What is Gainsharing ?
By Angela Bowey
http://www.gainshare.co.nz
Gainsharing is a form of remuneration, but it is different from most other forms. The traditional model of wage or salary negotiation has employers seeking a 'good deal' in terms of performance and effort for the money they pay their employees; and employees seeking the best pay they can obtain for their work. This model is particularly evident in systems such as piecework, where the bargaining between adversaries is institutionalised into the rate-fixing procedures.
Gainsharing is based on quite a different philosophy. Like other incentive systems, it usually relates only to the incentive component of remuneration, not the whole package. But the principles underlying gainsharing differ fundamentally from systems where employer and employee are at odds in fixing a bargain, where the advantage to one is almost inevitably to the disadvantage of the other.
Philosophy:
the philosophy behind Gainsharing is basically that of making 'work' into a 'win-win' situation, where employees and the organisation* benefit directly from success of the operation . Direct financial benefits to both the employees and the organisation ensure that a good Gainsharing system produces a real win-win situation. This differentiates Gainsharing from other "motivational" programmes such as Total Quality Management (TQM), Self-directed Work Teams, Quality Circles, Job Enrichment, etc., where there is no link to remuneration and no financial benefit to the employees.
Process: A good Gainsharing system consists of a PROCESS of activity where:
groups of employees and their managers meet regularly to review performance and plan how to improve it;
this leads to improved company performance;
when measurable improvements are achieved and maintained there are regular payments to employees;
these payments are paid for out of the value to the company of the performance improvements that are achieved;
in this way both the company and the employees share the gains from making improvements and develop a shared interest in company success.
It is quite common for people to confuse the Gainsharing Process with the formulae that are used for calculating the Gains and the Shares. These formulae are NOT Gainsharing, they are only a part. They have to be right in the sense of being appropriate to the circumstances, but they are not in themselves sufficient to ensure success.
An organisation that is running sweetly, - with no real problems, could introduce Gainsharing formulae for the purpose of sharing the benefits of success with their employees. But where Gainsharing is being introduced to create benefits for the organisation as well as the employees, then it is the process of Gainsharing that is required, and not just a set of formulae.
This chapter will address the design of Gainsharing formulae and calculations and also the design of the process of Gainsharing.
There are no magic formulae for Gainsharing: fortunes have been made promoting one particular method of calculating the Gainshares or another. But at the end of the day, even if you get the formulae slightly wrong, a good Gainsharing process will allow your system to succeed anyway.
The magic of Gainsharing lies in the process. A procedure where managers and employees come together with the shared purpose of improving organisational performance and a shared determination to succeed. That's the magic!
Origins: Gainsharing started in the USA in the 1930's with simple Scanlon Plans where employees shared a proportion of the costs saved in some failing steelworks.
Joe Scanlon was a union organiser in a steel works, who put a proposal to the owners aimed at saving the jobs of his union members. The steelworkers agreed to work in a more efficient way in return for an equal share of the savings that this generated. The plan was so successful that it was copied in numerous other companies.
Since that time, generations of managers, consultants, and researchers have made improvements to Gainsharing and studied the results. Consequently, Gainsharing is now a process with 60 years of improvement behind the latest developments.
It is widely used throughout the world, especially in the USA, the UK, Australia and New Zealand. A recent USA publication (Hattiangadi, 1998) stated: In fact, gainsharing seems to be the most effective incentive reward scheme.
Through gainsharing and employee involvement, firms are able to achieve significant and sustained productivity gains, raise the real wages of workers, and improve firm performance. Research documents the significant productivity and real wage effects of gainsharing in firm case studies. Gainsharing's popularity is growing, and it is expected to increasingly be adopted in the service sector over time
Situations it is suited to: Gainsharing has proved itself suited to virtually all situations: It has saved declining companies and revived them. It has strengthened thriving companies and shared the benefits of success with their employees. It has made private sector companies more profitable. And it has made public sector organisations more efficient and effective.
Sometimes people think Gainsharing is not appropriate for employees working in not-for-profit organisations, such as Government Departments, public sector schools, hospitals, military and security services, etc. This is an error.
Gainsharing is very different from profit sharing. The Gains to be shared result from improved performance on any appropriate indicators for the particular organisation. These include such things as greater efficiency or costs saved, which are just as appropriate for non-profit organisations as they are for commercial companies.
