How to Design a Gain-Sharing Program That Works

In order to incentivize employees and improve company performance, many businesses turn to gain-sharing programs. These programs offer employees a percentage of the profits generated by their work in addition to their regular wages. However, designing a gain-sharing program that actually works can be difficult.

In this article, we will examine what goes into a successful gain-sharing program, how it can benefit your company, common pitfalls, and some real-world examples.

What is a Gain-Sharing Program?

For my money, a well-thought, well-implemented gainsharing effort is the holy grail of productivity and efficiency incentives: Paying for performance with money you never would have had anyway, without the improved performance. An incentive plan that funds itself.

For the unenlightened, “Gainsharing” is an incentive plan that, using established, historical thresholds of performance, pays incentives for “gains” based on that threshold. Usually defined in some fashion as a “split,” such as 50% for the company, and 50% for employee incentives.

What is an Example of Gain Sharing?

Let’s say a company has historically spent $2.00 for every widget it produces. Under a gainsharing plan (oversimplified here for clarity), if the employee effort resulted in making widgets at $1.50 per, then the $0.50 savings, or “Gains,” would be shared equally between the company and employees.

What are the 4 Types of Gain-Sharing Plans?

It is commonly held that there are 4 types of gain-sharing plans. All 4 are still used in industry today, with some more popular than others.

1) The Scanlon Plan

Developed in the 1930s by Joseph Scanlon, this is probably the best-known gain-sharing plan. It is a company-wide plan that focuses on cost reduction and improved productivity.

Under the Scanlon Plan, employees are typically organized into teams. Each team is responsible for analyzing its own work process and suggesting improvements. A portion of the savings generated by these improvements is then distributed to the team members as a bonus.

2) The Rucker Plan

Also known as the Rucker-Loftus Plan, this gain-sharing arrangement was developed in the 1940s by John Rucker and J.W. Loftus. It is similar to the Scanlon Plan in that it also focuses on cost reduction and productivity improvements.

However, the Rucker Plan puts more emphasis on employee involvement in decision-making. A portion of the savings generated by productivity improvements is distributed to employees, but a larger portion is reinvested in the company (for example, in new equipment or training).

3) The Improved Productivity Bonus Plan

Developed in the 1950s, this plan was created as an alternative to the then-popular piece-rate system (a system where workers are paid based on the number of units they produce). The Improved Productivity Bonus Plan pays employees a bonus based on the overall increase in productivity, rather than on the number of units produced.

This plan was created with the intention of encouraging workers to work together to find ways to increase productivity, rather than competing with each other (as is often the case under piece-rate systems).

4) Custom Gain-Sharing Incentive Plan

This is a custom-made company-wide plan that focuses on quality improvement as well as cost reduction and productivity gains. Under this plan, employees are typically organized into teams.

Each team is responsible for analyzing its own work process and suggesting improvements. A portion of the savings generated by these improvements is then distributed to the team members as a bonus.

What are the Pros and Cons of Gain-Sharing?

Like any incentive plan, gain-sharing has its pros and cons.

On the plus side, gain-sharing can:

  • Encourage employees to work together to find ways to increase productivity
  • Encourage employees to focus on quality as well as quantity
  • Motivate employees to find ways to reduce costs

On the downside, gain-sharing can:

  • Be complex and difficult to implement
  • Require a lot of upfront investment (in terms of time and money)
  • Create tensions and conflict among employees if not properly managed

What Are Some Common Pitfalls of Gain-Sharing?

There are a few common pitfalls that companies should be aware of when implementing a gain-sharing program. These include:

  • Failing to involve employees in the planning process
  • Not setting realistic goals
  • Failing to monitor and adjust the plan as needed
  • Not rewarding employees in a fair and equitable manner

What Are Some Tips for Implementing a Successful Gain-Sharing Plan?

