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Gainsharing: overcoming common myths and problems to achieve dramatic results.

What is gainsharing? Another management fad that employees will see come and go? Isn't it a compensation system that places a big carrot or a new gimmick in front of employees in the form of a financial incentive? Isn't it the same as profit sharing that pays an annual bonus to employees when times are good? Gainsharing doesn't apply to the service sector, does it? It's only found in manufacturing organizations, right?

These are just a few of the many myths and misunderstandings about gainsharing. Companies that could benefit the most may immediately close their minds to the approach due to a lack of understanding or an unwillingness to change. The term "gainsharing" may be partly responsible for the misunderstanding. It gives a narrow focus to the incentive side of this concept and does not necessarily indicate what truly is involved in a successful gainsharing plan.


Some view gainsharing as a super carrot, as an incentive to get employees' attention and to encourage harder work. It's true that the bonus element is an important part of any gainsharing plan, but to view it strictly as a new type of incentive program is a mistake. The bonus aspect is a very visible part of gainsharing plan. The potential to earn a bonus quickly can get employee attention. But companies that have experienced the benefits of improved communications and teamwork will argue that their gainsharing plans are much more than compensation programs. Six months after a gainsharing plan was installed, an employee was asked, "What's changed since the plan began?" His first comment was, "People listen; we can get things done around here. I'm able to get my ideas implemented." His second comment was, "There is better teamwork. The other production shifts help out by having things in shape when we report to work." His third comment was, "The monthly bonuses we have been earning are also great."

In other words, the employee involvement dimension of gainsharing is a critical element. Involvement promotes the better utilization of the workforce, helps to foster cooperation and teamwork, and opens communications and information sharing.

On the other hand, gainsharing is more than an employee involvement program. Gainsharing's bonus dimension provides the link that is absent in many unsuccessful employee involvement endeavors. Employee performance is directly linked to compensation. Gainsharing answers the question, "What's in it for me?" Without this linkage, the employee involvement process runs the risk of becoming "just another program that comes and goes." The bonus opportunity is a matter of equity. It says, "We believe it is fair to share." This is particularly important as the compensation gap between executives and the balance of the workforce continues to expand. If gainsharing were strictly a bonus system, however, many plans would have failed after facing the first economic downturn, when the bonus potential is often limited. During hard times, the employee involvement activities help maintain the focus of working smarter and keep employees interested in the process.


This view takes the position that gainsharing is a new management program, a recent development that "will come and go" like so many other management approaches. It is true that there is significant growth in the interest in gainsharing. However, both the Scanlon and Rucker plans date back to the 1930s Depression era. Another form of gainsharing, Improshare, was first used in 1974. The need for increased productivity to save failing companies was the primary reason for initially installing gainsharing plans. Many of these earlier plans were installed in small companies. There are a number of larger companies, however, that have had plans in place for years. Dana, Motorola, and Herman Miller are only a few examples.

Gainsharing is not new. There have been at least two changes in the approach, however. The initial plans, such as the Scanlon and Rucker plans, had a standard formula and were packaged approaches. It was necessary for performance to improve only over a base level that was fixed and based only on history. Now, the great majority of plans are "customized arrangements" that are carefully designed to support an individual company's unique set of business objectives.Quality and customer service are often used as measurement components in today's plans.

A second trend is the increased use of gainsharing in the service sector and the installation of plans in companies that have a strong tradition of success. A recent American Compensation Association study of 432 organizations using gainsharing found that 40 percent of the group are in the service sector. Also, today larger and more successful companies are installing gainsharing to support their employee-involvement activities. General Electric, Holiday Inn, 3M, Taco Bell, Xerox, and Northern Telecom are such examples. These companies are not necessarily ones that have been forced to change because of dire economic circumstances. More progressive companies have a culture and values that recognize the need for continuous improvement. These companies have a climate in which change is a way of life.

They recognize that employee expectations have changed. The workforce is better trained and educated. Jobs are more complex, and people have more to contribute. Organizations are flatter with fewer layers of management. Gainsharing supports the philosophy of more fully utilizing a company's human resources and encourages people to work smarter by becoming more involved.


Many people who confuse profit sharing and gainsharing view them as being the same concept. Employees have an opportunity to earn a bonus under both approaches. But that is where the similarity ends.

First, profit sharing generally provides a bonus opportunity on a companywide basis. Financial performance or profits are shared. On the other hand, gainsharing generally applies to a single business or a separate facility within a larger organization. A gainsharing bonus formula typically measures operational factors such as productivity, cost, or quality, rather than profits. The idea is to build a linkage between the factors that people can control and the opportunity to earn a bonus.

Second, many profit-sharing plans today are viewed as retirement savings programs, not performance improvement plans. Employees are eligible for an annual bonus often in the form of deferred compensation for retirement.

