History Behind Annual “Lump-sum Payment,” Part I

Annual Lump Sum
Bargaining Updates 2014
General Wage Increase

While the parties have agreed on many issues there are a number of issues still in dispute. On some of these issues the parties are likely to engage in further discussion that might lead to resolution, others will have to be decided by an Arbitrator. Please note that any items agreed to at the bargaining table will not be implemented until the interest arbitration is complete. This is the twenty-second in a series of blog posts to discuss both the matters that have been agreed to and those that are still in dispute, and the fourteenth dealing with matters still in dispute.

Members who have joined UBC within the past ten years may wonder about Part 2, Article 5 (Lump Sum Payment) of the Collective Agreement, which states that on June 30 of each year all members will be paid a lump-sum amount equal to 1% of their “regular salary.” In other words, a small percentage of our annual salary compensation is “held back” from our bi-monthly paycheques and paid out in a lump sum at the end of the contract year. How did we come to such an unusual arrangement? An annual end-of-year lump-sum payment of 1% of salary has the same effect on members’ incomes as a one-time 1% general wage increase (GWI), ignoring some very minor interest rate effects, so what exactly is the point of this arrangement? To understand why this provision is in the Agreement it is necessary to know some history since this provision is part of a much larger story.

In the 2004-06 Collective Agreement the parties agreed that members would receive, at the end of the Agreement (June 30, 2006), one or both of two productivity payments, contingent on certain conditions being met. One was a payment of 1% of regular salary that every member would receive if fundraising efforts in 2005/06 exceeded $100 million (“the fundraising payment”). The second was a payment of 1% of regular salary that every member would receive if the University share of Tri-Council research funding for 2005/06 was at least $10 million more than it had been in 2004/05 (“the research grant payment”). Those were one-time bonuses.

In the 2006-10 Collective Agreement the parties agreed on a process to extend these payments into annual payments, again contingent on meeting certain targets. The language in the Agreement is almost indecipherable, but what it meant was that during the first year of the Agreement (2006/07) the parties would work out a way to make the productivity payments permanent based on the “demonstrable relevance of the bases, criteria, and measures for each of them.” That work was done, and what emerged was an agreement that both payments would be made annually, contingent on the conditions being met, and that the condition for the research grant payment would be that each year’s Tri-Council grant funding had to exceed the preceding year’s by a certain amount. It was an ever increasing target.

In the 2010-12 bargaining round the University came to the table with a proposal to eliminate the fundraising payment and make the research grant payment contingent on a more stringent condition, making it even more difficult to achieve. What we arrived at was quite different.

The parties agreed to eliminate any condition on the fundraising payment, given that the payment was contingent on a condition that had always been met. It simply became the annual end-of-year lump-sum payment we have today. To make a contingent payment non-contingent is obviously a good thing for the members, even if the condition on which it had been contingent had always been met, because one never knows what the future holds. We were pleased to achieve that outcome, but it’s not something either party costed against the Agreement.

This still begs the question: “Why an annual lump sum instead of a one-time GWI, since the two are equivalent?” In fact, the University did propose converting the 1% lump-sum payment into a 1% GWI, and the Association was willing to do that, but at a fair price. The annual 1% lump sum is only equivalent to a 1% GWI for individual members at the time of the conversion. For the Faculty Association as a whole the two are not equivalent. Currently UBC must make a 1% payment to every member now, and anyone who is hired in the future. By contrast, a 1% GWI only applies to members who are here at the time it is made. Members hired in the future would not receive it.

In a full-information world with rational agents, the existence of a 1% annual lump-sum payment would result in negotiated starting salaries being lower by exactly the amount of the payment. If that payment had been converted into a one-time GWI the effect would then be a compensating increase in negotiated starting salaries. That’s in a full-information world. However it is highly unlikely to be the case in a world characterized by asymmetric information. We are quite convinced that if we traded the 1% annual lump-sum payment for a 1% GWI, future members would, on average, not see their starting salaries rise fully by 1% over what they otherwise would have been. So the annual lump sum payment continues, an artifact of Collective Agreement provisions that soon will be completely forgotten.

Amusing story: While the Association understands the effect of the lump-sum payment on salary, the University claims not to. In the last round of bargaining leading up to and during arbitration the University repeatedly argued that the lump-sum payment represented a type of salary increase, equivalent to an annual GWI of 1%. We had to explain to the Arbitrator that if in Year 1 a faculty member’s salary was $100,000, the lump-sum payment would be $1,000, for a total salary of $101,000. In year two, if there was no GWI, the faculty member’s salary would still be $100,000, with a lump-sum payment of $1,000 at year end. Mystifyingly, the University tried to suggest to the Arbitrator that the lump-sum payment would increase the salary to $101,000 for year 2 (which if this were actually so, would mean the lump-sum payment for year 2 would be $1010). Fortunately, the Arbitrator was not fooled by the University’s numbers game.

Next up on the Blog: History Behind Lump-sum Payment, Part II

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