The history of labor relations

9-396-319
REV: MAY 1 3 , 2 0 0 8
________________________________________________________________________________________________________________
Professor Kathleen Valley, Harvard Business School, and Professor Victoria Medvec, J.L. Kellogg Graduate School of Management, prepared this
exercise with the assistance of Research Associate Julia Morgan, as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
Copyright © 1996-1998, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-
545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
KATHLEEN VALLEY
VICTORIA MEDVEC
Adam Baxter Company/Local 190
1978 Negotiation
Local 190 Confidential Information1
You are a new officer of Local 190, an affiliate of the AFL/CIO, which represents 1,700 employees
at the Adam Baxter Company, Deloitte. The Deloitte plant currently has approximately 2,000 FTE
(full-time employees) and produces about 75% of Baxter’s output. In your 18 years at Baxter, you
have become very familiar with Baxter’s history, especially the history of labor relations at the
Deloitte plant (see Appendix A for Historical Background Information). Your father was a highly
respected Local 190 officer years ago, and your grandfather also worked at Baxter. You are honored
and humbled by the prospect of following in their footsteps. One of your primary responsibilities as a
Local 190 officer, along with that of the two other officers, is to negotiate labor contracts for the
members of Local 190. It is June 1978, and bargaining is about to take place.
Local 190 has always been a maverick local union. Founded in 1933, it operated as an
independent union until joining the Congress of Industrial Organizations (CIO) in 1943. For years,
Local 190 was a highly vocal and influential member of the CIO. The CIO was more militant than the
other large American industrial union, the American Federation of Labor (AFL). In 1955, the AFL
and CIO merged. By 1978, the AFL/CIO represented over one million members. In contrast to its
initial independent status and its strong early influence in the CIO, with the merging of the unions,
Local 190 has watched its influence diminish to the point where it is now only one small voice in a
large chorus.
In the past, Baxter management has been fair and reasonable in contract negotiations. Baxter,
Deloitte, has been the industry exemplar of a plant with excellent labor/management relations. You
take great pride in that reputation. Since 1933, when there was a long strike before management
would come to an agreement with the workers, the contract has always been negotiated without a
strike or lockout. Furthermore, Adam Baxter, Jr., the company president from 1929 to 1946 son of
Adam Baxter, Sr., founding President, was one of the best managers workers could hope for. Faithful
to his father’s values, he understood that workers were what made profits possible, and that they
1 Endnotes (indicated by letters) are summarized in the final case, “Adam Baxter Company/Local 190 Debrief and Endnotes,”
HBS No. 396-326.
396-319 Adam Baxter Company/Local 190 1978 Negotiation—Local 190 Confidential Information
2
should share in the profitability and stability of the company. The workers have always been proud
of their company. And management, rightfully so, has always been proud of the workers. In fact, a
fairly cooperative labor-management atmosphere existed from 1933 through the late 1970s. Though
the first union contract was signed into effect in 1933 after a long strike, all labor agreements since
have been negotiated without strike or lockout. Since Adam Baxter Jr.’s death in 1954, however, labor
has begun to feel the gradual demise of a once paternalistic organization.
In 1940, Baxter and the Deloitte local union made labor history by being one of the only companies
to have a permanent “working agreement,” or base labor contract. After 1940, instead of
renegotiating the entire contract at the end of each contract period, union and management at the
Deloitte plant simply added modifications to the permanent working agreement.
Despite the changes in management philosophy, Baxter labor agreements for the Deloitte plant
have continued to include:
1. A guaranteed annual wage. The consumer food products industry is seasonal, and the unions in
other companies have allowed management to handle this through frequent layoffs. This is
unreasonable since it means working at the whim of management. At Baxter, workers are
guaranteed a regular paycheck. This was an innovation in the industry.
2. Annual bonus. The annual bonus reflects the profitability of the company. Since Baxter has
had steady profits since the early 1970s, your members have come to expect and rely on this
bonus.
3. A “no-layoffs” policy. Your members have job security in an industry where this is not
standard. Management must give a 52-week advance notice before laying off any full-time
workers.
4. Worker autonomy and incentive pay. Your members work as teams with team-level incentives.
As long as each team meets its production target each day, members are free to work in
whatever style they prefer. Once the target is met, work above that level earns incentive pay
for each worker on the team. This can make the weekly paycheck up to 100% higher than
base. Alternatively, a worker can choose to take a break, or even take the rest of the day off,
once the target is met.
