Volkswagen will give employees in Germany a 2.3 percent pay increase as part of a new labor agreement with the IG Metall union.
The deal covers 120,000 employees at six plants in western Germany. It starts in January and will run for 23 months until November 2022.
"We have reached a collective agreement with a sense of proportion and reason that does justice to the particularly challenging environment since the start of the pandemic," VW's chief negotiator, Arne Meiswinke, said in a statement on Tuesday.
VW will also give the employees a 1,000-euro ($1,190) coronavirus allowance. They will also receive 150 euros to strengthen the company pension plan.
The agreement applies to employees at plants in Wolfsburg, Brunswick, Hanover, Salzgitter, Emden and Kassel, as well as at Volkswagen Financial Services.
IG Metall had asked for a wage increase of 4 percent and last month dismissed VW's earlier offer of a 1.2 percent rise.
VW has seen its shares rise by more than half, shrugging off the impact from the pandemic and a chip shortage that has hit the automotive sector.
Employers have warned that hundreds of thousands of jobs could be lost in Germany if Europe's largest economy cannot improve its competitiveness and have said there was limited room for wage increases.
Reuters contributed to this report