Gain-sharing: The fuzzy facts

By Laura Bock


Gain-sharing sounds like something soft, fuzzy, and socialistic. Beware the name. The blunt truth of the matter is that gain-sharing is part of an incentive system partnering productivity with paychecks, connecting cost-saving with cash. Gain-sharing salutes the maxim that 'you get what you pay for'.

A close cousin of profit-sharing, gain-sharing empowers those who are removed from decisions which affect profits - decisions like going after a new contract, or introducing a new product line. Through quantifying the gains realized by the company as a direct result of their efforts to save costs or increase productivity, 'rank and file' employees have the opportunity to directly influence their paychecks.

For instance, say Pat makes widgets for Acme Inc. Productivity is good, but the widget-reject rate is too high. Acme wants it below 10%. Pat and the other widget makers toss some ideas around, then hit on a way to keep productivity the same yet spot problems before it's too late to fix them. Rejected widgets drop to 8%. Come payday, all the widget-makers' checks are a lot sweeter. Seems pretty straightforward.

In principle, it is straightforward. The underlying theories and mechanisms are a little more convoluted. To get a grasp on these particulars, a short trip back in time is in order.

The 1930s were tough years for a lot of Americans. One upside for the average American worker was that, after a hundred-year rough start, labor unions in the U.S. gathered strength and influence (1). In the midst of this, Joseph Scanlon was developing 'The Scanlon Plan', versions of which we know today as gain-sharing.

At the time, Joe was working as a cost accountant for a small steel mill in Ohio. Things weren't good. The company was on the brink of bankruptcy, and something needed to be done. Figuring that there had to be something better than the popular carrot-and-stick style of individual incentive systems, he devised a way to reward folks for putting their heads together (2). Collectively, they could save the company.

The plan was that the workers and the higher-ups would get together to target the areas where costs could be saved. Then, they'd come up with a way to measure success and reflect that in the workers' paychecks. Most importantly, it'd be up to the workers to come up with ways to cut costs. Tall order - this was calling for the union and management to not only work together, but believe in each other. But it worked.

Joe soon became local union chapter president, and later Research Director for the United Steelworkers of America. His efforts caught the attention of Frederick Lesieur, an apprentice machinist at a tool company in Massachusetts (3). Fred was instrumental in introducing the plan at his factory, and became local union president himself. In the meantime, Joe had also caught the attention of Douglas McGregor, a professor at MIT. Joe joined MIT and further developed his plan until it became known as 'The Scanlon Plan'. By 1950, Fred had quit his factory job, and joined Joe at MIT.

With 1956, came Joe's death. Undaunted, Fred picked up the reigns and continued working with companies interested in the innovative approach. 1958 saw MIT Press put out Fred's book "The Scanlon Plan: A Frontier in Labor Management Cooperation". That book has been reprinted ten times.

Douglas soon had a book published, too. McGraw-Hill printed "The Human Side of Enterprise" in 1960. In it, he proposed that there were two extremes of management, represented as X and Y (4). Theory X held that managers are the authoritative taskmasters needed to drive an unwilling workforce. Theory Y maintained that workers are naturally self-directed and ambitious, so managers need only reward desired performance. The Scanlon Plan was cited as an exemplary alignment with Theory Y. The book was seminal.

Joe, Fred, and Douglas went down in the annals as movers and shakers in the history of management theory.

Add Allen and Mitchell to that list. In the 1950s, Allen Rucker developed what he called 'The Rucker Plan' - a gain-sharing plan which is generally considered a little less elaborate than Joe's (5). Thirty years later, in 1981, Mitchell Fein, an industrial engineer, would publish an account of his version. He called it 'ImProShare', or "Improved Productivity through Sharing', and it placed emphasis on increasing production, rather than decreasing costs (6).

Nice story. So what?

If you're in the field of performance technology, this stuff is right up your alley. Say the training director of a design and manufacturing company calls you up.

"Costs are skyrocketing," she announces, "Our engineers are calling for things that just plunge us into the red. We've got to do something. Sure, we have a profit-sharing program, but clearly they're not seeing the bottom line. I'm thinking training. What do you think? A one day workshop?"

Sound familiar?

Andy, an engineer at a ship-building company who'd rather his bosses not see his name in print, has heard this refrain before.

"What good is profit-sharing if I can't control how the company spends money?" he asks, throwing up his hands, "When I started, it seemed like a great idea. But then I saw us hiring freelancers with crazy fees, and taking on contracts where we under-bid. Now, I'm racking up my over-time. My bottom line is the only one I can control."

Sound like a problem solved by a punchy one-day workshop?

