How to Cost Your Labor Contract

Transcription

1 How to Cost Your Labor Contract Second Edition Michael H. Granof Professor of Accounting The University of Texas at Austin Austin, Texas Jay E. Grenig Professor of Law Marquette University Law School Milwaukee, Wisconsin Moira J. Kelly Kelly Consulting LLC New Berlin, Wisconsin 1BNA BNA Books, A Division of BNA, Arlington, VA

2 DETAILED TABLE OF CONTENTS PREFACE SUMMARY TABLE OF CONTENTS v xi CHAPTER 1. INTRODUCTION 1 I. Objective of This Book 1 II. Analytical Approach of This Book 3 A. Evaluating the Impact of Compensation Changes 3 B. Simplistic Approaches to Analysis 5 1. Failure to Consider Effect of Adaptation 6 2. Failure to Account for Lost Opportunities 7 3. Failure to Consider the Cash Flow and the Time Value of Money 8 III. Progression of Discussion in Other Chapters 10 Part 1. Analysis and Preparation CHAPTER 2. LAYING THE GROUNDWORK FOR FINANCIAL ANALYSIS 15 I. Introduction '.' 15 II. Costing As an Integrated Effort 16 III. Timing and Nature of Preparations 18 IV. Sequence of Bargaining Decisions 19 V. Data Used to Evaluate the Financial Impact of Proposals 20 VI. Common Methods for Costing 23 A. Annual Cost 23 B. Cost Per Employee Per Year 24 C. Percent of Payroll 24 D. Cents Per Hour 25 E. Additional Method: Discounted Cash Flow 26 XIII

3 xiv How TO COST YOUR LABOR CONTRACT CHAPTER 3. PREPARING A COSTING WORKSHEET 27 I. Getting Started 28 Exhibit 3-1. Negotiation Folder Organization 30 II. Data Source Logs 30 III. Baseline Information 32 Exhibit 3-2. Sample Baseline Worksheet, With Explanations 34 A. Hours Worked Straight Time (Item 1) Overtime (Item 2) 36 B. Number of Employees (Item 3) Full-Time Employees Part-Time Employees Seasonal or Cyclical Employees 38 C. Key Calculations Per Employee Number of Regular Hours Worked Per Employee (Item 4) Number of Overtime Hours Worked Per Employee (Item 5) Number of Average Days Worked Per Employee (Item 6) Number of Average Hours Worked Per Day Per Employee (Item 7) 39 D. Preparing the Remainder of the Base Costing Worksheet Mandatory Subjects of Bargaining Categorizing Costs 40 Exhibit 3-3. Example of Cost Categories Roll-Up 42 CHAPTER 4. EVALUATING WAGES AND OTHER PAID TIME 43 I Wages 44 A. Analyzing the Cost of the Increase in Direct Wages 44 Exhibit 4-1. Sample Calculation of Average Cents-Per-Hour Increase Based on Number of Employees or Number of Hours Paid For 45 Exhibit 4-2. Sample Calculation of Average Cents-Per-Hour Increase Based on Productive Hours 46 B. Analyzing the Increase in the Cost of Benefits Linked to Direct Wages 46

4 DETAILED TABLE OF CONTENTS XV C. Estimating the Total Cost: Using the Roll-Up 47 Exhibit 4-3. Explanation of Hypothetical Facts and Formulas 49 Exhibit 4-4. Computation of Roll-Up 50 II. Cost-of-Living Adjustments 51 III. Overtime Premium and Shift Differentials 53 IV. Payment for Time Not Worked 55 A. Vacations Eligibility Scheduling Payment 56 B. Holidays 59 Exhibit 4-5. Explanation of Hypothetical Facts for Estimate of Cost of One Added Holiday in Cents Per Hour 60 Exhibit 4-6. Explanation of Sample Facts and Formula for Estimate of Cost of One Added Holiday in Total Dollars Rather Than Cents Per Hour 61 C. Relief Time 62 Exhibit 4-7. Explanation of Sample Formula and Hypothetical Facts to Determine Number s of Relief Employees Required to Cover for Additional Minutes of Breaks 63 D. Other Paid Time Off Funeral Leave Jury Duty. '...' Union Business Medical Injury 66 E. Required Payments 67 CHAPTER 5. EVALUATING OTHER CONTRACT PROVISIONS 69 I. Introduction 70 II. Pension Benefits 70 A. Defined Contribution Plans 70 B. Defined Benefit Plans 72 III. Other Post-Retirement Benefits 74 IV. Impact of Contract Changes on Financial Statements. 75 V. "Noneconomic" Provisions 76 VI. Economic Variables 77 A. Production Volume and Prices Volume 78