If you’re thinking of implementing a gain-sharing program, there are a few things you can do to increase your chances of success. These include:

  • Get it right – Determine the critical lever(s) involved that the gainsharing will apply. These are likely the final productivity measure, e.g., cost per lb., hours per process, waste, rework, etc. Do not use simple payroll dollars. And use a recent trend data point (1 yr, 3 yrs), not some arbitrary “goal.”
  • Keep it simple – If you can’t explain it to the lowest level impacted worker in less than 5 minutes — so they really understand — it’s too complicated.
  • Communicate – You cannot overcommunicate with a gainsharing effort. You must be open and free with sensitive financial data — if you feel you cannot, don’t use gainsharing.
  • Educate – Participants must be able to “connect the dots” between today and “better,” and they need new knowledge tools to do that. Financials, process, etc.
  • Reward – Timely payouts are a must. Monthly for typical blue-collar, perhaps quarterly for more sophisticated workers. You may have to prime the pump at first.
  • Involve employees in the planning process – As with any change initiative, it’s important to involve employees in the planning process. This will help ensure that they buy into the program and are more likely to support it.
  • Set realistic goals – Be sure to set realistic goals for your gain-sharing program. If employees feel that the goals are unrealistic or unattainable, they will be less likely to buy into the program.
  • Monitor and adjust the plan as needed – Be sure to monitor the progress of your gain-sharing program and make adjustments as necessary. This will help ensure that the program is effective and accomplishes its goals.

The Bottom Line

Gainsharing is not a “template” compensation scheme where you can take someone else’s and fill in the blanks. Things like holdback/reconcile, thresholds, buy-downs, etc. all need to be determined, to say nothing of the original planned design.

If done correctly, however, there is nothing better. Participation and employee buy-in will be high because the employees themselves have a direct stake in the outcome.

How Triangle Performance Can Help

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We work with you to develop an actionable plan that supports your goals and helps you achieve sustainable results. Our approach is tailored to your specific needs and based on proven principles of adult learning and change.

If you’re interested in learning more about our executive coaching services, we invite you to contact us today.

Executive Leadership Consulting That Works

Triangle Performance, LLC is a solutions-focused management consulting firm specializing in executive improvement, leadership development, and organizational effectiveness. Contact us today to get started on your journey to improving your leadership skills.

Top HR Issues for 2006

So, given that Human Resources eeems to be getting a lot of media attentioon recently — some posive, some not — I figured I’d offer a few things to really think about in 2006 (and beyond)…

My top 5 for 2006 (and somewhat beyond):

1. Management talent acquisition, development, and planning. This includes accurate hiring, and effective skills development, succession, etc. This is the #1 HR impact area, by a positively stupid margin.

*** BIG GAP BETWEEN #1 & #2 ***

2. Continued employee productivity gains.

3. Driving value-added initiatives while reducing the cost and impact of administrivia.

4. Effectively managing benefits design, delivery, and costs.

5. Planning for the changing demographics of employees.

My farrago list, in no particular order:

a. Better utilization & development of women in management.

b. Strategy for developing entry-level/low-skilled workforces from mediocre secondary education.

c. Strategy for utilization of post-retirement workers.

d. A serious focus on the discipline of HR planning, budgeting, and forecasting.

e. More emphasis on organizational effectiveness, less on ‘human resources.’

f. Developing and managing workforce ‘metrics that matter.’

Just a few off the top of my head…

KB

Budgeting That Matters for Human Resources

Real, strategic budgeting for Human Resources must done from three perspectives:

1. Internal, expense-based management of the function itself, including headcount and required resources for day-to-day management as well as planned initiatives,

2. Operationally, pushing out potential budgeting numbers to operating units, and

3. Organizationally, allowing the entire firm to complete budgets based on planned Human Resources initiatives, interventions, and planning.

The first of these is entirely tactical and functional, with emphasis pointed inside the human resources shop. The second shows meaningful synergies within the organization, while the third perspective is where Human Resources can have appreciable, strategic impact for the organizations planning, budgeting, and forecasted performance.

Internal budgeting is simple, and simply requires a determination of how much the discrete HR function will “spend” during the budgeted period. Headcount payroll, benefits burden, task vendors, some outsourced efforts, and paper clips. Much of this data is readily available, as prior budget “actuals” have historical spending patterns. Those may be used as a “go-by,” but any accurate budget – and all support functions, in my mind – should be “zero-base.” In other words, start with “nothing,” not with last years’ actual spending. Build the budget from the ground up.