5. Escalator clause. This isn’t something unique to Baxter. In fact, it was first negotiated by
workers in another local union at a different company. What it means is that workers’ wages
automatically change each year to reflect cost of living increases, as measured by the
Consumer Price Index (CPI). Because of pattern bargaining2 in the industry, escalator clauses
are now standard. The clause represents security for your members. Without it your
members would see a decrease in standard of living whenever there was inflation.
Modifications or additions to the working agreement are noted in an addendum as “memoranda
of understanding” (see Appendix B). In the past, even verbal agreements were sufficient. You know
that this is due in large part to the leadership of Local 190; contracts at other Baxter plants outside
Deloitte are much more conventional.
But some changes in the industry make you wonder whether the days of cooperation are coming
to an end. Beginning early in the 1960s, Iowa Food Processors (IFP), one of Baxter’s major
2 In pattern bargaining, one contract negotiation within the industry (usually that of the largest employer) sets the contract
standards for the entire industry. These standards are normally met by all other contracts, but there is no legal requirement
that other employers or local unions follow standards set in pattern bargaining.
Adam Baxter Company/Local 190 1978 Negotiation—Local 190 Confidential Information 396-319
3
competitors and the only non-unionized big player in the consumer food products industry, began
expanding operations. Their wages are much lower than those at unionized plants and they have
regular seasonal layoffs. The threat of IFP competition resulted in employee wage concessions in the
early 1960s—even Local 190’s workers were forced to accept wage concessions. IFP’s competitive
pressure has not gone away; their wages are not pegged to the CPI and have not kept up with the
double-digit inflation of the 1970s. As a result, IFP’s labor costs are now about half those of
unionized companies. All of the unionized companies are feeling the squeeze. A number have gone
out of business recently, and you think there is a move to get rid of the unions in other plants. Still,
Baxter management has always been reasonable in balancing worker considerations and competitive
forces, and you hope this will continue into this negotiation.
This contract negotiation promises to be shaped by one very unusual and very important event.
Management has recently announced plans to build a new, one million square foot production
facility, stating that the current plant, which has been in almost continuous operation nearly 80 years,
is “hopelessly antiquated,” and Baxter’s president explained, “This new facility will replace the
original ‘home’ plant, many parts of which have become obsolete and inefficient.”b Top management
asserts that a new plant is necessary if Baxter is to remain competitive. Management has actually
announced a plan to build the plant outside Deloitte. They have also just given 52-week layoff
notices to 325 more Deloitte employees, after laying off (with 52-week notice) 226 workers when they
closed down a division of the old facility in 1976. You are hoping that this threat to build the plant
outside of Deloitte is a bluff, since you cannot imagine them betraying the loyalty of so many
long-term employees. Moving their major production facility out of Deloitte would destroy the
goodwill that has been built up over so long. In addition, since according to the charter of the
company corporate headquarters must remain in Deloitte, it makes good economic sense to keep the
major production facility there as well. But you realize management is demanding serious
concessions in terms of worker autonomy and incentives in return for locating the plant in Deloitte,
and you are ready to treat it as a very serious issue at the bargaining table.
Your negotiating team is planning its strategy for the approaching negotiation with Baxter
representatives. As has always happened historically, Baxter management and Local 190 need only
agree on new clauses or changes in the working agreement; the rest of the working agreement will
stand. Most of the issues being discussed have arisen because of the expectation of a new plant.
There are four issues you want to make sure are covered in this negotiation:
• Location of the new plant
• Transfer of workers into the new plant
• Operation of the new plant
• Wages and benefits
Each one is discussed in more detail below. As you plan for the negotiation, you realize that
management may want to raise additional issues. While your team is to do all the negotiating with
three management representatives, ratification is left to the top management team of Baxter. Any
agreement ratified by top management must then be voted on by Local 190 members; a majority of
“yes” votes from the 1,700 members is required for final ratification.
Location of the New Plant
Baxter’s stability has always been entwined with that of Deloitte. In fact, the corporation and
its philanthropic foundation, The Adam Baxter Foundation, which owns over 40% of Baxter’s stock,
396-319 Adam Baxter Company/Local 190 1978 Negotiation—Local 190 Confidential Information
4
has a charter insuring that control of the foundation and the corporation will always stay with
residents of Deloitte. Thus, the members of Local 190 were stunned by the company’s announcement
that locations other than Deloitte are being considered for the new plant. While you think it’s a
management bluff, moving the major production facility out of Deloitte would be a disaster for your
workers. It would also be devastating for Deloitte. It would cause irreversible damage to the town’s
economy. Most of your members enjoy a high standard of living in Deloitte. They have built the
town into what it is and want to stay. It’s unreasonable to expect them to move with the company,
and there are no jobs in Deloitte if the company leaves.
