So lets take a back of the envelope example. Lets say that I view industry best fixed pay rate plus 5% as the upper bound of responsible corporate governance. Further, lets say that in deriving this bound management has considered future exposure of half our current PS. Finally, lets embrace the flawed idea that PS can never go down and represent a loss in earning power. In doing so the value of future PS is defined and will be the same or higher than last year for the duration of the contract.

OK. Management using those parameters would be willing to pay as high as a 12% increase to current fixed rates. What would that look like? Lets say for simplicity that AA is the industry leader at our rate plus 7%. In reality we exceeded that pay rate last year by 9% or so due to PS. Nonetheless, we would need 7% to reach par, plus 5% in fixed pay rate increase, and then we add half of the current profit sharing or roughly 8% for a total of 20% premium over AA.

So our pay rates would like like 12,3,3 for a 3 year contract or 4,8,3,3 for a 3 year contract done 6 months early like last time. There you go, hourly compensation ends up at AA plus 5% plus PS = 13%

The math isn't difficult. What is difficult from our perspective is determining what is a reasonable upper bound that a board can sign off on. The negotiating process is designed to find the bound. Also, determining the value of profit sharing is not an intuitive process. It requires economic and risk analysis. Suffice to say a lot of math is involved. Of course there is also a purely speculative element as well. After all, a hedge is a bet.

The company will want to value PS at something less than par, rightfully IMO claiming that the risk is rising for them as we reach the peak of the economic cycle. We will take the opposite position and say we want a premium to par because past history shows accelerating profitability (a disingenuous position that ignores the business cycle, but necessary for the negotiation). We will find the value somewhere during the negotiation. That value is valid on that day, but inevitably will change when the future unfolds.

I suggest when we toss around pay rates we should start with what we believe is possible from the viewpoint of responsible corporate governance. We can all come up with numbers we like, but they are meaningless if they cannot be achieved in the real world. Then we work backwards to determine what annual pay raises would look like, with or without profit sharing.

Again, it may be instructive to talk with anyone who manages a publicly held business to determine what is possible when figuring out labor costs. Study the history of our business and the history of other labor intensive businesses. "It ain't my problem to find the money" isn't sufficient analysis to justify something that cannot happen.