Operational budgeting pushes some human resources costs out into the operational world. Frequently, many hiring costs such as testing, travel, etc., are charged directly to the gaining operation (not human resources), so sharing an idea of how many potential candidates may have to travel to interview, relocate, etc. is useful information. Other categories could apply here, also, including specific HR staff travel to an operational location, unique efforts for a single operation, and so forth. Sharing this operational budgeting information allows the organization to work together to roll up a more accurate estimate of true costs.

Organizational budget considerations are “the real deal.” Here, human resources leaders have to make a commitment, and prepare to held accountable for the results. If we say that, through our negotiations, we intend to reduce the Benefits Costs Per Employee by 8%, then the organization should plan on it. Further, if we are spending money and effort to increase real productivity through various means (training, hiring, performance management) in specific operations, those increased productivity numbers should be reflected in the period’s budget. Further, joint efforts should be reflected here as well.

At one company, I spearheaded a “Tiger Team” that was mobilized whenever we opened a new facility or had serious performance issues needing a turnaround. As the champion for that cross-functional effort, I was accountable for determining the financial value (ROI), and distributing that value correctly throughout the organization for budgeting and forecasting.

All three of these perspectives may occur somewhat seamlessly, but should be purposeful nonetheless. It’s another area where we can move the human resources effort from simple functionality to an integral part of the organization’s success.

Leadership Stengths, Weaknesses & Skills

Not too long ago, I worked with a group of division presidents for a fast-growing company. Two things struck me as interesting, and somewhat of a paradox: First, they were all reasonably successful in their jobs (and their jobs were substantially the same, just different geographic regions). Second, they were all incredibly different. Yes, they each had similar behavior characteristics, such as intelligence and work ethic. In other areas, such as sales, marketing, people management, organizational skills, strategy, planning, and do forth, they were all over the charts.

So what? Well, I’ll tell you “so what.” You hear a lot of garbage about understanding your “strengths and weaknesses,” and then you’re supposed to work on your weaknesses. Let’s look at it differently. How about we assume that succeeding in a position can be done in any of several different ways, using a variety of skills. Using that reasoning, you don’t have strengths and weaknesses, you have learned skills and skills you have yet to learn.

Wow!

So, then, we should then simply “learn more skills,” right?? No, no, no… We should, instead, clearly identify our skills, since we know that we can succeed with them, and work on improving our strengths! That’s right, improve our strengths, since we already know that they work for us. Learning new skills is time consuming, and depending on application, may or may not work for us the way they work for others.

Now, this logic assumes current success, so don’t confuse this with those managers who are clearly unsuccessful, though I would argue this could help them with their improvement also. In other words, as Bum Phillips (retired Houston Oilers coach) would say, “Dance with who brung you.” Use the skills you have — improve and hone them to a razor’s edge — and continue your increasing levels of success. Over time, identify some additional skills you would like to pick up, and develop a aplan to learn them in a reasonable time and fashion.

But don’t break what works…

Executive Teamwork Depends on the Executive First

With one of my clients, a start-up, we scoured the nation for the best and brightest — real “top of the food chain” sorts of executives. And we were pretty darned successful, since we hired a bunch of ’em.

All brilliant, and at the top of their respective games.

All came from intense, successful, team-driven environments.

All clearly had incentives — cash and equity — to work together as a cohesive group.

Seems like a recipe for some serious kumbaya, doesn’t it?? If it were, I wouldn’t have a story for my blog today…

It was nearly a disaster.

You see, though as individuals, they clearly and personally believed in the team concept, and promoted it — honestly — to all that came near, the truth is, they were each accustomed to being in the center of their respective teams, not linked arm-in-arm in a big, egalitarian circle. Not that they were insincere, because they certainly were not. In fact, we were all confused in trying to determine “what’s wrong with this picture??” It took a good deal of effort and introspection to discover the real issue.

So, the lesson learned is “don’t hire best-of-the-best” executives?? Of course not. But realize that in doing so, if we want several “best-in-class” horses to run with each other as one, we need to identify the concerns and issues up front, and possibly take some unusual actions to make this thing work.

Because 6 of the world’s best horses, pulling in 6 different directions, doth not a team make…

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