On November 20 of last year, Hostess Brands announced that it had failed to reach agreement with its second-biggest union and, as a result, was permanently shutting down its operations.
The news was met with dismay by baby boomers and others who had grown up with the 80-year-old company’s shelf-stable confections. But consumers had been passing up Twinkies, Wonder Bread, and other Hostess products for decades in favor of healthier fare. Changing tastes, mismanagement, and sky-high labor costs led Hostess to declare bankruptcy not once in the past decade, but twice.
When faced with the prospect of significant cuts to members’ pay and benefits, the Hostess bakery union chose to strike, even after management warned that the action would mark the end of the company. Hostess followed through on its threat, and almost 18,500 people lost their jobs. A closer look at the Hostess negotiations tells us when negotiators are likely to dig in their heels—and suggests how you might inspire them to cooperate with you instead.
Bankruptcy, take 2
Upon filing for its second bankruptcy in early 2012, Hostess set about reorganizing its finances and negotiating for cost-cutting concessions from its workforce, as reported in the New York Times.
As it faced the task of negotiating with 12 different unions, Hostess had its work cut out for it. In July 2011, months before the company’s bankruptcy filing, the board tripled then-CEO Brad Driscoll’s salary from $750,000 to about $2.5 million and granted at least nine other executives significant raises. The company’s subsequent bankruptcy plan called for $1.75 million in bonuses to corporate officers and high-level managers for carrying out the shutdown. After the filing, the Teamsters put on the pressure to oust Driscoll, who was replaced by Gregory Rayburn.
During its first bankruptcy, which lasted from 2004 to 2009, Hostess obtained $110 million in annual concessions from its unions, including about 11,000 layoffs and cuts to wages, pensions, and health benefits. In the end, Hostess’s labor costs roughly equaled those of its major competitors.
Now the unions were being asked to help Hostess through a second bankruptcy. They, like many observers, believed that Hostess had squandered an opportunity to modernize and grow. Why should they give the company another chance?
A tale of two unions
Negotiations with Hostess’s two biggest unions—the International Brotherhood of Teamsters (which represented 6,700 Hostess employees) and the Bakery, Confectionery, Tobacco Workers, and Grain Millers International Union (which represented 6,600 of them)—proved pivotal.
The unions were torn between hostility toward Hostess management and the knowledge that the company would likely collapse without more labor concessions. Each union went in a different direction, as described in the New York Times.
The Teamsters were more stoic and pragmatic. They hired a prominent bankruptcy expert, Harry J. Wilson, who laid out exactly how much the union could expect to get while still allowing Hostess to recover. In September, after eight months of negotiation, the Teamsters narrowly approved a five-year deal with Hostess management. The union granted significant concessions, including an 8% pay cut the first year, shrinking pay cuts over the next four years, 17% reductions in the company’s health-care contributions, and suspended pension contributions until 2015.
In return, the Teamsters negotiated a 25 percent share of Hostess’s stock for all the unions, a $100 million claim in the bankruptcy, and two union seats on the company’s eight-member board of directors.
Meanwhile, the bakery union took a more contentious approach to negotiations, publicly deriding Hostess management as being controlled by Wall Street investors and “third-tier managers,” according to the Times. They, too, hired a financial consultant, but theirs painted a more pessimistic view of Hostess’s future, predicting that the company’s debt load would put it back in bankruptcy within a year even if the unions did grant concessions.
Threat and response
Hostess presented the bakery union with the draft agreement it had negotiated with the Teamsters and issued an ultimatum: “They said, ‘If you do not ratify this, we are going to liquidate [the company] based on your vote,’” according to bakery union secretary-treasurer David Durkee. Nonetheless, 92% of the bakery union’s Hostess employees voted to reject the deal.
The bakery union stopped returning calls from Hostess and on November 9, declared a strike. The Teamsters respected the picket line, causing Hostess operations to come to a virtual standstill. Publicly stating that it would liquidate and lay off most of its workforce if the strike continued, Hostess called on “unhappy employees” to leave the company voluntarily rather than striking and “forcing everyone to lose their jobs.”
A federal bankruptcy judge prodded Hostess management and the bakery union to agree to mediation; when that failed after one day, the company officially shut down, fired most of its employees, and began the process of selling off its assets.
What went wrong?
Some observers have argued that the bakery union members had a responsibility to themselves and others to save Hostess by agreeing to burdensome concessions. Others have argued that Hostess was so poorly run it wasn’t worth saving.
For the bakery union workers, was impasse the best option? Job prospects for many former Hostess employees look grim, with the U.S. food-manufacturing industry still climbing back slowly from the recession.
For at least some of the employees, several key concerns may have gotten in the way of a rational decision between impasse and acceptance:
1. The weight of burdens. Negotiations over burdens, such as pay and benefit cuts, are exponentially more difficult and contentious than negotiations over benefits, such as raises and job improvements, Adam Galinsky of Northwestern University and Harris Sondak of the University of Utah have found. The unhappiness we feel when negotiating to absorb a burden outweighs the satisfaction we receive from negotiating for a new benefit, according to Galinsky and Sondak. That is, all else being equal, negotiators can be expected to have stronger reactions to pay cuts than to raises. For this reason, negotiators risk more to avoid burdens than they do to acquire benefits. This helps to explain why some Hostess employees were so resistant to the concessions the company was demanding that they risked a potentially job-killing strike.
2. Trust and fairness. Over its last 10 years, Hostess, which is controlled by private equity firm Ripplewood, had six CEOs, a state of affairs that left employees feeling rudderless. Moreover, it’s no surprise that bakery union employees, who earned $16 an hour on average, felt distrustful and resentful when a recent leadership team tried to personally profit from bankruptcy by giving themselves huge bonuses. A lack of trust combined with a deep sense of unfairness left many employees reluctant to make a deal, even at the risk of protracted unemployment. In negotiation, subjective qualities, such as perceptions of trust and fairness, can have an even greater impact on negotiators’ decisions than facts and figures. Wise negotiators work hard to demonstrate their trustworthiness and sense of fairness to the other side through their actions during, before, and after the negotiation.
3. Threat response. Hostess management escalated its conflict with the bakery union by threatening to pull the plug on the company if its members didn’t agree to the draft employment agreement. A threat such as this can provoke resistance, according to Galinsky and Katie Liljenquist of Brigham Young University. When we feel that our freedom is restricted, we react against the perceived lack of choice. Threats also can trigger a desire for vengeance. When the consequences of a threat appear to be severe, those on the receiving end will be motivated to retaliate—sometimes in ways that undermine their own best interests.
3 keys to breaking the impasse
- Ease the burden. By building rapport, taking their time, and framing onerous issues as benefits, negotiators can lighten the task of negotiating painful burdens.
- Earn their trust. As a negotiator, you must build a positive reputation and prove your trustworthiness before sitting down at the table.
- Deliver more rational threats. When a threat seems unavoidable, keep it private and fact driven, and find ways to satisfy the other side’s interests.