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Gainsharing is the most popular form of pay-for-performance wage system. Tactically, a gainsharing plan is a group incentive plan under which employees, as a group, earn bonuses for cooperating to improve plant performance. And when employees earn a gainsharing bonus, the company earns an equal amount. Strategically, gainsharing is a key motivational/reward system which emphasizes using employee ideas for improving overall organizational effectiveness. Successful gainsharing plans result in quality and productivity improvements of about 17 to 22 percent annually.

Executives are awakening to the fact that the old methods of running an organization from the top down are no longer effective in today's world of global competition and high quality requirements. Senior managers are realizing that improved performance is a vital necessity. By tapping the product and technical knowledge of employees who are close to the work, executives can use their ideas to attain quality, productivity, and customer satisfaction goals.

There are now over 2000 gainsharing plans in existence, mainly among manufacturers. A wide variety of ways to measure "improved performance" are used in these plans: a reduction in manhours worked to produce a given volume of goods or services; an increase in the value added by the manufacturing process; a reduction in defects or of the cost of rejects and rework; an increase in the level of customer service; a reduction in in-process work or inventory; an improvement in raw material yield; a reduction in energy usage; a reduction in downtime and maintenance costs; a reduction in materials, supplies, and other variable costs; or some combination of the above.

Gainsharing plans readily lend themselves to assembly line, batch, and continuous process operations in manufacturing, because the results of employees' efforts can be easily measured. For example, the number of good units (like fuel pumps or armchairs) produced per manhour worked is often an accurate indicator of productivity in assembly line manufacturing. In batch processing, the number (and quality) of the batches (like special lubricants or industrial cleaning supplies) produced per work crew per shift may be a good marker of productivity, assuming each batch is the same size. In continuous process operations (like chemical plants), actual yield of the various products in relation to theoretical yield may be a sound procedure.

Financial measures of improvement can be used, such as Return On Investment or Profit Before Taxes, but financial yardsticks are more difficult to understand than a more familiar measure of productivity. For example, year-end inventory adjustments used by accountants can affect an organization's financial results. Also, many privately held companies are reluctant to share financial statistics with employees. Some multi-plant companies do not keep their financials in such a way that they can be easily broken down, location by location. Thus, the majority of gainsharing plans do not use financial statistics as an index of measuring improvement.

A company should analyze its costs to see where the big dollars are spent. If a high percentage of company expense is in raw materials, and a low percentage is employment costs, then their gainsharing plan should aim at boosting raw material yield, to minimize the usage of expensive raw materials. In light bench assembly work, total labor can be as high as 40% of costs. In such a factory, productivity per manhour less scrap and rework costs would be a good measure for a gainsharing plan.

The most important element of any gainsharing formula is simplicity. Employees and their elected representatives (if any) must be able to readily understand how the gainsharing bonus system works, the impact their efforts have upon it, and what they must do collectively to earn a bonus. If the plan is complex or its explanation muddled, it is doomed to failure.

Before executives begin to worry about windfall bonuses for employees resulting from a gainsharing plan with no upper limit on pay-out, they must remember that gains are usually split 50/50. In a properly designed gainsharing program, the company profits just as much as the employees.

There is no standard one-size-fits-all gainsharing plan. Each company has a unique culture and its own operating policies. Each organization has executives with their own management styles. Thus, even two metal fabricators producing similar products may need different gainsharing plans. What works in a steel mill will not work in a machine shop, a coal mine, a food processor, or foundry. A gainsharing plan must be tailored to the needs of each individual company for it to motivate employees to improve productivity and be profitable both to employees and the company.
COPYRIGHT 1993 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Imberman, Woodruff
Publication:Tooling & Production
Date:Jul 1, 1993
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