If management is seriously considering relocating the plant, it’s a complete betrayal of the loyalty
of your members who have worked so hard to make Baxter and Deloitte what they are today. It
would be a slap in the face to your family who has loyally worked in the plant for generations. And
while the charter says control, rather than operations, will stay with Deloitte residents, surely it is not
in the spirit of Adam Baxter to move the major operating plant to another location.
Your membership has made it clear that keeping the plant in Deloitte should be your primary
objective in this negotiation.
Transfer of Workers to the New Plant
All of the workers at the old plant should be guaranteed jobs at the new facility, regardless of its
location. Since the new plant will be bigger, this should be no problem. If management disregards
economic and ethical reasoning and builds the new plant outside Deloitte, current employees must
have the right of first refusal on all jobs at the new location. You are not certain that many employees
would leave Deloitte and move to a new town, but they should have this option.
As long as the plant stays in Deloitte, transferring the current workers to the new plant is the
obvious way to proceed. These are loyal, seasoned employees who have years of experience working
in food processing plants. Though it may appear to be in management’s short term economic interest
to hire new workers at lower wages, the company would pay in the long run because of training
costs, injuries, absenteeism, lack of skilled employees, and reduced employee loyalty. You doubt that
management would consider replacing its long-term employees, but it is very important to you and
your members that the contract explicitly states current employees will be guaranteed jobs in the new
plant.
Operation of the New Plant
The key issue regarding operation of the new plant is whether or not management will continue
to allow a high level of worker autonomy. It’s unclear right now what management is planning, but
it seems reasonable to maintain the same level of worker autonomy in the new plant as is currently
working well in the old plant. If there is to be an amendment to the working agreement relative to
autonomy levels, you want it to state in principle that operations in the new plant will continue to be
based on reasonable team targets and worker autonomy. Specific production targets will have to be
negotiated after the plant is built, once you know what is possible with the new facilities. But Local
190 workers fear that they will be working much harder for less money, and you want to make sure
this doesn’t happen.
Management has explicitly stated that it wants more authority in the new plant. They’re saying it
is necessary to “keep production high.” What this means is they’re trying to compete with non-union
Adam Baxter Company/Local 190 1978 Negotiation—Local 190 Confidential Information 396-319
5
shops at the expense of your members, by taking away worker autonomy. You know the best way to
keep up productivity is to maintain the strong group incentive program now in place, based on
reasonable targets in the new plant. While getting the plant built in Deloitte and ensuring transfer of
current employees to the new plant is your first priority, worker autonomy is very important to you
and those you represent. You and your family have worked hard to ensure management doesn’t step
all over the workers, and you don’t want to see this change. Baxter has always been a shining
example of a company that makes lots of money by allowing its workers autonomy—what do
workers around America have to hope for if Baxter begins to whittle away the rights of its own
employees?
Wages and Benefits
Finally, wages are always an issue. You know that wages will be a big part of management’s push
in this negotiation because of the market forces created by Baxter’s nonunion competitors. Currently,
the workers are paid $10.69 an hour, plus incentives for production over target, overtime for over 40
hours/week (paid annually), and annual bonuses based on the company’s profitability. Because of
the existing incentive system, your members could earn up to twice their guaranteed annual salary
(weekly wages x 50 weeks) by exceeding their target production levels. You would like to raise the
wage and maintain a strong incentive and bonus system. You feel this is reasonable given the
industry average and the large profits currently being earned by Baxter. (See Exhibit 1.) It is only fair
that the workers also profit from the fruits of their own labor.
Your benefit package mirrors the standard set in pattern bargaining in the industry, and includes
holidays, vacations, rest periods, meal periods, overtime and holiday pay, and health and retirement
benefits. You expect to keep this standard of comparable benefits.
Overall, you would like to be guaranteed wages and benefits at the average paid by Baxter’s three
major competitors, all unionized companies that are leaders in the industry. It is very important to
you that your members’ wages keep up with the industry standards. In the end, wages matter a lot:
a local’s reputation depends on ensuring that its members are paid a reasonable wage. They are also
an unambiguous, visible signal to those who elected you. It is the members of Local 190 that must
ratify the agreement your team negotiates and who will decide whether or not to re-elect you each
year to be their representative.