Types of Gainsharing:
1: Using a financial measure only (e.g. Scanlon; Rucker);
2: Using a single measure of Productivity (e.g. "IMPROSHARE");
3: Using a Family of measures (as at Stagecoach Auckland).
Simple financial-measure Gainsharing (e.g. Scanlon, Rucker, etc): The following is an example of a very simple one-factor Scanlon Plan calculation. The only factor is 'costs saved' and this is calculated from the ratio of sales to labour costs. This is a fairly typical Scanlon Plan.
First of all calculate average monthly sales over a base period (usually 12 to 18 months). Suppose, for the purposes of our example, that this is $1m. Also calculate average monthly wage costs over the same base period (suppose these were $200k). It is normal to use the previous year or 18 months as the base period. Then work out the "normal" ratio of wage costs to sales (in this example = 20%) as derived from these base period figures.
Now suppose the first month's sales are $1.2m and the wage costs are $210k. The normal ratio (20%) would have produced wage costs of $240k, so there has been a $30k saving to be shared 50-50 between the company and the employees.
This kind of system was introduced successfully in the 1930's to save more than one inefficient steel plant in the USA from going bankrupt. It is a very crude kind of system, which makes no allowance for factors beyond the control of the employees. It has limited suitability for organisations today, but even simple Scanlon Plans have a good track record for reducing costs.
Rucker Plans came later than Scanlon Plans, but they are also very simple one-factor plans. Considering these simple early systems helps to get a basic understanding of the principles underlying Gainsharing.
Rucker Plan Calculation: Using a base period (previous 12 or 18 months) calculate the normal monthly sales, cost of bought in materials and services, added value, and wages. Suppose these are $1m, $500k, $500k, and $200k respectively. Then work out the ratio of wages to added value (in this example 40%).
Then suppose that in the first month of operation, sales are $1.2m and bought in items $600k; so the added value is $600k. This is an improvement of $100k on normal added value (which was $500k), and this improvement would be shared out such that 40% goes to the employees (using the ratio of wages to added value to determine the employees' share).
Again, this kind of simple one-factor system has many disadvantages and has generally been superceded today by multi-factor and "family of measures" gainsharing.
Productivity-measure Gainsharing (e.g. "IMPROSHARE" etc.)
A more recent development in Gainsharing is to base the calculation of gains on a formula for productivity improvement. The best known such scheme is the "Improved Productivity through Sharing Plan", or "IMPROSHARE". Here the productivity improvement of employees is estimated from the number of work hours saved for a given number of units produced. The value of the savings is shared between company and employees.
The disadvantage of this kind of system is that it is again just a one factor system, and does not take account of changes in prices, revenue volume, client satisfaction, client loyalty, and a range of other issues which may be very important in a particular organisation.
Family of Measures or Multi-factor Gainsharing: the most recently developed and the most successful form of Gainsharing.
These systems usually involve a mixture of short term and long term indicators, for example reduction in unit costs could be a short term measure, whilst "client loyalty" would be a long-term measure. Multi-factor plans also mix financial and non-financial measures, for example revenue per head might be one financial measure used, whilst reduction in lost time from injuries could be the non-financial measure. Factors like safety improvement emphasise common interests of company and employees.
Link to consultation: Research in Britain supported by findings in the USA shows that the best results from Gainsharing are obtained when it is introduced and operated in a consultative way. To quote a recent US study "productivity gains resulting from employee involvement alone range from 18 to 25 percent, with an additional 3 to 26 percent gains when used in combination with an incentive reward system such as gainsharing." (Hattiangadi, 1998 op. cit.)
In the late 1970's a major study was conducted at Strathclyde University in Scotland into 63 organisations that all introduced a new incentive reward system at about the same time. This is the only large-scale comparative longitudinal study of the effects of incentive remuneration systems in the UK. (Reported in Bowey, Thorpe, Mitchell, et al. "Effects of Incentive Payment Systems UK 1977-80")
The aim was to find out what systems or what features of systems were most successful. There were ONLY four factors that were significantly associated with good results, and they were:
1: Clear tight job specifications (this means that Gainsharing works best when the employees know clearly what is expected)
2: Group basis for the payment (systems based on Group Performance work better than individual incentives)
3: Payments vary with level of performance (good systems pay pro rata for partial performance as compared to on-off, all-or-nothing systems)
4: Extensive consultation (the most successful systems always had extensive consultation).