5 xvi How TO COST YOUR LABOR CONTRACT a. Overal Dollar Costs Are More Significant in Making Contract Decisions Than Are Cents-Per-Hour Costs 78 b. Labor Costs Do Not Always Vary Directly With Production Volume 79 c. Estimates of Future Volume Are Too Important Not to Be Incorporated Into Cost Estimates Prices 80 B. Product Mix 80 C. Capital Investments and Technological Improvements 81 VII. Spillover 82 VIII. Post-Contract Audits 83 CHAPTER 6. USING THE DISCOUNTED CASH FUND MODEL 85 I. Advantages of the Model 86 A. The Model Takes Into Account the Time Value of Money 88 B. The Model Provides a Frame of Reference for a Thorough and Systematic Analysis of the Financial Impact of a Proposal and Enables Management to Take Into Account Operational Changes That the Firm Is Likely to Make in Order to Adjust to the New Contract 89 C. The Information Returned by the Model Is Easy to Understand, and Because the Model Summarizes the Present Value of a Proposal in a Single Figure, It Facilitates Comparisons of Alternative Proposals 91 D. The Model Avoids Problems of Allocations Inherent in Evaluation Techniques Based on "Accounting" Income 91 E. Owing to the Availability of Spreadsheet Software Such as Excel 53 ', the Model Requires Little Mathematical Knowledge or Computer Programming Expertise 92 II. Limitations of the Model 92 A. The Model Implicitly Assumes That a Firm Has a Single Goal: To Maximize the Net Present Value of a Stream of Future Cash Flows 92 B. The Model Requires That a Firm Explicitly

6 DETAILED TABLE OF CONTENTS xvii Determine a Discount Rate 93 C. The Model Necessitates Estimates of Future Cash Flows 93 III. Cents-Per-Hour Computations 93 Exhibit 6-1. Factors to Consider in Determining Elements of Formula 94 IV. An Illustration of Cents-Per-Hour Computations 99 Exhibit 6-2. Key Features of Old Contract 100 Exhibit 6-3. Pro Forma Labor Costs Under Old Contract Assuming New Size and Composition of Labor Force and New Mix of Straight-Time and Overtime Hours 102 Exhibit 6-4. Summary of Major Changes in New Contract 104 A. Direct Wages ". 105 B. Overtime 105 C. Holidays 106 D. Vacations 106 E. Cost-of-Living Bonus 107 F. Supplemental Unemployment Benefits 108 G. Accident and Sickness Insurance and Pensions 108 H. Effect of Direct Wage Increases on Wage-Related Benefits 109 I. "Spillover" 110 J. Prices 110 K. Summary of Costs Ill Exhibit 6-5. Cost of Old Contract and Cost of Revisions; Total Cost and Cents-Per-Productive Hour Cost., 112 V. The Discounted Cash Flow Approach 114 Exhibit 6-6. Present Value of $1 115 Part 2. Execution CHAPTER 7. COSTING PROPOSALS DURING NEGOTIATIONS 125 I. Anticipation and Research for Collective Bargaining A. Employee Surveys 126 B. Grievance Histories ; 126 C. Review of Previous Negotiations 128 D. Union Bargaining Team Selection 128 E. Management Bargaining Team Selection 129