Clearly, Andy's company has several issues to tackle, but let's stay focused. Cost-savings are the issue at hand. Let's say you toy with the concept of gain-sharing - seems to fit, after all. There are three tenets which make for a successful program (7):

  1. Commitment: management has to be onboard, but their involvement ends there. This is about employees identifying and enacting change.
  2. Employee Involvement: teamwork is key. No stories of singling out idea-generators, because this will become a political event. Everyone gets credit. Furthermore, it is essential that everyone perceives the system to be fair (8).
  3. Communication: this is the tough one. Full access to financial data, like customer orders and quality reports, for 'ordinary' workers calls for a major cultural shift in most companies. If this is to work, though, everyone needs to be 'in the know'.

Alright. This sort of thing would need to go beyond the training director who gave you a call. This sort of thing would need to go straight to the top.

Before setting your sights on the boardroom, best to arm yourself with some empirical data. That information is a little sobering:

  • In a 1993 study (9), of 59 manufacturing firms seriously considering implementing a gain-sharing plan, only 17 (or 28.8%) actually did.
  • That same study showed that if managers already perceived employees to be cooperative, the firm was more likely to implement gain-sharing.
  • Analysis of a 1992 study (10) revealed that dependence on external consultants to supporting gain-sharing programs caused problems in the long run.

All this makes gain-sharing sound like organizational development more than performance technology. Joe, Fred, and Douglas might agree. Researchers, on the other hand, aren't sure if it's sustainable (11). Then the question is where does performance technology fit in?

Let's toss some ideas out there. Say your client company has implemented gain-sharing, but it's just not working as expected. Could communication be the problem? Might you be able to come up with systems to support that communication?

Maybe your client company is more like Andy's ship-building company - the profit-sharing model has limited, if any, employee support. Could that model be modified to emphasize productivity, rather than profits? Or if the model's not the problem, could employees be given evidence of how their work directly impacts profits?

Maybe your client company has no version of gain-sharing plan in place, and no intention of introducing any such thing. Meanwhile, costs are ballooning and productivity is sagging. Are there any best practices you can winnow from gain-sharing plans which might help? Can some sort of accountability systems be introduced?

Lots of questions, but no pat answers. Take heart - performance technology isn't about 'pat answers'. It's about good questions, blended solutions, and creative insights. Gain-sharing plans, or versions thereof, can be part of a blended solution. At the very least, the philosophy behind it - that the gains of the whole are a direct result of the efforts of many - can offer creative insight into whatever solution is developed. No matter where you slip gain-sharing into your performance technology toolkit, remember that it was created by an accountant fighting off a factory's bankruptcy. Gain-sharing isn't about fuzzy feel-goodness; it's about facts and figures.

References

Endnotes

1 ALF-CIO's 100 years of struggle and success (n.d.)

2 McGregor in Lesieur (1958)

3 Anonymous (1991, April 10)

4 University of Western Ontario (2001, November)

5 Economist.com (n.d.)

6 Kaufman (1992)

7 Anonymous (1998)

8 Cooper, Dyck, & Frohlich (1992)

9 Collins, Hatcher, & Ross (1993)

10 Dong-One (1999)

11 Ibid.

Bibliography

AFL-CIO's 100 years of struggle and success. (n.d.) Retrieved January 27, 2004, from http://www.aflcio.org/aboutaflcio/history/history/100years.cfm

Anonymous, (1991, April 10). Obituaries: Fred Lesieur dies at 70. TechTalk: MIT News Office. Retrieved January 29, 2004, from http://web.mit.edu/newsoffice/tt/1991/apr10/410obits.html

Anonymous (1998). Gainsharing: how it works. Quality, 37(5), 32.


Collins, D., Hatcher, L., & Ross, T. (1993). The decision to implement gainsharing: the role of work climate, expected outcomes, and union status. Personnel Psychology, 46(1), 77-105.

Cooper, C., Dyck, B., & Frohlich, N. (1992). Improving the effectiveness of gainsharing: the role of fairness and participation. Administrative Science Quarterly, 37(3), 471-91 .


Dong-One, K. (1999). Determinants of the survival of gainsharing programs. Industrial & Labor Relations Review, 53(1), 21-42.


Economist.com (n.d.). Rucker plan. In Bloomsbury Business Encyclopedia Dictionary Online. Retrieved January 31, 2004, from http://www.economist.com/encyclopedia/dictionary.cfm?id=IDA31C94EF-8CAA-11D5-8498-00508B2CCA66

Kaufman, R. (1992). The effects of ImProShare on productivity. Industrial & Labor Relations Review,45(2), 311-23.

McGregor, D. (1958). The significance of Scanlon's contribution. In F. G. Lesieur (Ed.), The Scanlon plan: a frontier in labor-management cooperation (pp. 7-15). New York: The Technology Press and John Wiley & Sons.

University of Western Ontario (2001, November). Douglas McGregor. In Business Library. Retrieved January 27, 2004, from http://www.lib.uwo.ca/business/dougmcgregor.html

 

Author Note

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