The pay rise for 97,000 VW production workers and 5,000 employees at the company's financial services division will take effect June 1, VW said in a statement. The new pay accord also includes provisions to hire 3,000 temporary workers.

"This is a very good and acceptable compromise," IG Metall chief negotiator Hartmut Meine said on Thursday at a press conference in Hanover.

VW's new in-house wage accord, signed after all-night negotiations, reflects a salary agreement reached between IG Metall and employers on May 19 for 3.6 million engineering workers across Germany, affecting staff at companies including Daimler (DAIGn.DE) and BMW (BMWG.DE).

"Workers will earn a decent pay increase," Martin Rosik, VW's chief negotiator said at the press conference.

Yet, the size of the wage increase will not lessen pressure on VW which is facing growing headwinds from volatile financial markets and slowing European economies, he said.

(Reporting by Andreas Cremer)

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