (even though corporate performance on relative terms may be on par). This scalability challenge continues to exist at GM and Ford today as they agreed to continue to utilize this same basic formula in the 2015 and 2019 Agreements. In general, as highlighted in the example above, as you grow your workforce you effectively pay more in profit-sharing per employee and vice versa.
2015 UAW Agreement
The UAW selected FCA to be the lead company in 2015 and leading up to negotiations, the union suggested that they wanted to address the scalability issue inherent in the GM formula. There were a number of options including developing a sliding-scale approach that could apply as a pattern for all three automakers. For example, if a company had 40,000 employees - the profit-sharing formula would be $1,000 per $1 billion in profits, if a company had 32,000 employees – the profit-sharing formula would be $1,250 per $1 billion of profits, etc.
As an alternative, the FCA bargaining team proposed to modify the profit-sharing formula to $800 for every 1% of North America profit margin. This formula clearly addressed the scalability issue inherent in the GM model discussed earlier - the UAW accepted and ratified the new concept. As noted earlier, both GM and Ford decided to retain their $1,000 per $1 billion profit-sharing formula rather than moving to the profit-sharing model developed by FCA. See my earlier blog that illustrates how GM may have saved up to $650 million had they adopted the FCA profit-sharing model over the course of the 2015 Agreement: Why does FCA have an $8 per hour competitive labor cost advantage over GM?
2019 UAW Agreement
During 2019 bargaining, both GM and Ford retained the $1,000 per $1 billion in North America profit formula. In contrast, the UAW negotiated a 12.5% increase in the profit-sharing formula at FCA, increasing it by $100 for every 1% of North America profit margin (moved from $800 to $900). In addition, the $12,000 profit sharing cap no longer exists at any of the Detroit 3 Automakers.
Here is how the UAW may have quietly negotiated profit-sharing increases for their members at GM and Ford during 2019 bargaining. First, we will take a look at a hypothetical example, similar to what we looked at in the 2011 example above. As we will see, the potential increase in profit-sharing is a direct result of the scalability issue inherent in this type of formula. The illustrative example below assumes that a 15% increase in the workforce will translate into a 15% increase in North America profits, driving a 15% increase in profit-sharing per employee.
In this illustrative example, assuming that corporate profits increase consistent with the expansion of the workforce, profit-sharing payments per employee will increase by 15% from $10,000 to $11,500.
During 2019 bargaining, the UAW was successful in securing additional investment and workforce commitments from both GM and Ford. GM committed to add or retain 9,000 UAW jobs over the term of the contract while Ford made a similar commitment for 8,500 jobs. It is difficult to ascertain the breakdown between new and retained jobs, however any new jobs will likely have the same type of impact on profit-sharing payments as noted above. Therefore, the UAW may have quietly increased the potential profit-sharing payouts for GM and Ford UAW members by securing new job commitments from the automakers over the term of the Agreement. As noted below, directionally, potential profit-sharing payments may be up to 18.8% higher for GM-UAW employees and up to 15.5% higher for Ford-UAW employees due to projected increases in the workforce.
It is always important to understand all aspects of your collective agreement and to recognize how certain decisions, that on the surface may appear to be non-economic in nature, can have a significant impact on your labor costs.
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