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Using gainsharing to improve financial performance.

Using Gainsharing to Improve Financial Performance

Gainsharing's ability to improve profits is one of the most important reasons many companies have given serious consideration to implementing such a system. There have been many articles written about gainsharing that emphasize and document the improvements it achieves on the human side of companies such as teamwork, cooperation, communication, etc. But, as many companies have found, one of the best reasons to implement a gainsharing program is to improve the bottom line.

Gainsharing helps improve the bottom line by reducing labor costs and absenteeism, improving productivity, increasing attention to quality, and in many other ways.

One of the most frequently noted features of a gainsharing program is its compensation component, which can award cash bonuses to employees for improvements in the performance of the company as a whole. This compensation or bonus component plays a key role in changing employees' perspective from thinking only about their own performance to being concerned about the performance of the company as a whole. The employees of most companies are very shrewd about knowing what they get paid to do and what they do not get paid to do. Consequently, employees often pay close attention to information concerning their own job performance, but have very little concern for overall company performance. In fact, the way most get paid (by the hour or by salary) gives them no compelling reason to be concerned with overall company performance. Once a portion of their pay is tied to the big picture of company performance, employees begin to undergo a shift in their perspective. By using this compensation mechanism, a company can begin to harness one of the strongest forces in human motivation - self-interest - to foster the development of teamwork and concern for company performance.

Labor costs are frequently one of the greatest costs (as a percentage of sales) that a company incurs. If a company's employees can find a way to produce more without increasing its labor cost (hiring more people, working longer hours, etc.), the company will, of course, realize a tremendous savings. When these savings exceed the point where the company has received a fair return on its capital investment, bonuses can then be paid to the employees that made the improvements happen.

As we can see in the figures on the following page, if a company's people can produce 10 percent more without increasing labor costs, the financial return to the company can be substantial. The first figure shows a pie graph of a company that does $20 million a year in sales with a 30 percent people cost and a 5 percent profit margin. In the second, the people of this company increase their production by 10 percent. The resulting profit improvement to the company is 110 percent. This improvement comes not only from the reduction of the people costs as a percentage of sales, but also from the percentage reduction in fixed costs. That is, the fixed costs are $4 million in both scenarios. By increasing total production, they have effectively increased the size of the pie without increasing the fixed cost component. Savings like this can improve the company's bottom line tremendously.

There are many sources of evidence regarding gainsharing's ability to help improve company performance. For example, a Government Accounting Office report found that "gainsharing programs contributed to significant productivity improvements in private industry . . . . that productivity savings resulting from gainsharing programs averaged almost 17 percent for 24 companies providing financial data. Firms with gainsharing programs in operation over five years averaged almost 29 percent savings in work force costs, while firms with programs in operation less than five years averaged savings of about 8.5 percent." The report also said that "80 percent of the 38 firms surveyed reported improved labor-management relations as a result of gainsharing."

Another review of 33 gainsharing plans also reported productivity and a variety of other gains. This study found that about three quarters of the plans experienced improvements in productivity, quality, cost reduction, or customer service. Over three-quarters of these plans also reported increases in employee ideas, suggestions, and innovation. More than 90 percent reported bonuses or pay increases as a result of performance improvements.

As these findings indicate, substantial financial improvements can be achieved by having employees actively search for wasted time and effort in the manufacturing or service delivery process including eliminating unnecessary steps in the work process, making tools or material more accessible, eliminating delays, or reducing rework. Once employees realize that wasted time and effort represents lost bonus opportunities for them, a change in their perspective regarding improving company performance begins. A key element here is the self-interest of the average employee. A properly designed gainsharing program rewards employees for doing the things they can which will improve the overall performance (including bottom-line performance) of the company. Maximizing productivity and solving company problems is in their best interest.

At Barrett, Haentjens & Co. Inc., in Hazelton, Pennsylvania, gainsharing has led to a whole new commitment on the part of employees to continual improvement in the products and production processes. For years, the company and its unionized employees had operated in an environment where supervisors took sole responsibility for tackling production problems. After gainsharing was implemented, a new working atmosphere developed between management and the hourly workers. Problems are now addressed in a team manner where everyone is informed and everyone benefits from the resolution of problems. The result has been over 350 ideas implemented in the first eight months of their gainsharing program.

Also, in gainsharing companies, this concern for effectiveness is not limited to their own job performance as it might be under incentive plans based on individual performance (like piece-work plans). Because gainsharing is typically based on the performance of the company as a whole (or productive facility in the case of very large companies), employees are concerned about productive effectiveness throughout the company. They are not only concerned that their own work procedures and results are the best possible, they feel the same way about their co-workers, other department, and the entire organization.

This concern for overall company effectiveness can set into motion powerful forces to improve work procedures and equipment. For example, let's imagine that you are a machinist with 20 years experience in a given company. Over the years, you have learned certain "tricks of the trade" that enable you to do your work better and faster than your co-workers. These tricks may include special tools and special techniques. If you get paid by the hour or are on an individual incentive plan, what reasons would you have to share these tricks with others? If your superior performance has led to desirable outcomes for you in the past, you may be specifically interested in seeing that these tricks are not picked up by others.

If you worked in a gainsharing company, your bonus would be tied to the performance of the company as a whole, so you would want it to be as productive and effective as possible. Thus, you would want all of your co-workers to know and use your tricks. Improving cooperation and helping behaviors among co-workers can lead to tremendous savings. The key here is that employees are rewarded (both financially and in recognition) for doing what they can to maximize the performance of the company as a whole.

