Gainsharing or Profit Sharing:
by Robert L. Masternak
In order to fully understand the concept, one must examine its roots. The Gainsharing concept dates back to the 1930's when a labor leader, Joe Scanlon, preached that “the worker” had much more to offer than a pair of hands. The premise was that the person closest to the problem often has the best and simplest solution. Moreover, if the worker is involved in the solution, most likely he or she will make the solution work. Scanlon is often credited for developing a system that promotes involvement in the workplace through employee ideas and suggestions.
The involvement structure not only is intended to encourage participation but also is meant to enhance two-way communications regarding company goals and objectives. The idea system helps foster respect and cooperation. In other words, if employees feel their ideas are listened to, are given prompt feedback, and see their ideas promptly implemented, they will feel that they are respected.
Unlike a traditional suggestion system, Scanlon’s system does not provide individual monetary rewards for improvement ideas. The thinking is that the review, investigation, and implementation of employee’s ideas are truly a collaborative effort. Suggestion systems that pay individual awards based on the projected savings from the idea promote behaviors in which employees may conceal their improvement suggestions rather than freely share and collaborate with others to advance the idea. Originally the Scanlon approach didn’t have an employee bonus component. However, a few years after the plan’s initial implementation, Scanlon devised an organization-wide bonus formula that provided a more frequent and line-of-sight measurement system than profit sharing. The idea system and other improvement efforts drove the performance measures, and in turn gains (savings) generated through the measurement formula are shared with everyone in the organization. Basically the Scanlon philosophy says, “As we work together to improve the operations, everyone shares financially in the savings.”
The Scanlon Plan became know as “a frontier in labor-management cooperation.” Scanlon went on to work at MIT to help other labor leaders and managers. As a result the Scanlon message gradually began to spread. In the 1950’s Scanlon developed a group of disciples including Frederick Lesieur and Carl Frost. As companies moved forward with the concept, interest in academic and government circles grew. One of the earlier studies was done by the General Accounting Office and was entitled “Productivity Sharing Programs; Can they Contribute to Productivity Improvement?’ The 1981 study examined 36 “productivity sharing” firms. The GAO reported that “while productivity sharing plans are not the panacea for every firm in the solution to the Nation’s economic problems, they warrant serious consideration by firms as a means “of stimulating productivity performance, enhancing their competitive advantage, increasing monetary benefits to their employees, and reducing inflationary pressure.” The report was published in the hope of encouraging organizations to implement performance-enhancing tools that better engaged the workforce.
As time passed, the term “Scanlon Plan” evolved to “Gainsharing Plan”. The Scanlon term mistakenly had become associated with a single bonus formula focused on people productivity. The “Gainsharing” term became more associated with the use of tailor-made measures that still focused on the line-of-sight.
Another hallmark study was published in 1992. The study, (one of the most comprehensive studies up until that time) was sponsored by WorldatWork (Formerly the American Compensation Association). The group was known as the Consortiums for Alternative Reward Strategies Research (CARS). The study entitled, “Capitalizing on Human Assets,” focused on 2,200 organizations with performance-based reward plans. The findings reported many positive results in both operational performance and employee attitudes. In addition, the study reported better performance in plans that used more line-of-sight measures (Gainsharing) than plans using only “a bottom-line’’ profit- sharing measure. In addition the study reported that successful plans lead rather than support cultural change.
In the mid-1990’s the Total Quality Management movement led to further interest in the Gainsharing concept. As TQM attempted to involve the workforce, employees began asking; “What’s in it for me?” Gainsharing was one answer. More recently interest in Gainsharing has again surfaced as companies cycle through Lean Manufacturing and Six/Sigma initiates. An important point is that all of these improvement initiatives are nothing more than tools to better engage the workforce and to promote involvement. Simply put, these tools are an extension to what Scanlon had preached in the 1930’s.
Unfortunately many of today’s companies that study Gainsharing see the concept as an incentive, thinking that if you simply put a carrot in front of people, you will put “fire in their belly.” These organizations focus on the bonus/incentive side of Gainsharing, and may lack the understanding and appreciation of the cultural and employee involvement origins of the concept. They believe that a bonus system lacking employee involvement, will somehow miraculously lead to a positive result. The problem is that they are putting the cart in front of the horse, the incentive in front of the involvement.
Line-of-Sight & Measurement
As the pie expands, the greater the improvement (gain), and the more financial benefit for the company and employees. The key point is that there must be an improvement before any sharing occurs. A critical point is that since gains are typically measured in relationship to a historical baseline, employees and the organization must change in order to generate a gain.