7 xviii How TO COST YOUR LABOR CONTRACT F. Preparation of Proposals 130 G. Obtaining Bargaining Authority 131 II. How Proposals Integrate with Roll-Up 132 Exhibit 7.1 Sample Worksheet With Examples 134 III. Key Strategic Issues During Economic Bargaining 136 A. Timing 136 B. Disclosure of Information 137 C. Selection of Negotiation Format 138 IV. "The Offer Cone" 138 A. Best Alternative to a Negotiated Agreement (BATNA) 138 B. Presentation of Offers ("The Offer Cone") 139 CHAPTER 8. USING AN INTEREST-BASED NEGOTIATION STYLE IN ECONOMIC COMPONENTS OF BARGAINING" 141 I. The Differences in Distributive and Integrative (Interest-Based) Bargaining Styles 141 A. Distributive Bargaining Style Example Using Distributive Bargaining Style B. Interest-Based Bargaining Style The Steps of Interest-Based Bargaining Example Using Interest-Based Bargaining Steps 146 Exhibit 8-1. Sample Interests 147 Exhibit 8-2. Sample Options Table Methodology for Using Interest-Based Bargaining for Economic Issues 150 II. When to Use Each Style 151 CHAPTER 9. ALTERNATIVE DISPUTE^ RESOLUTION: NEGOTIATION, MEDIATION, FACT FINDING, AND ARBITRATION 153 I. Alternative Dispute Resolution Processes 154 A. Introduction Generally Using Alternative Dispute Resolution Avoiding Strikes or Lockouts Timing of Bargaining 155 B. Negotiation Generally The Negotiation Process Costing Information and Negotiation 156 C. Mediation 157

8 DETAILED TABLE OF CONTENTS xix 1. Generally Compared With Arbitration Federal Mediation and Conciliation Service State Mediation Agencies...: 159 D. Fact Finding Generally Compared With Arbitration and Mediation 161 E. Interest Arbitration Generally 162 a. Defined...: 162 b. History 163 c. Compulsory Interest Arbitration 164 d. Private Sector Pros and Cons of Interest Arbitration Compared With Grievance Arbitration Constitutionality of Interest Arbitration Tripartite Panels Forms of Interest Arbitration 170 F. Mediation-Arbitration Generally Authority to Mediate and Arbitrate 171 II. Standards in Interest Arbitration 172 A. Introduction 172 B. Standards Introduction Statutory Standards Discretion of Arbitrator 174 CHAPTER 10. USING COSTING INFORMATION IN NEGOTIATING, MEDIATING, FACT FINDING, AND ARBITRATING 175 I. Introduction : 177 A. Generally...: 177 B. Preparation Generally Collecting Information 178 II. Selected Standards 179 A. Comparable Compensation Practices Generally Bargaining Patterns External Comparability 182 a. Generally 182 b. Databases 183

9 xx How TO COST YOUR LABOR CONTRACT c. Comparable Employers 183 d. Comparable Job Classifications or Occupational Groups Internal Comparability 184 a. Generally 184 b. Benefits 185 c. Parity Application 186 a. Generally 186 b. Determining Comparable Employers 186 c. Determining Comparable Positions or Classifications 187 d. Comparing Wages and Benefits 187 e. Historical Rankings 188 f. Examples : 189 Table Truck Driver Annual Wage 189 Table BA Base 190 Table BA Seventh Step 191 Table BA Maximum 192 Table MA Base 193 Table MA Seventh Step Table MA Maximum 195 Table Schedule Maximum 196 B. Economic Conditions Generally Application 197 a. Trends 197 b. Program and Position Cutbacks 198 C. State Law Generally : Application 198 D. Ability to Pay Generally 198 a. Ability to Pay in the Private Sector 200 b. Burden of Persuasion 201 c. Employer's Budget Application.': 202 a. Generally 202 b. Evaluating Employer's Budget and Financial Statements 204

10 DETAILED TABLE OF CONTENTS xxi c. Compensation of Other Employees 204 E. Changes in the Cost of Living Generally 204 a. Average Consumer Prices for Goods and Services 204 b. Comparison of Settlement Patterns The Consumer Price Index 205 a. Generally 205 b. Available Indexes 205 c. Limitations of the CPI Application 206 F. Overall Compensation Presently Received by Employees Generally Application 207 a. Generally 207 b. Benefits 207 c. Paid Leave 208 d. Teacher Annual Salary Calculated As an Hourly Wage 208 e. Public Safety Employees 209 f. Employee Furloughs 209 g. Early-Retirement Incentives 210 G. Interest and Welfare of the Public Generally Application 211 H. Other Factors 212 INDEX 213 ABOUT THE AUTHORS :'. 227