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

As a thought leader in your industry, you face challenges every day that test your creativity, resilience, and ability to lead effectively. You need a partner who understands your unique challenges and can help you overcome them.

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.