Two-tier system
Encyclopedia
A two-tier system is a type of payroll
system in which one group of workers receives lower wage
s and/or employee benefit
s than another.
The two-tier system of wages is usually established for one of three reasons: 1) The employer wishes to better compensate more senior
, ostensibly more experienced and productive
workers without increasing overall wage costs; 2) The employer wishes to establish a pay for performance
or merit pay
wage scheme that compensates more productive employees without increasing overall wage costs; or 3) The employer wishes to reduce overall wage costs by hiring new employees at a wage less than incumbent workers.
A much less common system is the two-tier benefit system, which extends certain benefits to new employees only if their receive a promotion or are hired into the incumbent wage structure. This is distinguishable from traditional benefit structures, which often do not permit an employee to access a benefit (such a retirement pension
or sabbatical leave) without having first achieved certain time-in-position levels.
Two-tier systems became more common in most industrialized economies in the late 1980s. They are particularly attractive to companies which have high rates of turnover
among new hires (such as retail) or companies which have large numbers of high-wage, high-skilled older workers due to retire soon.
Trade union
s generally seek to reduce wage dispersion
(the differences in wages between workers doing the same job). Not all unions are successful at this. A 2008 study of collective bargaining
agreements in the United States
found that 25 percent of union contracts surveyed included a two-tier wage system. Such two-tier wage systems are often economically attractive to both employers and unions. Employers see immediate reductions in the cost of hiring new workers. Existing union members will see no wage reduction, and the number of new union members with lower wages is a substantial minority within the union and subsequently unable to negatively affect ratification votes. Unions also find two-tier wage systems attractive because they encourage the employer to hire more workers. Some collective bargaining agreements contain "catch-up" provisions which allow newer hires to advance more rapidly on the wage scale than existing workers so that they reach wage and benefit parity after a specified number of years, or which provide wage and benefit increases to new hires to bring them up to party with existing workers if the company meets specified financial goals.
Some studies have found problems with two-tier systems. Some negative effects which have been found include: Higher turnover among newer, lower-paid employees; a demoralized workforce. Given enough time, a two-tier wage system can permanently lower wages in an entire industry. Lowering productivity expectations for new hires seems to alleviate some of these problems.
Payroll
In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons...
system in which one group of workers receives lower wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
s and/or employee benefit
Employee benefit
Employee benefits and benefits in kind are various non-wage compensations provided to employees in addition to their normal wages or salaries...
s than another.
The two-tier system of wages is usually established for one of three reasons: 1) The employer wishes to better compensate more senior
Seniority
Seniority is the concept of a person or group of people being in charge or in command of another person or group. This control is often granted to the senior person due to experience or length of service in a given position, but it is not uncommon for a senior person to have less experience or...
, ostensibly more experienced and productive
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
workers without increasing overall wage costs; 2) The employer wishes to establish a pay for performance
Performance-related pay
Performance-related pay is money paid to someone relating to how well one works. Car salesmen, production line workers, for example, may be paid in this way, or through commission....
or merit pay
Merit pay
Merit pay is a term describing performance-related pay, most frequently in the context of educational reform. It provides bonuses for workers who perform their jobs effectively, according to measurable criteria...
wage scheme that compensates more productive employees without increasing overall wage costs; or 3) The employer wishes to reduce overall wage costs by hiring new employees at a wage less than incumbent workers.
A much less common system is the two-tier benefit system, which extends certain benefits to new employees only if their receive a promotion or are hired into the incumbent wage structure. This is distinguishable from traditional benefit structures, which often do not permit an employee to access a benefit (such a retirement pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
or sabbatical leave) without having first achieved certain time-in-position levels.
Two-tier systems became more common in most industrialized economies in the late 1980s. They are particularly attractive to companies which have high rates of turnover
Turnover (employment)
In a human resources context, turnover or staff turnover or labour turnover is the rate at which an employer gains and loses employees. Simple ways to describe it are "how long employees tend to stay" or "the rate of traffic through the revolving door." Turnover is measured for individual companies...
among new hires (such as retail) or companies which have large numbers of high-wage, high-skilled older workers due to retire soon.
Trade union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
s generally seek to reduce wage dispersion
Wage dispersion
Wage dispersion is an economic term which refers to the amount of variation in wages encountered in an economy.-Wage dispersion in the US and Europe:European countries have in general much less wage dispersion than the U.S. does...
(the differences in wages between workers doing the same job). Not all unions are successful at this. A 2008 study of collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...
agreements in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
found that 25 percent of union contracts surveyed included a two-tier wage system. Such two-tier wage systems are often economically attractive to both employers and unions. Employers see immediate reductions in the cost of hiring new workers. Existing union members will see no wage reduction, and the number of new union members with lower wages is a substantial minority within the union and subsequently unable to negatively affect ratification votes. Unions also find two-tier wage systems attractive because they encourage the employer to hire more workers. Some collective bargaining agreements contain "catch-up" provisions which allow newer hires to advance more rapidly on the wage scale than existing workers so that they reach wage and benefit parity after a specified number of years, or which provide wage and benefit increases to new hires to bring them up to party with existing workers if the company meets specified financial goals.
Some studies have found problems with two-tier systems. Some negative effects which have been found include: Higher turnover among newer, lower-paid employees; a demoralized workforce. Given enough time, a two-tier wage system can permanently lower wages in an entire industry. Lowering productivity expectations for new hires seems to alleviate some of these problems.