Volkswagen reached agreement on a new contract with its primary union, IG Metall.

Volkswagen AG agreed to a new labor contract with its principal German labor union, IG Metall, to raise wages by 5.7% over 20 months.

VW will increase base pay of its German workers by 3.4% as of Sept. 1, and another 2.2% as of July 1, 2014, the Wolfsburg, Germany-based maker said. In addition, the company will make a one-time payment of €300 to the company pension plan.

Dr. Horst Neumann, Volkswagen Aktiengesellschaft Board of Management Member for Human Resources, noted, “Employees are receiving a good pay increase. In addition, Volkswagen is improving company pension arrangements for its workforce, particularly with reference to young employees.

“However, it is also clear that this collective bargaining agreement stretches us to the limit of what is possible in light of the difficult market situation in Europe and tough international competition,” he cautioned.

The new contract at VW follows the basic pattern set earlier in May in IG Metall’s negotiations with employers in the state of Bavaria, which include BMW and Siemens AG.

The VW pact, negotiated separately from the union’s regional accords, covers 102,000 employees at six plants in western Germany and the financial services unit. The number of employees covered by the contract is about the same as the number covered by the United Auto Workers’ contracts with General Motors, Ford Motor Co. and Chrysler Group.

Contract terms are in line with an industry-wide pay increase that the IG Metall union won in mid-May for about 770,000 manufacturing workers in the state of Bavaria, which is being used as a pattern for other labor agreement. The pattern is also expected to cover workers at Daimler AG and Porsche AG plants around Stuttgart.

The contract in Bavaria followed a series of warning strikes, involving more than 600 workers and businesses, including BMW and Siemens. The union is hoping the higher wages will help stimulate the German and European economy.

The contract insures that German auto workers will remain the highest paid in the world with hourly. Unionized auto workers in the U.S. have not had a comparable raise since 2007 and in many non-union plants in the U.S. employers, including VW, have been hiring temporary rather than full-time employees.

Last week, VW reported it delivered more than 3 million cars, vans and trucks worldwide in the first four months of this year, the first time its sales have exceeded that figure in the period.

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The carmaker’s earnings before interest and taxes rose 2.1% last year to $14.9 billion Volkswagen is also predicting an increase in revenue for 2013 on higher vehicle sales, while operating profit is predicted to match last year’s figure because of the European car-market decline and an increase in spending on new models and factories.

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In all, Volkswagen’s workforce in Germany totals 249,000 people. It employs just fewer than 550,000 workers worldwide.