On the other hand, gainsharing plans provide a more immediate cash payment. Often, employees are eligible for a bonus opportunity on a monthly or quarterly basis. Some plans may even have a weekly payout.

A third distinction between profit sharing and gainsharing is related to the concept of continuous improvement. Generally, the traditional profit-sharing philosophy focuses on dividing the profit "pie" with employees. Profit-sharing plans do not necessarily require that profits improve in order for a bonus to be paid. Conversely, in order for a gainsharing bonus to be earned, there must beimprovement in the performance over a predetermined standard or base. Generally, there are no payments if past performance is merely duplicated.

Fourth, and most important, traditional profit sharing does not incorporate the employee involvement element. Instead, profit sharing is a compensation plan. Gainsharing is more a system or management philosophy that emphasizes employee participation and ingenuity.


How does gainsharing tie to total quality management (TQM)? One common myth regarding gainsharing is that it is an alternative approach for total quality management. It is mistakenly viewed as a competing approach to quality programs such as those offered by Crosby, Deming, and Juran.

Gainsharing, more appropriately, should be viewed as a philosophy of management that is integral to the TQM process. Employee involvement, teamwork, communication, recognition, and measurement are examples of steps in the quality process that are reinforced and enhanced by gainsharing.

TQM is reinforced by gainsharing, even when it is narrowly viewed as a compensation system. When gainsharing is taken to a higher level and is viewed as a management philosophy, it provides much broader support to TQM. Gainsharing can drive TQM. It can serve as the umbrella. A successful gainsharing plan has the following components, all of which are integral to TQM:

* Identity. Employee and company goals become common. Employees establish a sense of ownership for the business.

* Equity. Gainsharing companies believe it is fair to share.

* Involvement. Managers learn that the people performing the work often have the solutions that best solve the problem.

* Commitment. No management initiative can be accomplished without the commitment of a competent management group. Like TQM, management and employee commitment are critical to the success of the process.


Some think that the gainsharing measure of inputs/outputs is limited to strictly operational measures, such as units produced per worker hour. In other words, the measure is restricted to physical productivity. It is true that the early gainsharing plans employed rather narrow measures of performance. For example, Improshare is based on a standard ratio of labor hours per goods produced. Today, however, measures range from more narrow physical inputs/outputs to financial measures including sales and return on investment. We even find that some more creative plans may be blended in nature, using a combination ofoperational and financial measures. An approach that is growing in popularity is one that employs a family of measures. Items such as cycle times, equipment utilization, material usage, energy, scrap, quality, inventory levels, fill rates, on-time shipments, turnaround time, customer complaints, housekeeping, and safety. One can go on and on listing items of possible measurement. The point is that an organization needs to study its mission and vision. What arethe critical goals of the organization? What types of employee behavior does the organization want to encourage?

Fixed Targets

In gainsharing plans, employees earn a bonus in a period when actual performance improves over a predetermined base or standard. Some companies considering gainsharing are concerned about establishing the baseline or target level of performance. They think that the baseline many be fixed or very difficult to change.

The historical plans established a fixed baseline, generally based on three to five years of history. The only way the base could be changed was for the company to "buy back" the base by making a lump-sum payment to employees. Obviously, this approach does not fit today's world of continuous improvement and the requirements that some customers place on their suppliers for rebates through cost reductions. Today, many companies, in conjunction with an employee design team, review the baseline at least annually. Adjustments are made for capital improvements, changes in technology, and product mix. Also, some companies have a formula in their plan document that specifies how the base will be adjusted. Some change the base every year. They may use a weighted average of the past two years' performance and a target for future improvement. In other words, the company and employees know in advance how the baseline will change from one year to the next. Finally, some may use a rolling average as the base, such as the most recent thirty-six months.


There is a major change in compensation philosophy when shifting from the traditional individual approach to the nontraditional team approach. Unfortunately, traditional compensation is based on the exchange theory of compensation. The traditional approach says, "If you do this, you will get paid that." In the traditional sense, pay is used as a form of management control. Employees are to perform specific functions and in return are paid for performing that function. Companies have elaborate systems for evaluating jobs and pay expensive fees to consulting firms to maintain the system. Unfortunately, the approach reinforces behavior that limits flexibility. What are the chances that an employee will go beyond his or her normal job boundaries? An employee asks, "Why should I take on more responsibility? It's not my job, and I won't get paid for the effort."

Also, the exchange approach that attempts to recognize individual performance has been a significant failure. Individual performance is very difficult to measure in a fair and objective manner. Companies have been searching for the perfect performance evaluation system for years. Many studies support the fact that too often employees do not believe that they will personally benefit if they are more effective on their job.

