Workers to receive 3.4 per cent wage increase despite cost cutting measures
About 115,000 workers at VW's six factories in western Germany and its financial services division will see monthly pay go up for from June, VW said.
Workers will also each see 450 euros ($619 CAD) paid into a staff pension account over the coming year as part of the new salary contract which runs until May 31, 2016.
"The agreement we have reached represents a compromise that is just about acceptable and allows us to maintain our competitiveness in a difficult economic environment," VW's human resources chief Horst Neumann said.
IG Metall, which demanded a 5.5 per cent raise, welcomed the agreement which also includes provisions by VW to create 4,200 apprenticeships in 2015-17.
"This is a good pay deal with a decent amount of cream on top," union chief pay negotiator Hartmut Meine said.
Thursday's compromise is in line with a deal IG Metall reached last month with employers in the engineering sector in Germany's southwestern state of Baden-Wuerttemberg, which was seen as a pilot accord for other sectors.
The carmaker is seeking to boost annual cost savings at its namesake brand, its largest division by sales and deliveries, to 5 billion euros by 2017 to narrow a profit gap with rivals such as Toyota.