A multi-measure system is commonly used which is referred to as a “family of measures” approach. Basically the “family of measures” approach uses 3 to 6 drivers of performance. Examples of measures are listed below.
|Examples of Operational Measures|
It’s very important to point out that employees do not have 100% control of any measure. No matter what the measure: productivity, cycle time, yield, spending, or on time delivery, there are always outside factors that will influence the result. The point is that employees have more control of operational measures than profitability.
However, unlike Profit Sharing and depending on the Gainsharing plan’s design, employee payouts can potential occur even during periods of profitability decline. Companies with this type of Gainsharing model argue that even though profits may be down, profits would have further declined if not for the savings generated from the gainsharing measures. In this example the company is sharing “savings” and not necessarily “profits.”
Family of measures
On the other hand, a Profit Sharing plan may exclude lower level or hourly employees, or profit bonuses may be paid out on a hierarchical basis. In other words the bonus payout percentage is reduced as the Profit Sharing cascades down the organization. The end result could divide the workforce and create feelings of inequity rather than build teamwork and the sense of unity. On the other hand, Gainsharing plans are designed to distribute gains based on an equal percentage of pay or cents per hour worked.
Another Gainsharing line-of-sight enhancement is that Gainsharing is always paid in the form of a cash bonus. Gainsharing’s intent is to be based on the “pay-for-performance” concept as compared to a “benefit/deferred compensation plan.” In addition the frequency for possible payout is greater for Gainsharing than Profit Sharing. The payout of Profit Sharing plans is typically an annual arrangement.
On the other hand, Gainsharing typically has the potential for a monthly or quarterly payout opportunity. A gain and resulting payout is best described as a score rather than a bonus. Since everyone in the organization is typically included, the score is a “team score” as compared to an individual one. The score helps give a common focus for employees on measures they can influence and control. Therefore, Gainsharing works best in work environments that require collaboration between individuals, work groups, and departments.
Another important feature regarding Gainsharing is that typically a portion of the employees share is placed in a year-end reserve account that is paid to all the eligible participants at the end of each plan year. In periods of deficit performance, the employees’ share of the loss is deducted from the annual reserve account. In other words, employees will see consequences for worse performance and longer-term thinking is reinforced. If at the end of the plan year the reserve is negative, a company will typically absorb the loss and start the next plan year at zero. The reserve concept helps further develop a sense of employee identity and ownership to the organization. For example if a company measured scrap and shared 50% of the gain and 50% of the loss (through the reserve) in a sense employees would own 50% of the financial value of the scrap. Obviously the sense of ownership would drive many new behaviors.
Unlike Profit Sharing in multi-site operations, Gainsharing is typically site specific. The measures and resulting gains are specific to the facility rather than gains being aggregated from multiple locations and in turn distributed across the organization. Again the concept is to increase controllability and the line-of sight. On the other hand, unlike group incentives, Gainsharing typically measures across department/units/functions. The concept is to build cooperation and communications between departments instead of building silos.
Another distinction between Profit Sharing and Gainsharing relates to the method of plan design and development. A Profit Sharing plan is typically developed at the top of the organization. In larger corporations the plan may be designed and developed by compensation executives who in turn are granted approval from an executive committee made up of board members.
However, the development of a Gainsharing plan often involves employees in many aspects of the plan’s design and implementation. Often a cross-functional Design Team is assembled that mirrors the makeup of the total organization. The Design Team sorts through a number of issues related to measures, policies, and communication. After upper management’s approval, the Design Team is responsible for conducting all employee kick-off and promotional meetings. The objective is a sense of employee ownership for the plan. In a sense the Design Team members become disciples of the plan and help lead a process for improvement and change.
So should the farmer consider installing a Gainsharing plan rather than profit sharing? Again, the same question must be asked. What is the objective? If the farmer’s objective is to drive organizational change by influencing attitudes and behaviors, then Gainsharing may be the right answer. However, the farmer needs to have the horse in front of the cart. He needs to understand that Gainsharing is an employee “involvement system with teeth.” Simply instituting some type of bonus formula is not enough. A second question; “Should the farmer consider a broad financial measure of performance or more narrow operational measures?” All other things being equal, the use of more narrow, “line-of-sight” measures will more likely yield significant changes in behaviors which in turn generate positive results. The use of a broad financial based measure is much more dependent on the level of employee involvement in the organization at the time of the plan’s implementation. In other words, “How open is the company’s communication? How knowledgeable are employees about the business conditions? What is the level of trust? How much baggage is the organization carrying from its past? A Gainsharing plan that uses a broad financial measure such as profitability, EBIT, or ROI may be a success if the organization can answer “yes” to the following questions: Is their a high level of company commitment to the concept of sharing? Are employees afforded regular training both in terms of skills and individual development? Is communication ongoing? Are the financial results openly shared? Does the company practice open book management? Are managers willing to admit mistakes? Is the workforce highly engaged? Are people at all levels involved in some decision making? Do employees have a strong understanding of how they influence profitability? Do people identity with the business? Does the company demonstrate loyalty to the workforce? Do employees view themselves as stakeholders? If the answers are” yes”, then measuring and sharing profits may work. If not, then it’s best to have a plan that focuses on operational more “line-of-site measures. Otherwise, the organization will find itself in the same position as the generous, but disappointed farmer.
