A compensation plan in which new employees are paid at a reduced rate compared to experienced employees. Two-tier plans are particularly attractive to businesses that experience high labor turnover.Case Study
Two-tier wage plans gained traction in the face of globalization, which forced U.S.-based production facilities to compete with foreign plants enjoying much lower labor costs. Labor unions nearly always strenuously oppose two-tier compensation plans, in part because the arrangements fly in the face of the important union principle “equal pay for equal work." Dual-tier pay systems also tend to damage labor harmony and create worker and public perception of a weak union. U.S. companies exercised a powerful bargaining weapon against labor unions when the firms threatened to move jobs overseas through outsourcing or acquiring offshore production facilities. In January 2005, the United Auto Workers ratified a new six-year contract with heavy equipment manufacturer Caterpillar, Inc. under which new hires would make $10 to $15 per hour (depending on job classification), compared with the firm's then current workers, who had started at an hourly wage of $20 to $22. The contract also called for annual lump-sum payments rather than yearly wage increases. The union indicated that the proposal of a two-tier system was accepted in an effort to preserve jobs. California grocery workers represented by the United Food and Commercial Workers Union had accepted a similar two-tier compensation system the prior year.