9-396-321

REV: MAY 13, 2008

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KATHLEEN VALLEY

VICTORIA MEDVEC

Adam Baxter Company/Local 190

1983 Negotiation
Local 190 Confidential Information 1

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It is now September, 1983—five years have passed since your last negotiation with Baxter
management. In those negotiations, you agreed that the new plant would be built in Deloitte. The
new Deloitte plant became fully functional in August, 1982, operating at 20% higher production
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levels than the old.

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The current negotiation comes two years before the end of the contract, at the request of
management. It concerns wages only: management has asked for a decrease in wages for the
remaining two years of the contract, claiming that this is necessary because of significant changes in
the industry. You, as one of the leaders of Local 190, have accepted management’s request to
negotiate, but you have publicly stated and privately believe very strongly that the continuing
profitability of the company suggests at least maintaining, if not raising, wages.

Summary of 1978 Contract

When Local 190 members and top management read your proposal after the 1978 negotiation,
they were quite pleased with the overall tone of the agreement, but suggested a number of changes.
Both your team and management’s team were willing to incorporate these changes before the final
proposal was presented for a vote. Local 190 voted to accept the revised agreement.

The “working agreement” was officially scrapped, but the standard clauses, including a
guaranteed annual wage, annual bonuses, and a policy requiring 52-week notice before layoff, were
written into the new contract. The 1978 contract appeared to be exemplary in its foresight,
anticipating working conditions in the new plant even before building plans were underway.

Listed below are the important points from the final contract that was ratified by Local 190
members and Baxter management in 1978. As you can see, you were compelled to trade some of the

1 Endnotes (indicated by letters) are summarized in the final case, “Adam Baxter Company/Local 190 Debrief and Endnotes,”
HBS No. 396-326.
________________________________________________________________________________________________________________

Professor Kathleen Valley, Harvard Business School, and Professor Victoria Medvec, J.L. Kellogg Graduate School of Management, prepared this
exercise as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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 396-321 Adam Baxter Company/Local 190 1983 Negotiation—Local 190 Confidential Information

workers’ autonomy and incentive pay for assurance that the new plant would be built in Deloitte.
Management, of course, is also aware of these points.

• The permanent working agreement that had been implemented in the days of Adam Baxter Jr., in
1940, was replaced by a more traditional seven year contract. While the workers agreed to this,
they feel threatened without the formal security of the working agreement.

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• The group incentive system was eliminated. Management insisted that this was necessary if the
plant was to remain in Deloitte. To make this acceptable to the union, a plan was devised
whereby cost-of-living increases were used to supplement falling real wages. Cost-of-living
increases, set by the escalator clause, were deferred and put into an escrow account. This account
was to be used to supplement the incomes of workers who would experience a decline in their
wages due to the elimination of the incentive system. Any old workers transferring to the new
plant would receive their base pay plus money from the escrow account to bring current salary
up to the level it was at the old plant. New hires, who had never worked under the incentive

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system, would not receive any money from the escrow account.

• Management was granted full control over work rules, reducing worker autonomy.

• The 52-week notification of layoff remained in effect.

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• Laid-off workers were guaranteed rights of first refusal for job openings with the same job
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classification up to ten years after layoff.

• A no-strike agreement was put into place for the life of the contract, i.e. for three years after the
new plant was fully functional.

• A “me-too” clause was added to the contract. This clause pegged Baxter wages and benefits to
those of the other five top consumer food processing companies. It specified that if three or more
of the five industry leaders change their wages or benefits, “1) the union will identify the three
companies whose provisions it most prefers and 2) Baxter will pay the average wage or benefit
provided by the three companies.” The five industry leaders were identified by name in the
contract.

• Base rate wages were set at $10.69/hour.