|Purpose||To drive performance of an organization by promoting awareness, alignment, teamwork, communication and involvement.||To share the financial success of the total organization and encourage employee identity with company success.|
|Application||The plan commonly applies to a single facility, site, or stand-alone organization.||The plan typically applies organization-wide; companies with multiple sites typically measure organization-wide profitability rather than the performance of a single site.|
|Measurement||Payout is based on operational measures (productivity, quality, spending, service), measures that improve the ?line of site? in terms of what employees do and how they are compensated.||Payout is based on a broad financial measure of the organization?s profitability.|
|Funding||Gains and resulting payouts are self-funded based on savings generated by improved performance.||Payouts are funded through company profits.|
|Payment Target||Payouts are made only when performance has improved over a historical standard or target.||Payouts are typically made when there are profits; performance doesn?t necessary have to show an improvement.|
|Employee Eligibility||Typically all employees at a site are eligible for plan payments.||Some employee groups may be excluded, such as hourly or union employees.|
|Payout Frequency||Payout is often monthly or quarterly. Many plans have a year-end reserve fund to account for deficit periods.||Payout is typically annual.|
|Form of Payment||Payment is cash rather than deferred compensation. Many organizations pay via separate check to increase visibility.||Historically profit plans were primarily deferred compensation plans; organization used profit sharing as a pension plan. Today we see many more cash plans.|
|Method of Distribution||Typically employees receive the same % payout or cents per hour bonus.||The bonus may be a larger % of compensation for higher-level employees. The % bonus may be less for lower level employees.|
|Plan Design & Development||Employees often are involved with the design and implementation process.||There is no employee involvement in the design process.|
|Communication||A supporting employee involvement and communication system is an integral element of Gainsharing and helps drive improvement initiatives.||Since there is little linkage between ?what employees do? and the ?bonus,? there is an absence of accompanying employee involvement initiatives.|
|Pay for Performance Plan versus Entitlement||Gains are generated only by improved performance over a predetermined base level of performance. Therefore, Gainsharing is viewed as a pay-for-performance initiative.||Profit sharing often is viewed as a entitlement or employee benefit.|
|Impact on Behaviors||Gainsharing reinforces behaviors that promote improved performance. Used as a tool to drive cultural and organization change.||Little impact on behaviors since employees have difficulty linking ?what they do? and their ?bonus.? Many variables outside of the typical employee?s control determine profitability and the bonus amount.|
|Impact on Attitudes||Heightens the level of employee awareness, helps develop the feeling of self worth, builds a senses of ownership and identity to the organization.||Influences the sense of employee identity to the organization, particularly for smaller organizations.|
2. Masternak, Robert. L. and Camuso Michael. A. “Gainsharing and Lean Six Sigma – Perfect Together” WorldatWork Journal, First quarter 2005.
3. Masternak, Robert. L. "Gainsharing Programs at Two Fortune 500 Facilities: Why One Worked Better." National Productivity Review, Winter/1991/92.
4. Masternak, Robert. L. “How to Make Gainsharing Successful: The Collective Experience of 17 Facilities” Compensation & Benefits Review, September / October 1997.
5. Lesieur, Fredrick G. The Scanlon Plan A Frontier in Labor-Management Cooperation, Cambridge: The MIT Press, 1958.
6. McAdams, J. L. and Hawk, E. L. Capitalizing on Human Assets: The Bench Mark Study, Scottsdale: ACA. 1992.
7. General Accounting Office. “Productivity Sharing Programs Can They Contribute to Productivity Improvement” U.S. General Accounting Office AFMD- 81-22, March 3, 1981.
8. Coates, Edward. M. Profit Sharing Today: Plans and Provisions, Monthly Labor Review, April 1991.
9. Achievement Sharing… In Business Together, DuPont Handbook, 1989.
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