Modernisation of metalworking pay framework starts in four regions

In March 2005, a new pay framework was launched in four bargaining regions of the German metalworking and electrical industry. It brings pay formation up to date by assigning blue-collar and white-collar workers to pay grades on common principles. The use of 'adjustment funds' should ensure that implementation of the scheme is cost-neutral at company level.

Beginning in March 2005, a new framework agreement on pay structure (Entgelt-Rahmenabkommen, ERA) has started to replace old framework agreements governing pay grades in the metalworking and electrical industry in four bargaining regions. The fundamental principles of the old frameworks can be traced back to 1947, and for a number of years these have been subject to calls for modernisation from both the German Metalworkers’ Union (IG Metall) and the Employers’ Association for the Metalworking and Electrical Industry (Gesamtmetall). Pay schemes in the metalworking and electrical industry, as in other industries, have until now been segregated. Blue-collar workers have received wage and white-collar workers have received salaries, with the formation and development of pay differing between the two groups. The new framework agreements on pay, however, merge the different schemes into a single remuneration system for all employees. The new scheme guarantees that employees are paid at equal levels for equal tasks, irrespective of their 'traditional' white- or blue-collar status.

New pay frameworks

New pay framework agreements (ERAs) were reached on 23 June 2003 in Baden-Wurttemberg (DE0205206F), on 20 November in Lower Saxony, on 18 December in North Rhine-Westphalia and on 20 January 2004 in Osnabruck. Starting from 1 March 2005, member firms of Gesamtmetall have committed themselves to completing the transformation process by 29 February 2008 in Baden-Wurttemberg and by 31 December 2008 in Osnabruck and Lower Saxony. The process of transformation should be completed in North Rhine-Westphalia by the end of February 2009. Every individual company has the right to implement the ERA when it wants (as long as this is before the completion deadline). If firms so desire, an extension of the compliance period (12 months) is possible on the condition that an agreement between IG Metall and the employers’ association exists at regional level.

The new ERAs align pay schemes with new forms of work organisation. For example, teams brought together on either a temporary or permanent basis (eg to increase flexibility and to meet customers’ demands quickly and effectively) have broken up the distinction between the tasks of blue- and white-collar workers within traditional forms of work organisation. The two groups have become more and more alike over the last two decades, and the new pay framework thus abolishes the distinction in this area too. It standardises both basic compensation and incentive payments. Though uniform in this respect, there are differences among the ERAs concluded in the various reasons.

The number of pay grades has been reduced, though the extent of this reduction depends on the bargaining region. For example, the ERA in North Rhine-Westphalia consists of 14 grades instead of the previous 58. Concerning the highest grades, pay ranges from 80% to 100% of the corresponding wage level. There are now 12 grades in both Osnabruck and Lower Saxony (plus one grade for trainees) instead of the previous 26 and 17 respectively. In North Rhine-Westphalia, each grade is differentiated into two stages, whereas there are three stages in Osnabruck and Lower Saxony. In Baden-Wurttemberg, there are now 17 grades.

The ERAs assign both blue-collar and white-collar workers to pay grades according to the requirements of the tasks that they perform. These requirements are based on qualifications, responsibility and key skills. The sectoral social partners provide guidelines for companies. Tasks and requirements are evaluated individually for every employee within each company. In this respect, some employees are upgraded, while others are not, even if they used to receive the same pay level. Generally speaking, medium-skilled and highly-skilled workers are better off, whilst low-skilled workers move down the pay scale.

The ERAs also involve a common system of incentives for blue-collar and white-collar workers. The extent of performance-related pay is to be capped at an average percentage rate of the annual paybill at company level. This cap averages 15% in Baden-Wurttemberg and 10% in the other regions. Within firms, differentiation is possible but is restricted. Traditional modes of performance-related pay, such as piece rates, bonuses, merit pay and so on, are supplemented by new payment methods that are linked to 'objectives management' and to which employees or teams must give their consent. The number, nature and importance of objectives as well as methods of payment and the length of the agreement are fixed by contracts in advance. Works agreements can embrace both individual and group settlements.