1983 Bargaining Context and Issues

While the contract appeared to be very long-sighted, neither your team nor management’s could
have foreseen the economic and competitive changes that the industry would have to endure in the
last five years. The high inflation of the 1970s gave way to a recession by 1981; the recession
continues today. Consumer changes are also taking place: as the public becomes more concerned
about salt intake and fat content, the demand for processed food products is falling. Some companies
are filing for bankruptcy. Over a dozen plants have been closed down or sold then reopened as non-
union shops. Many of your fellow union members in other food processing companies are losing
their jobs or seeing their real wages reduced. Even after strikes, locals at some other plants have had
to accept significant cuts in pay. Your members realize these changes threaten their security and the
security of all employees across the country.

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 Adam Baxter Company/Local 190 1983 Negotiation—Local 190 Confidential Information 396-321

In 1981, International AFL/CIO leaders negotiated with a number of the leading food processing
companies, including Baxter, settling on a 3-year freeze of base rate wages at $10.69/hour. The
International leaders claimed the freeze was necessary to stop a tide of falling wages throughout the
industry. In spite of the freeze, wages have fallen precipitously in other companies over the last two
years. One of Baxter’s major competitors, and a leader in the industry, filed bankruptcy in the Spring
of 1983. By September, 1983, their unions had agreed to accept a 40% wage cut. The other leading

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companies in the industry quickly followed suit. Baxter management argues it must reduce wages as
well in order to remain competitive.

Because of the agreement that you secured with Baxter, your members’ jobs have been protected
and their wages have remained fixed at a base wage rate of $10.69/hour. Simultaneously, Baxter’s
profits have increased while other firms have gone bankrupt. In fact, you are quite certain that
Baxter’s market share has increased as smaller firms have dropped out of the marketplace (see
Exhibit 1). While other firms may, in fact, be losing money, Baxter is not, and mid-contract wage
reductions are out of the question.

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You have maintained your officer position in Local 190, as have the other two officers on your
1978 negotiating team. In the most recent election, the three of you won because of your aggressive
“no concessions” platforms. The members of Local 190 are counting on you to take a stand. In many
industries, profitable companies are increasing their profits at the expense of their employees and
your team does not want to see this occur in Deloitte. You find it unreasonable for workers to accept
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a falling standard of living at all, and especially when the company continues to be profitable at
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record levels. You believe the leaders of the International AFL/CIO are conceding where no
concessions are necessary if labor stands firm.

Though contract negotiations are not scheduled to take place for two more years, Baxter’s official
request for a wage negotiation stated that if the union was unwilling to negotiate a company-wide
reduction, Baxter would go to arbitration requesting the “me-too” clause from the 1978 contract be
invoked to reduce wages. (The 1983 wages of the five firms listed in the “me-too” clause of the 1978
agreement are shown in Table A below.) With the “me-too” clause as a threat, Baxter has already
settled with all of its other plants on a base rate of $9.00/hour, effective September, 1983, rising to
$10.00/hour, effective September, 1984. Local 190 separated itself from the company-wide
negotiations, and you and your team are dealing with Baxter, Deloitte, management on your own.

Table A Hourly Wages at Firms Stipulated in the “Me-Too” Claused

Firm A Firm B Firm C Firm D Firm E

$9.00 $8.00 $8.25 $8.75 $6.00–$7.00

It is clear to you that Baxter’s interpretation of the “me-too” clause is incorrect, and you doubt an
arbitrator would rule in favor of Baxter. During the 1978 negotiations, all of the discussion
surrounding the “me-too” clause centered on increasing wages—the clause was designed to raise
wages to keep up with industry averages, not to lower them. It was intended just as the escalator
clause was intended, to ensure that wages would rise with cost-of-living or with changes in
competitive wages. No one would consider that the escalator clause should result in lowering real
wages during recessionary times, and likewise it is absurd to use the “me-too” clause to lower wages.
If you had known that management would ever consider such an act, you would have ruled it out
explicitly through restrictive language in the 1978 agreement. Obviously, no one had foreseen the
changes that the industry would endure, or the results these changes would have on Baxter’s

3
 396-321 Adam Baxter Company/Local 190 1983 Negotiation—Local 190 Confidential Information

management philosophy. But you are convinced that to turn the clause upside-down and use it to
reduce wages is both illegal and unethical.

