Gainsharing

By Walter Weckmann


Gainsharing: A technique that compensates workers based on improvements in the company's productivity. (HR-Guide.com, 2004)

Gainsharing is a bonus incentive system designed to improve productivity through employee involvement, with the gains from "working smarter" shared between the employer and the employees according to a predetermined formula (AFSCME, 1995). It includes (1) a financial measurement and feedback system to monitor company performance and distribute gains in the form of bonuses when appropriate, and (2) a focused involvement system to eliminate barriers to improved company performance (gainsharing.com, 2004). Gainsharing, in one form or another, has been around since the 1930's.

Gainsharing most definitely is NOT profit sharing, although there are some similarities. Profit sharing is generally tied to the company's overall performance, whereas gainsharing focuses on the company's most vital performance metrics. Payments come out of increased revenue or reduction in costs. Profit sharing typically runs on a quarterly or annual cycle, whereas gainsharing generally cycles on a monthly basis. As a result, more frequent performance discussions take place; with the added benefit that mediocre or poor performance is addressed sooner. While there are both similarities and differences between profit sharing and gainsharing, this does not mean that the two programs must be implemented exclusively of one another. Many companies that use profit-sharing use gainsharing also and the two systems work well together.

"Gainsharing has a simple, but essential purpose. To involve staff in helping to improve our business." - Barry Turley, former CEO The Yellow Bus Company. There were many changes introduced in the Yellow Bus Company as a direct result of Gainsharing. They were so successful that in late 1998 the company was sold to an international company, Stagecoach, for a sum in excess of one hundred and ten million dollars. Not bad for a company that a few years before had been losing nearly a million dollars a week! (GainSharing Online, 2004).

Gainsharing works best when company performance levels can be easily quantified. Employee involvement significantly enhances the effectiveness of incentive pay. When used simultaneously, productivity gains from combining these techniques can exceed gains achieved separately. Gains must be verifiable, and clearly stated at the outset. Table 1.1 demonstrates how gains have been defined in various organizations.

1.1 Examples of how gains are defined in various organizations (AFSCME)

Government

The Indianapolis Department of Public Works (DPW) agreement with AFSCME Council 62 and Locals 725, 1887, 1831, 3131, and 3766 defines gain as the difference between bid operating costs and actual annual operating costs. Service improvement, defined as a reduction in the total number of annual calls, is also considered in computing gains.

The City of Loveland, Colorado's gainsharing program, which has been in effect since 1982, set three distinct criteria in defining gain: city revenues had to exceed actual expenses; actual expenses had to be less than or equal to the prior year's expenses on a per capita basis; and there had to be an acceptable level of satisfaction with city services as determined by a citizen satisfaction survey performed each year.

School
The Monona Grove, Wisconsin, School District agreement with AFSCME Council 40 and Local 60 defines gain as the excess of food service revenues over food service costs for a single school year. Language proposed in other localities defines gain as the difference between "allowed," or budgeted, costs and actual incurred costs.
Military
An agreement between the Sacramento Air Logistics Center at McClellan Air Force Base, California, and the American Federation of Government Employees (AFGE), involving a program that ran from 1988 to 1993, defined gain as expected costs minus actual costs, adjusted for inflation, technology changes, and workload changes.

Gainsharing is used in more than a quarter of Fortune 1000 companies, as well as many smaller firms and public sector organizations (GainSharing Online, 2004). In 1991, a study by the U.S. General Accounting Office of 76 companies found that with gainsharing, the average company improved productivity by 17 percent in the first year (Imberman, 1995).

New Zealand Can Ltd. New Zealand Can Ltd was a part of the AMCOR group. This plant, in south Auckland, New Zealand, employed around 70 people, and made aluminum cans for drinks like coca-cola and beer. Gainsharing was introduced just before Christmas 1995, and on Christmas Eve, 1996, the plant made a record number of cans in a day. The gainsharing process produced considerable benefits in terms of employee concern for the success of the business and greater understanding of the priorities for achieving success. It also rewarded the company's employees fairly for their efforts.

Chelsea Sugar Company Ltd. Gainsharing was introduced early in 1996 as part of a program of change which included introducing self-managed teams. An objective for Gainsharing was to support the restructuring and reward employees for their cooperation and commitment. The Chelsea Sugar Gainsharing System produced significant improvements in several key indicators for success (GainSharing Online, 2004).


References

Bowey, Angela (n.d.) How Does Gainsharing Work? Retrieved April 11, 2004 from http://www.gainshare.co.nz/

Gainsharing Q&A. (n.d.) Retrieved April 11, 2004 from http://www.gainsharing.com

HR Guide to the Internet: Compensation: Incentive Plans: Gainsharing. (n.d.) Retrieved April 12, 2004 from http://www.hr-guide.com

Gainsharing. (Summer 1995) Retrieved April 12, 2004 from http://www.afscme.org/

Imberman, Woodruff. (1995) Improving Plant Performance Through Gainsharing [Electronic Version.] Journal of The Minerals, Metals & Materials Society 47 (7) (1995), p. 57

Author Note

Walter Weckmann
Bank of America
walter.o.weckmann@bankofamerica.com

 

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