Finally, the exchange theory fosters an environment of individual competition that often is in conflict with the need for more employee collaboration and cooperation. Today's focus is on quality and customer satisfaction. Employee teamwork is essential to accomplish these goals.

Gainsharing is a nontraditional approach; it is a team-based approach. Instead of focusing on the exchange theory, gainsharing supports the "creation philosophy." Gainsharing is a philosophy built on teamwork, collaboration, and working smarter. Employees, departments, and the total organization work together to create improved performance by focusing on common goals. The concept says, "We are in this together; just do it! Together we are creating improved performance, and as performance improves, we will all share in the gain." Rather than the payment being the primary focus, it becomes almost a by-product of the organization's culture. The nonmonetary gains include a sense of ownership, teamwork, pride, and feeling of control. A great deal of employee identity with organization goals is developed.

The creation philosophy doesn't happen overnight, but many organizations make the shift. Gainsharing is for the long term. It doesn't fit for organizations that are looking for a quick fix. A great deal of management commitment is required, including communicating performance, training, and fostering an environment that supports employee involvement. Management must be open and listen to employee ideas and concerns.


We don't often hear about gainsharing plans that fail, nor has there been much research documenting failures. But plans do not always accomplish their objectives. Organizations generally do not like to openly share failings, but the following are two recent examples of gainsharing endeavors that may have caused more harm than good.

In both companies the management teams initially invested considerable amounts of time and resources in developing their gainsharing plans. As in most cases, an employee design team was formed to help design the plan, including the performance measures and plan policies. In the process some employees developed a great deal of identity with and ownership of the plan. In addition, an employee involvement system was established to help focus on problem solving and implementation of ideas to improve performance.

Unfortunately, in both companies, there has been a lack of management commitment and support for the plans. There are no top management champions for the plans.The gainsharing plans are viewed as human resources programs. Many other members of the management teams have not been involved, and are therefore not active supporters. There is little visible support and encouragement from the top managers and staff. Also, in both cases, after initial installation, little has been done to support the involvement system. Teams have been formed, but no one is facilitating or coordinating the involvement effort. There has been an absence of training for the teams and no follow-up to help employees understand the performance measures and worker impact on a potential bonus. In one case, the primary gainsharing measures did not accurately reflect the current positive level of business performance. The company's overall performance is improving. But monthly bonuses have not been paid. The product mix dramatically changed, and the bonus formula does not accurately reflect this change. In fact, the performance measure reflects worse performance, even though the company's business activity is dramatically better. The company has not taken the time, however, to properly monitor the situation, nor has it made an effort to correct the measurement. What is the lesson?

When first installing a gainsharing plan, it may be very difficult to foresee all the future events that may dictate adjustments to the new plan's bonus formula. The organization must be attentive to this fact and be flexible enough to make a mid-term correction. The plan must be fair to both the company and to employees. Gainsharing plans simply do not run themselves. Revision maybe necessary, and management must be proactive and make adjustments. Management simply can't say, "We are too busy with other things." Both are a reflection of management's lack of commitment to the plan. The plan itself will not help promote employee involvement efforts, nor will it improve employee focus on the performance objectives. That must be done by a committed, focused management team, without which employee expectations dramatically diminish. Credibility and trust further deteriorate, due to management inaction and a lack of commitment. If a plan does not have full management commitment, barriers often become insurmountable. A poorly administered gainsharing plan will become "another program that employees see come and go." Unfortunately, most organizations have only one shot at installing a successful plan. Therefore, management should not make the attempt to install a gainsharing plan without being ready and committed.


Undoubtedly, the most important single element for a gainsharing plan's success is the level of management commitment. A competent management team must be in place and committed to the process. As we've discussed, gainsharing doesn't run itself. Instead, particularly at the early stages, employees will be observing management actions to determine whether gainsharing is just another short-lived program. Even though some enthusiastic supporters may be present, the silent majority may take a wait-and-see attitude. The key role of the management staff will be to demonstrate support and commitment to the plan, but how does management demonstrate its commitment?

* EDUCATION ABOUT THE PLAN. The management staff should help employees gain a better understanding of the business and the role of employee involvement in gainsharing. Regular departmental or organizationwide communications meetings should be held. After the bonus results are posted, it is important that employees receive quick feedback on the "whys" behind the results. For this reason, it is critical that communications meetings be held (in many cases monthly). Someone from management needs to meet with employees to communicate results and respond to questions. The meeting also provides an opportunity for added education about the measures and how employees affect performance. Employees must have a basic understanding of the system and their role in improving performance.

* INVOLVEMENT. The idea behind the involvement system is to push decision making down. Sometimes, supervisors may view this as a loss of control and may not be willing to give up some of their decision-making power. The idea, however, is to provide the opportunity for every employee to have more control and influence over his or her work.

