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Compensation: Incentive Plans: Gainsharing

This page was contributed by: Robert L. Masternak

Gainsharing (sometimes referred to as Gain sharing, Gainshare, and Gain share):

Gainsharing is best described as a system of management in which an organization seeks higher levels of performance through the involvement and participation of its people. As performance improves, employees share financially in the gain. It is a team approach; generally all the employees at a site or operation are included.

How does Gainsharing work?

The typical Gainsharing organization measures performance and through a pre-determined formula shares the savings with all employees. The organization's actual performance is compared to baseline performance (often a historical standard) to determine the amount of the gain. Employees have an opportunity to earn a Gainsharing bonus (if there is a gain) generally on a monthly or quarterly basis. Gainsharing measures are typically based on operational measures (productivity, spending, quality, customer service) which are more controllable by employees rather than organization-wide profits. Gainsharing applies to all types of business that require employee collaboration and is found in manufacturing, health care, distribution, and service, as well as the public sector and non-profit organizations. Typical elements of a Gainsharing plan include the following:
Advantages
Disadvantages
  • Helps companies achieve sustained improvement in key performance measures
  • Rewards only performance improvement
  • Payouts are self-funded from savings generated by the plan
  • Aligns employees to organization goals
  • Fosters a culture of continuous improvement
  • Enhances employee focus and awareness
  • Increases the feeling of ownership and accountability
  • Enhances the level of involvement, teamwork and cooperation
  • Supports other performance improvement efforts and helps promote positive change
  • Promotes morale, pride, and more positive attitudes toward the organization
  • Measures are narrower than organization-wide profit and therefore gains may be paid even though profits may be down.
  • Requires a participative management style
  • Requires that management openly shares information related to performance measures
  • Employees may question or challenge management decisions that may adversely impact a gain.
  • Increases the level of organizational stress since everyone has more of a financial stake in the organization's success
  • Applies best to and a work environment that requires teamwork and collaboration rather that individual entrepreneurship
  • Paid on the basis of group performance rather than individual merit

When does Gainsharing work best?

Works best when company performance levels can be easily quantified and in a work environment that is based on openness and trust. A supporting system of employee involvement will significantly enhance the long term effectiveness of the plan. Requires management commitment, training and frequent and ongoing communications.

What is the best way to implement Gainsharing?

Executives and managers must be educated in order to develop a clear understanding of the Gainsharing philosophy and the management style required for success. If an organization moves forward with a plan, it is best to form a team of employees to work on various elements of the project. The team is involved in preparing many of the rules of the plan and final approval for the plan details from top management. The team is then responsible for presenting and communicating the plan details. Supervisors and managers are trained in the relationship of their role toward the plan. Teams are formed and trained in order to work on performance enhancement initiatives. It's best to have an expert on Gainsharing to guide and facilitate the process in order to work through the pitfalls and to avoid payout out of false gains.

Gainsharing or Profit Sharing: The Right Tool for the Right Organization an article by Robert L. Masternak

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