The United Auto Workers union's new tentative labor pact with Fiat Chrysler Automobiles NV will boost pay for hourly workers and recast the profit-sharing formula so factory employees get bigger profit-sharing checks in good times, say people familiar with the matter.

While it appears labor costs will go up, Fiat Chrysler is looking to offset the increase by moving some U.S. car production to Mexico where labor costs are cheaper, according to one person briefed on the plans. The Italian-American auto maker will then backfill those factories with more lucrative trucks and sport-utility vehicles, this person said.

The agreement, which must be ratified by membership vote, will reshape the way Fiat Chrysler's 36,000 hourly workers are compensated and set a high bar for larger Detroit rivals General Motors Co. and Ford Motor Co. to match during this round of contract talks.

Under the proposal, assembly line jobs will get a new starting wage of $17 an hour—about $1 higher than it is now—and newer hires will top out at about $25 an hour, the people say.

Workers hired within the last eight years, whose hourly pay is now capped at $19.28, will also get raises under the new wage progression but it will now take them longer to top out, these people said. Today, they hit the wage cap after four years.

Veteran workers—those hired before 2007—will get pay increases through a combination of lump sums and base-wage increases. That will raise their hourly pay to over $30 during the life of the contract, up from $28 now, these people say. Their higher wage, however, will gradually disappear as they retire or leave the company, replaced by the new pay scale.

As a sweetener, the agreement offers workers a $3,000 signing bonus if the deal is ratified and pledges $5.3 billion in new investment at its U.S. plants over the next four years, say sources briefed on the deal.

UAW President Dennis Williams says the deal gives newer workers a path to better pay, rewards members for their sacrifices in tougher times and takes steps to curb fast-rising health care costs.

"We believe that we have met those goals, but ultimately our membership will make the final decision," Mr. Williams said.

But it's a risky strategy for Fiat Chrysler, which is banking on strong SUV and truck demand to hold up in a cyclical industry vulnerable to gas price fluctuations.

UAW members will be briefed on the contract details in the coming days and shortly after, vote on whether to ratify it. A UAW spokesman didn't immediately respond to a request for comment.

Union and company leaders are hoping the new pact will address one of the membership's biggest gripes: a contentious two-tier wage structure that has lowered labor costs for the U.S. auto makers but has frustrated many workers.

The arrangement, adopted in 2007 to keep the then-financially distressed companies afloat, pays newer hires about $9-an-hour less than their more senior co-workers for doing the same job.

About 45% of Fiat Chrysler's hourly workers earn the lower wage, compared with less than 25% at GM and Ford.

The new labor deal doesn't eliminate the old two-class wage structure immediately but rather phases it out over time—a move that could be a sticking point for UAW leaders looking to get the contract ratified.

At rallies and conventions, UAW workers have loudly called for its elimination in this agreement.

To bridge the pay gap—a phrase favored by UAW leaders—the pact will give newer hires a richer profit-sharing formula, allowing them to outearn their veteran counterparts in good years.

The formula will be tied to company profitability, targeting margins of 8% to 10%, said one person familiar with the details.

As part of the agreement, Fiat Chrysler will move production of two cars, the Chrysler 200 and Dodge Dart, to Mexico, following a move this summer by Ford to do the same with its Michigan-built Focus compact car.

Fiat Chrysler will then reshuffle Ram truck and Jeep production to fill the voids.

Trade publication Automotive News first reported the car-production shift Thursday.

Write to Christina Rogers at christina.rogers@wsj.com and Jeff Bennett at jeff.bennett@wsj.com

 

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(END) Dow Jones Newswires

September 17, 2015 17:15 ET (21:15 GMT)

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