Costing out a wage and benefit package

Labor costs represent the largest single cost of operation for most organizations. For the unionized employer, the compensation package is determined during contract negotiations. It is important for both union and management negotiators to be able to identify the cost of a proposed agreement. Both parties to a contract should know whether a proposed compensation package is consistent with an organization's ability to pay. In addition, when "trading" demands, both parties should be aware of the cost of the demands being traded. An approach to costing out a labor agreement has been presented in this article. While it can be described as the standard approach, it is subject to several criticisms. Typically, it is applied in a way that assumes that history will repeat itself. In addition, it focuses on the direct cost of a proposed compensation package. While this is certainly relevant, the impact of the compensation package on organization profits is more important. Finally, the time value of money is not taken into account. This would be important if a multi-year contract is being negotiated. While there are legitimate concerns about the approach presented here, our objective is to provide the reader with a basic approach to costing out a wage and benefit package. Anyone involved in contract negotiations or, in the nonunion firm, anyone responsible for administering a wage and benefit program, should be aware of the problems that we have described and seek out reference materials to provide guidance in addressing them.