Summary
In summary, Baxter continues to make a very good profit because of its dedicated employees.
The way for Baxter to continue this profitability and maintain the loyalty of its employees is to build
the plant in Deloitte and continue to treat its long-standing employees well by hiring them in the new
plant, allowing them to determine the most efficient way to produce the products Baxter sells, and
paying them a fair wage.
You believe prevailing in this negotiation is important not only because it benefits Local 190
members and Baxter, but because it allows Local 190 and Baxter to continue showing to the world the
benefits of labor/management cooperation. While you contemplate the best way to approach this
negotiation, you think back about the complex, mutually beneficial, and long-lasting relationship
between Local 190—a strong and vocal advocate for the benefits of worker voice both within and
outside Baxter—and the Adam Baxter Company—a profitable, once family-run business now
competing in a demanding economic environment.
396-319 -6-
Exhibit 1 Financial Summary: Adam Baxter Company and Subsidiaries (in thousands of dollars)
1978a 1977 1976b 1975 1974 1973 1972 1971 1970b 1969
Operations
Net Sales $1,244,865 $1,106,274 $1,094,832 $ 995,593 $ 943,163 $ 825,671 $ 719,755 $ 686,487 $ 695,768 $ 626,017
Net Earnings 20,039 21,951 14,717 13,366 17,369 7,403 7,788 16,664 9,933 9,236
Percent of Sales 1.61% 1.98% 1.34% 1.34% 1.84% 0.90% 1.08% 2.43% 1.43% 1.48%
Wage Costs 200,631 191,719 179,588 167,049 151,052 129,419 129,277 127,775 116,921 104,325
Total Taxes 18,431 23,276 14,127 13,102 18,094 8,717 9,431 19,053 12,648 12,260
Depreciation 11,551 11,313 10,697 9,140 7,667 7,125 6,417 5,435 4,918 3,830
Financial Position
Working Capital $ 89,298 $ 79,253 $ 63,957 $ 64,350 $ 48,659 $ 34,256 $39,275 $43,646 $37,818 $39,339
Properties (net) 103,992 99,921 97,465 85,398 74,392 67,481 60,178 51,841 45,683 38,767
Total Assets 275,442 258,283 228,585 224,488 193,696 179,950 149,468 153,144 129,416 115,788
Stockholders’ Investment 166,870 153,363 136,792 126,879 117,932 104,654 101,187 96,175 83,081 76,480
Per Share of Common Stock
Net Earnings $ 4.17 $ 4.57 $ 3.06 $ 2.78 $ 6.62 $ 1.54 $ 1.63 $ 3.50 $ 2.09 $ 1.94
Dividends 1.36 1.12 1.00 0.92 0.84 0.81 0.78 0.75 0.70 0.63
Stockholders’ Investment 34.74 31.93 28.48 26.42 24.55 21.77 21.04 20.20 17.45 16.07
aProjected; based on 4 month actual.
b53 Weeks.
Adam Baxter Company/Local 190 1978 Negotiation—Local 190 Confidential Information 396-319
7
Appendix A Adam Baxter Company Historical Background Information
Founded 1891, by Adam Baxter, Sr., in Deloitte, Iowa.
Ownership 40% of stock owned by philanthropic foundation, The Adam Baxter
Foundation. Charter requires that residents of Deloitte maintain control
of Baxter and the Adam Baxter Foundation.
Business Consumer food products
Earnings 1977: Sales: $1.1 billion
Profits: $22 million (1.98 % of Sales)
Commitment to Deloitte One out of every four paychecks in Deloitte (a town of 23,000) written
by Baxter. 75% of Baxter’s production takes place at the Deloitte plant.
Employee status Low turnover, wages high relative to community standards, high
reported loyalty to Baxter.
Union status Employees represented by Local 190, affiliated with AFL/CIO.
396-319 Adam Baxter Company/Local 190 1978 Negotiation—Local 190 Confidential Information
8
Appendix B
Memoranda of Understanding3
We, the undersigned, agree that the following terms will be modified in the existing working
agreement between the Adam Baxter Company, Deloitte and Local 190 of the AFL/CIO. (Additional
sheets may be attached.)
Signed on behalf of the Adam Baxter Company and Local 190, AFL/CIO (All negotiators sign below):
3 A copy of this sheet should be turned in after the negotiation is complete.

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