Labor Contract Arbitration: As Broken As Executive Comp

Some of the real villains of the current financial malaise are unrecognized by the general public:  executive compensation consultants like Hewlett Associates and certified New York State labor contract arbitrators.

On the surface, these people are well meaning, but they are the guardians of a compensation system that is fundamentally broken and destructive.

Both groups give advice on what is ‘pattern’ in terms of pay and benefits in a particular industry, region or skill category.  ‘Pattern’ involves looking at what everyone else is doing and conforming behavior or policy to it.  Logical systems based on ‘pattern’ have an systematic upward bias.  Eliminating or even moderating pay increases are virtually impossible because they are ‘below’ pattern’, while each executive recruiting incentive or labor concession made by a participant in the ‘pattern sample’ results in an increase in the overall pay level.   ‘Pattern’ leads to an upward spiral of compensation and benefits.

Two examples of the insidious effect of ‘pattern’ were evident this week in contract arbitration settlements in White Plains and New York City.  In both cases, union members were given approximate 4% annual increases because surrounding communities had granted similar increases to their employees, i.e., ‘pattern’, or in the case of the MTA  in NYC similar increases were given to other trades, i.e., the police, firemen and civil service.  The arbitrators gave no consideration to the financial condition of the payers.  White Plains is projected to run a budget deficit of $13.9M, while the MTA is 100’s of millions of dollars in the red.

In White Plains, the arbitrator also rejected a proposal to delay ‘steps’ from one to two years, because a two-year step is ‘out of pattern’.   The head of the White Plains PBA applauded this decision out of concern for a ‘badge drain’ to neighboring communities.  In Dobbs Ferry, for example, a starting police officer gets a base salary of $46,963.  After four years due to the ‘steps’, the same officer is earning $91,162 – an increase of $44,199 or $11,049 per year – just for sticking it out for 4 years.  All-in, a fifth year police officer earns more than $125,000 per year including all types of compensation, time off and benefits excluding overtime.    

 Arguments that such compensation levels are unsustainable are met with one word, ‘pattern’.   In fact, the arbitrator’s hands are tied by self-interest.  A deviation from ‘pattern’ would result in a civil suit and the arbitrator would not be selected by the union in subsequent arbitrations.   The arbitration system is another American institution infected with an inherent conflict of interest and a faulty notion of the efficient market.

In order to fix executive compensation on Wall Street, the US Government had to appoint a compensation czar, Kenneth Feinberg, who can cut or limit pay packages to reasonable levels, regardless of ‘pattern’ or the advice of conflicted compensation consultants.  New York State needs a similar official to help agencies, counties, municipalities and school districts out of an endless cycle of unaffordable base wage, step, grade and benefit increases justified by ‘pattern’ and sealed by the binding decisions of conflicted labor contract arbitrators.  The current system of arbitration and ‘pattern’ will not reduce county, agency, municipal or school district payroll and benefit increases and help solve the budgetary crisis.