A similar situation applies to reducing scrap. During a typical gainsharing meeting, the scrap that was generated during a given week will be discussed. It will be emphasized that workers' gainsharing bonuses are tied to overall production of defect-free products. When they produce something and then throw it away it's the same as taking some of their pay and throwing it away. Thus, every piece of scrap represents a lost opportunity for the employees to increase their pay. Employees will be willing to do what they can to reduce unnecessary scrap when it is in their own personal best interest to do so. This reduction in scrap directly improves the company's overall financial performance in terms of reduced labor, utilities, material, etc. Dramatic reductions in scrap rates are not uncommon after implementing a gainsharing program.

Most employees realize that the customer base and overall sales volume will be increased by providing the best customer service possible. But most employees are not familiar with specific problems or objections that many customers have regarding their company's products or services. Nor do they typically realize the full impact of these problems on future overall sales volumes and their job security. Being kept in the dark is not only frustrating and insulting to workers, but it prevents them from being able to solve the problems that exist.

We all know how frustrating it can be to have a company ship out the wrong product, miss an important delivery date, or unintentionally overcharge for products or services delivered. We also know how these problems reduce the probability that we will do business with this company in the future. Employees will only become intensely interested in preventing such errors if they are aware of them and will be personally affected by their occurrence. Gainsharing companies make their employees aware of these problems by discussing them in short weekly meetings, showing how they affect everyone, and fitting aspects like customer returns into the gainsharing formula. When a customer return occurs, the specifics are discussed in all company gainsharing meetings. With everyone aware of what is going on, employees can think of ways to detect or otherwise prevent such problems from occurring in the future.

For example, at Wirco Castings, an iron foundry in New Athens, Illinois employees regularly review all customer feedback on products. They review the customer's exact specifications (special quality requirements, delivery times, etc.) and any problems with past deliveries. Doing this educates employees, on an ongoing basis, about the basic dynamics of their marketplace and where they stand as a company. Wirco has found this process has significantly improved its ability to quickly deal with problems and has resulted in a workforce that is much more knowledgeable about and involved in the dynamics of the business. This type of attention to quality and customer service is important to improving market share and can pay major dividends in terms of the long-term financial performance of the company.

Rework problems are treated the same way. Doing the work over and over will neutralize gains made in other areas or reduce the probability that bonuses will be paid, employees are told. Problems that occur (whether in one's department or not) will affect overall compensation. It is through emphasizing and demonstrating that "we are all in this together" that companies get all employees to pull together.

Frequent discussions in gainsharing meetings of overall company performance and associated people costs make it clear that one of the best ways to increase gainsharing bonuses is to increase overall sales volumes. This realization spurs employees to pay close attention to customer needs, both in terms of what they want and don't want.

Customers today are interested in buying from companies that are committed to continually improving their operations and abilities to serve the customer. This is particularly true of companies that are evaluating other companies as potential suppliers. Because gainsharing programs typically include employee involvement, problem solving, and team based systems, having a gainsharing program can go a long way to convince your potential customers that you are answering their requirement for commitment to continual improvement. These efforts can provide your company with an edge over your competitors because your potential customers know that they will ultimately benefit from your continual improvement efforts. Thus, gainsharing can saves your company money in the course of producing your products or services, and it can help to bring additional business.

Significant savings can also be realized by the reductions in sick time and absenteeism that frequently are associated with a successful gainsharing program. It's hard to underestimate the positive impact associated with higher personal involvement in the challenges and excitement of business that gainsharing gives employees. Positive outcomes that can come from this include employees who feel better about coming to work, do not want to miss out on any bonuses that are distributed, do not want to let their co-workers down by not being on the job to do their part, and enjoy their jobs much more than they did before gainsharing. In gainsharing projects sponsored by the U.S. Army Materiel Command, most of the projects were found to be "successful in improving productivity as well as providing indirect benefits, including decreases in sick leave usage, personnel turnover and absenteeism." Experiences such as these are common with successful gainsharing programs and can result in substantial long-term savings for all types of organizations.

Gainsharing is a comprehensive strategy where various elements of the program gather momentum from the impact of the other elements - a strength that often makes it succeed where other strategies fail. The information people gain during gainsharing meetings increases their ability to find and solve problems. Their increased involvement improves their morale and attitude toward the company, and increases overall company performance through goal setting, performance feedback, and increased problem solving which, in turn, generates gainsharing bonuses. As bonuses are achieved and paid, people become even more personally involved and committed to achieving even higher performance. They do this, of course, because it is in their own best interest to do so. But promoting this chain of events is also in the company's best interest since it leads to continual improvements in overall performance and the bottom line.

As America's companies struggle to compete, they need improved financial performance more than ever to be able to afford the improvements necessary to stay in the battle. Gainsharing is a management tool that is helping hundreds of companies achieve this goal by increasing overall performance while reducing or holding costs at the same level. There are many reasons companies consider implementing a gainsharing program, but one of the best is that it will improve the bottom line.

Charles W. DeBettignies, Ph.D., is with W.M. Jackson and Company in Marion, Illinois.
COPYRIGHT 1991 Institute of Industrial Engineers, Inc. (IIE)
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:DeBettignies, Charles
Publication:Industrial Management
Date:May 1, 1991
Previous Article:Eliminating "doublethink;" or, how to overcome terminal inertia.
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