Caterpillar to unions: Drop dead

Steven Pearlstein
Columnist August 4, 2012

For decades, executives at unionized companies have harbored the fantasy that they could dictate the wages, benefits and working conditions of their employees, just like non-union firms. What stood in their way was the unions’ ability to mount a strike that would prove more costly than paying above-market compensation. In the language of economics, the strike gave workers market power.

Now, at a hydraulics plant in Joliet, Ill., this corporate fantasy is about to become economic reality. Thanks to globalization, declining union density and years of chipping away at labor laws, Caterpillar is set to prove that even unionized companies can operate as if they have no union at all.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

It’s no longer just a matter of getting unions to agree to “concessions” and “give-backs” in order to save their plants or avoid corporate bankruptcy, as happened in the steel and auto industries. As Caterpillar aims to demonstrate in Joliet, even a thriving, global powerhouse posting record profits can take a strike and impose market-level wages and benefits on its unionized workers.

It’s been three months since Local 851 of the International Association of Machinists voted overwhelming to reject Caterpillar’s “best and final” offer and go out on strike. In terms of negotiations, there really haven’t been any. From the outset, Caterpillar made it clear that there really wasn’t anything to negotiate.

In the previous six-year contract, Caterpillar won a two-tier wage structure: Existing employees would get to keep wages that average about $26, but there would be no raises and new employees would be paid wages pegged to the existing market — roughly $12 to $19, depending on the job classification. Instead of the old defined-benefit pension plan, the company would put 3 percent of each worker’s base pay into a 401(k) retirement account, and match employee contributions up to an additional 3 percent. The company would continue to pay 90 percent of the premiums for a generous health insurance plan, and profit sharing that averaged $2,300 a year.


It was reported that strong demand fueled Caterpillar Inc.'s second-quarter earnings which rose 67 percent on July 25, 2012. (Scott Olson/Getty Images)

Now, six years later, the company is offering pretty much the same — no raises of any sort for the “old” employees, whose compensation the company says is still 34 percent above the market, with pay for new employees continuing to rise only with prevailing market wages. In exchange for more flexibility in shift scheduling and elimination of certain seniority rights, the company was willing to offer a no-layoff pledge. And it demanded that workers increase the share of health premiums to roughly 20 percent, which by the end of the contract would represent an increase of roughly $3,800 if premiums continue to escalate as they have been. The company also offered a one-time $5,000 per worker signing bonus if a contract were signed without a strike.

The union counterproposal was, by historical standards, rather modest: in effect, a 1.5 percent raise each year, along with continuation of most existing seniority rights. The company rejected it out of hand.

The reason Caterpillar has no intention of negotiating with its workers is pretty simple: It doesn’t have to. In the three months since the strike began, the company says its Joliet plant has produced all the hydraulic parts it needs. The work is done by supervisors, newly hired employees and employees contracted from temporary help agencies, along with 80 and 100 union members who have crossed the daily picket lines and returned to work. If things really got tight, the company could always import the same parts from other Caterpillar plants around the world.

Caterpillar’s success in effectively neutering its unions is the result of decades of disciplined work and billions of dollars in investment. The turning point came in the 1990s when, after two long strikes, 9,000 members of the United Auto Workers at its giant facility in Peoria, Ill., effectively capitulated and went back to work on terms dictated by the company. The strikes demonstrated to Caterpillar’s workers that they were not as irreplaceable as they thought, and that their picket lines would no longer deny the company the workers or the raw materials needed to continue operation. As it turned out, the capitulation also allowed Caterpillar to avoid the near-death experience of the Big Three automakers, which accepted the UAW’s overly generous contracts for another decade.

Caterpillar makes no bones about the fact it intends to bring its “market-based” approach to worker pay and benefits to every location. That message, apparently, was lost on the 465 unionized workers at a 62-year-old locomotive plant in London, Ontario, that Caterpillar bought a few years ago. Those workers had been getting $35 an hour. Caterpillar’s take-it-or-leave-it offer was for half that, along with substantial cuts in benefits. When the workers balked, Caterpillar closed the plant, took its cutting-edge diesel-electric technology and moved production to Muncie, Ind., where workers lined up for a shot at one of $12- to$18-an-hour jobs.

It is easy to get moralistic about a company that pays its chief executive $16.5 million as a reward for squeezing the incomes of employees who, even at the top of the scale, earn about one-half of 1 percent of what he does. It’s easy to get nostalgic about the loss of union power that really did make it possible for generations of workers with only a high-school education to enter the middle class. But the reality is that Caterpillar probably has no choice but to bow to the dictates of the markets — not only the markets from which it gets it labor but also the markets from which it raises its capital and the markets into which it sells its products. If it can’t sell its products at above-market prices or offer its investors below-market returns, it can’t afford to pay its workers above-market wages.

Even from a market perspective, however, there is a valid critique of Caterpillar’s hardball tactics.

The first is to note that when it comes to its executives, managers and engineers, Caterpillar does not use the same criteria of paying the average market wage. In those instances, the company has seen the competitive benefit of paying above the average to attract and retain a cadre of above-average employees and give them sufficient incentive to work hard, take risks and deliver superior performance. There is no evidence to suggest that having better-than-average production workers will not have the same beneficial results. To believe or behave otherwise is nothing more than the sort of class snobbery better suited to the country-club locker room than the executive suite of a modern global corporation.

If Caterpillar were really serious about having a world-class workforce, it would be willing to negotiate wage and benefits levels 15 percent above the market. And if it were serious about insuring that all workers share in the company’s success, then it would offer production workers a profit-sharing plan that reaches at least 10 percent of base pay in good times.

Because of its size and reputation, companies like Caterpillar also need to acknowledge that they have an outsize impact on the social, political and economic environment in which markets operate. Caterpillar should not expect voters to embrace its aggressive free-trade philosophy if globalization merely gives it license to grind down the incomes of average workers. It shouldn’t expect politicians to approve more money for public works projects, or give the green light to increased coal and shale-oil production — both big generators of Caterpillar sales — if the profits from those sales won’t be shared fairly with front-line workers. And it shouldn’t expect to win the good opinion of investors or the public if its human-resource strategy is to become the recognized leader in the corporate race to the bottom.

The reason the union movement is in trouble is because unions abused their market power and overplayed their hands. Now, it is Corporate America that has gained the upper hand, and if the news from Joliet, Ill., is any indication, it is about to make the same mistake.

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