Adjustment funds established

A strict application of the ERAs is expected to increase the paybill by almost 3%. This is due, first, to the upgrading of certain employees and, second, to a guarantee that no workers will suffer from a downgrading in real terms. Therefore, the settlements include a compensation package for firms so that increased labour costs are avoided. In this respect, annual pay growth has been divided into two parts. Besides a regular increase, employees have, since 2002, also received a flat-rate payment each year. This compensation package (ERA-Strukturkomponente) amounted to 0.9 percentage points of the 4% total wage growth in 2002, 0.5 points of the 3.1% in 2003 and 0.7 points of the 2.2% in 2004 (DE0403203F). For 2005, a flat rate of 0.7 points of 2.7% has been agreed on. In subsequent years, these flat-rate components have to be paid into an 'adjustment fund' at the company level (betrieblicher Anpassungsfonds) instead of being transferred to employees directly. This has happened since 2003. The payments are reserved for covering rising paybill expenditure. At the end of February 2006, adjustment funds are likely to amount to roughly 4% of the annual paybill. If the new compensation scheme is not applied, the company will have to transfer 2.8% of the annual paybill to employees as flat-rate payment every year. However, it is possible for management and works councils to stipulate that this money should be used to increase the size of the adjustment fund until the new pay scheme is implemented. If adjustment funds do not match the increased paybill expenditure, companies are allowed to deviate temporarily from the sectoral collective agreement by reducing additional pay.

Reactions

On 21 March 2005, Hartmut Meine, chair of IG Metall in Lower Saxony, praised the launch of the new ERA as the biggest reform that the union had ever managed. In an earlier press release, IG Metall had hailed ERA as proof that the collective bargaining system in Germany is both viable and successful. According to a comment by Berthold Huber, vice-president of IG Metall, in Metall (on 1 April 2004), the new ERA has ushered in a new era of wage policy that can foster co-determination.

The reactions of employers’ associations revealed a greater degree of caution. They have emphasised the importance of cost-neutral implementation at company level. However, at a conference on 17 March 2005, Otmar Zwiebelhofer, chair of the metalworking employers’ association for Baden-Wurttemberg, described the ERA as a chance to launch a new wage policy at company level. Moreover, Jan Stefan Roell, the employers' chief negotiator in the same region, [praised](http://www.suedwestmetall.de/SWM/WEBSWM.nsf/0ecbf9c9fbea3811c1256bc500493599/2c7af0af2a75685cc1256ebc002844a9/$FILE/ATTIDV7W/ERA-Info 1.pdf) the ERA as a device to overcome shortcomings with regard to rewarding individual performance, which has been a problem in the past. The ERA, he stated, could prevent higher labour costs, as collective wage agreements had often not been applied appropriately in the past. The metalworking employers’ association for North Rhine-Westphalia is concerned that employees could become accustomed to the flat-rate payments that firms are obliged to pay beyond March 2006 as long as the ERA is not implemented. This might result in a reluctance to accept the new framework.

Commentary

Owing to structural change and increased national and global competition, companies have to react quickly and flexibly in order to sustain competitiveness. By re-engineering production and implementing new forms of work organisation, firms are able to strengthen their innovative capacity. This process blurs the distinctions between jobs and tasks, and, in addition, raises demand for skilled workers. Traditional assignment to pay grades under the auspices of the old pay frameworks has been revealed to be an inappropriate way of dealing with a more volatile environment. In this respect, the new ERAs in metalworking mean that an important step towards reconciling tasks and jobs with pay formation and development has been taken.

Implementation is expected to strain personnel and financial resources. An open question is whether companies may incur adaptation costs above the value of the reserves supplied by the adjustment funds. Preventing an increase in labour costs and a possible decline in employment at the company level will depend upon the success of the ERAs. This success, in turn, will depend upon the ability of firms to deviate from collective agreements, at least temporarily. Moreover, lower grades of the ERAs still determine wages for unskilled and low-skilled employees above the level at which companies will hire new entrants. In this respect, wage compression remains an obstacle to higher employment. (Oliver Stettes, Cologne Institute for Business Research, IW)