Your team has agreed to meet with the management team to discuss the wage issue, though you
are understandably apprehensive about the invitation. You fear that if Baxter’s management does
not begin to see reason on the wage issue, the workers will soon be asked to accept major concessions

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in order to protect their jobs and the union status of the plant. This is beginning to happen across the
country and it has to stop somewhere or workers will lose everything they have been struggling for.

The membership is trusting your team to show management that the continued profitability of the
company is in large part due to the loyalty and hard work of the union members, and that there is no
need for wage concessions when the company is enjoying solid earnings. You are hoping that the
history of positive labor/management relations between Baxter and Local 190 will carry through into
this negotiation and make Baxter, Deloitte, the beginning of the end of concessions.

Rather than accepting wage reductions, you have notified management that it is time for Baxter to

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reward your members for the sacrifices they have made during the building and start-up of the new
plant. The new plant is now running profitably due to their loyalty and hard work. Though the new
plant is technologically advanced, the workers are working harder than ever before and you feel they
should be rewarded for their efforts. They have been making the same base rate of $10.69/hour since
1978, while the company has continued to enjoy high profits. You expect management could agree to
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raise wages at Deloitte, even though other companies have been reducing their wages. You believe
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this is a reasonable expectation because of Baxter’s continued profitability.

4
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396-321 -5-

Exhibit 1 Financial Summary: Adam Baxter Company and Subsidiaries (in thousands of dollars)

1983a 1982 1981b 1980 1979 1978 1977 1976b 1975 1974b 1973

Operations
Net Sales $1,417,705 $1,426,596 $1,433,966 $1,321,966 $1,414,016 $1,244,865 $1,106,274 $1,094,832 $ 995,593 $ 943,163 $ 825,671
Net Earnings 27,897 28,051 27,283 32,758 29,970 20,039 21,951 14,717 13,366 17,369 7,403
Percent of Sales 1.97% 1.97% 1.90% 2.48% 2.12% 1.61% 1.98% 1.34% 1.34% 1.84% 0.90%
Wage Costs 250,724 269,964 270,522 254,303 233,878 200,631 191,719 179,588 167,049 151,052 129,419
Total Taxes 28,483 22,805 18,796 28,077 27,635 18,431 23,276 14,127 13,102 18,094 8,717
Depreciation 26,410 17,587 13,887 13,452 12,102 11,551 11,313 10,697 9,140 7,667 7,125

Financial Position
Working Capital $ 95,403 $ 69,527 $ 59,440 $ 69,843 $ 84,646 $ 89,298 $ 79,253 $ 63,957 $ 64,350 $ 48,659 $ 34,256
Properties (net) 270,103 276,684 228,813 160,825 119,213 103,992 99,921 97,465 85,398 74,392 67,481
Total Assets 512,559 488,859 425,065 355,853 323,149 275,442 258,283 228,585 224,488 193,696 179,950
Stockholders’ Investment 263,861 245,570 226,741 208,296 183,608 166,870 153,363 136,792 126,879 117,932 104,654

Per Share of Common Stock

Net Earnings $ 1.45 $ 1.46 $ 1.42 $ 1.70 $ 1.56 $ 4.17 $ 4.57 $ 3.06 $ 2.78 $ 6.62 $ 1.54
Dividends 0.50 0.48 0.46 0.42 0.37 1.36 1.12 1.00 0.92 0.84 0.81
Stockholders’ Investment 13.73 12.78 11.80 10.84 9.56 34.74 31.93 28.48 26.42 24.55 21.77

aProjected; based on 8 months actual.

b53 Weeks.

Purchased for use on the E326 E SUM24, at London Business School (LBS).
Taught by Minseo Baek, from 27-Mar-2024 to 11-Jun-2024. Order ref F502344.
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