* TRAINING. Ongoing training and employee development are essential. Employees must be provided with the tools to become more involved. Many companies designate a plan coordinator whose role includes

* Training involvement teams on meeting effectiveness, problem solving, and interpersonal skills;

* Monitoring and facilitating involvement activities;

* Educating employees on the performance measures;

* Scheduling regular organization meetings to review business activities, performance, and areas for improvement;

* Communicating through newsletters, posters, and bulletin boards; and

* Daily/monthly performance charting.

* SUBMITTING IDEAS. The staff should demonstrate their involvement. For example, some companies install a team-based suggestion system in order to provide a structured approach to employee involvement. Along with other employees, managers should submit ideas themselves. Some managers may feel that idea generation is not part of their job, and therefore, will not submit suggestions. All the managers should participate. You have to "walk it the way you talk it."

* SUPPORT. The managers should regularly discuss gainsharing, show their support, and identify potential problems. Also, managers should help monitor team activity. They should visit involvement team meetings and provide the time, facility, and resources for involvement team meetings. This is not always easy with day-to-day operations and customer demands.

* IMPLEMENTATION OF IDEAS. The management staff needs to listen. The resources to implement employee ideas and suggestions need to be provided. This may result in some additional costs and technical or engineering support. It is extremely important that employees see suggestions being implemented. Otherwise, the plan may be viewed as ideas falling on deaf ears.

Managers should be alert to a low volume of ideas, a large number of declines, a backlog of pending suggestions, or delays in implementation. If any of these problems exist, the matter should be investigated and corrective action taken. The management staff should serve as advisors and resource persons.

* RECOGNITION. The staff should be supportive of employee involvement and give recognition to those who are actively involved. The managers should openly support and recognize individual employees, supervisors, and teams in their gainsharing efforts.

* MONITORING. The measures and bonus formula need to be monitored. It may be necessary to make changes in order to ensure fairness for both the company and employees. The baseline will need to be changed, and performance measures may no longer reflect the needs of the business. New measures or goals may be required. Gainsharing should be dynamic, supporting changing business needs.

* PERFORMANCE EVALUATIONS. Some companies include support and commitment to the gainsharing plan as one of the factors in their managers' and supervisors' performance evaluations. Managers and supervisors need to understand their role in relationship to the gainsharing plan.

The employees' initial attitudes and response to gainsharing will be significantly affected by the actions of the management team. A competent management team must be committed to the process.


Gainsharing is not simply an incentive program. It is not a fad. It is not a profit-sharing program. Instead, gainsharing combines two of the most active areas in the human resources field: pay for performance and employee involvement. It 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. The approach is a team effort, rather than a system based on individual incentives.

There are a number of myths and misunderstandings associated with gainsharing that must be overcome before installing a plan. However, if it is done properly dramatic results are possible. Plans using operating measures show a typical return of nearly 200 percent on their payout. In addition, many nonfinancial returns have been reported, including better teamwork and improvements in communication, business understanding, and overall attitudes. Another study conducted by Towers Perrin found that 73 percent of 177 organizations (using plans with operational or blended measures) reported that their plans met or exceeded their expectations.

Many companies view gainsharing as being much more than a compensation system. They see it instead as an integral part of their business strategy and a method to drive organization change. If the organization is ready and management is committed, gainsharing can be a powerful tool for positive change.


Coates, E.M. "Profit Sharing Today: Plans and Provisions." Monthly Labor Review, April 1991.

Graham-Moore, B., and T.L. Ross. Gainsharing Plans That Improve Performance. Washington: BNA Books, 1990.

Masternak, R.L., and T.L. Ross. "Gainsharing: A Bonus Plan or Employee Involvement?" Compensation and Benefits Review, Jan-Feb 1992.

Masternak, R.L. "Gainsharing--Is it the Answer?" Operations Management Review, Dec. 1991.

Masternak, R.L. "The Myths of Gain Sharing." American Productivity & Quality Center Letter, Feb. 1992.

Masternak, R.L. "Gainsharing Programs at Two Fortune 500 Facilities: Why One Worked Better." National Productivity Review, Winter 1991-92.

McAdams, J.L., and E.H. Hawk. "Capitalizing on Human Assets." American Compensation Association, Fall 1992.

Nickel, J.E. "Can Your Organization Achieve Better Results by Sharing Gains with Employees?" Employment Relations Today, Autumn 1990.

O'Dell, C. People Performance and Pay. Houston: American Productivity Center, 1987.

Robert L. Masternak is president of Masternak and Associates in Medino, Ohio. His major focus is on consulting and training in the areas of productivity and quality improvement through gainsharing and employee involvement.
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Author:Masternak, Robert L.
Publication:Employment Relations Today
Date:Dec 22, 1993
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