Gainsharing principles:
It is a pity that we still come across companies that have introduced what they call "Gainsharing" using out-moded designs and principles, with insufficient consultation and management support.
We strongly recommend that Gainsharing should incorporate the following principles:
- extensive consultation;
- a mixture of short term and long term measures;
- a mixture of financial and non-financial measures;
- designed to ensure there is always some payment if there is measurable performance improvement;
- based on regular meetings between employees and managers about performance improvement;
- with regular feedback on the performance measure results;
- and strong support from senior executives.
Gainsharing is essentially a process of activity, it is not just a method of working out and sharing gains. It is the activity of working in groups to identify ways of improving performance that is the key to major success with Gainsharing Plans the world over.
These groups should consist of a cross-section of employees and managers meeting regularly; they plan and implement the changes that produce improvements in company performance. These improvements produce better financial performance which results in the Gains that are shared with the employees provided they reach the agreed targets.
Designing the Gainsharing Process
Gainsharing is a name which covers a wide range of collective performance-related reward systems. However, there are two types of remuneration that should never be called "Gainsharing" because their design principles are at odds with the philosophy of gainsharing.
The first of these is any individual incentive remuneration. Gainsharing is essential a collective form or reward. And the second is profit sharing. Gainsharing motivates and rewards employees for improving their contribution to organisation performance and results. Profit is influenced by many factors that are beyond the control of employees, and that is not Gainsharing. Having said that, profitability can be one of the factors in Gainsharing, but not the sole measure. And individual targets may be superimposed on Gainsharing for senior executives.
The process:
There are five important steps to introducing a Gainsharing system. These are:
policy
consult
tailor
train
implement
Policy:
the employer must first consider some key policy issues that are fundamental to the design of gainsharing. The first of these concerns the level of commitment that the organisation is prepared to put into Gainsharing. It is vital that the senior executives understand what is involved and are prepared to put in the necessary resources.
Other policy issues concern:
- the objectives that the organisation is seeking to achieve by introducing Gainsharing;
- who should be included;
- how frequently the payments can realistically be made;
- whether Gainsharing will be part of the formal contracts of employment or separate;
- whether everyone should preferably be paid the same sum or a percentage of salary or some other basis of calculation;
- what division of the gains is preferred between the organisation and the employees;
- what to call the system
- how to ensure maximum commitment and motivation to the programme
- and other similar issues.
It is no use going into consultation with employees without considering these policy positions in advance, even when the ultimate result of consultation produces modifications and adjustments. The aim of this part of the process is to prepare the organisation's preferred outcome or solution for the policy issues and to identify any areas where the top levels of the organisation have very strong views. In other words, what is fixed and what is open for consultation?
Consult:
Once the policy issues have been considered the next stage is CONSULTATION, at all levels. Sometimes there are shareholders or Board members whose permission will be needed before Gainsharing can proceed. Certainly the organisation's own managers need to be committed to Gainsharing and they must be consulted at an early stage to secure this commitment. If there are union representatives, who speak on behalf of the employees, they need to be consulted. and so do the employees themselves. It is important to consult with supervisory levels, as they will be an essential element in success of Gainsharing.
The purpose of this consultation is:
- to explain Gainsharing and make sure everyone understands what is involved
- to listen to points of view and adapt the gainsharing system to suit this organisation
- to convince people of the benefits of Gainsharing
- to win commitment to making a success of the project
- to plan the next stages together.
It is valuable to have an experienced consultant to contribute towards the presentations which start off this consultation process, and to suggest suitable measures, advise against known pitfalls, and generally advise on keeping the process on track.
Tailor: the next stage in the process is tailoring Gainsharing by designing indicators and performance improvement factors which can be measured, which the employees can contribute towards, and which will lead to better performance for the organisation.
How to set targets: In order to set targets for Gainsharing, Identify areas in the organisations where some aspect of company performance needs to be improved.
Targets for gainsharing must relate to improvements that are important to the organisation. It is a common error to look for targets that are easily measured, or commonly used elsewhere, and not to give enough attention to finding the issues that are REALLY important to THIS organisation.
At the end of the day, Gainsharing will only be worthwhile to the organisation if it contributes to goals or aims that were high on the list of organisation priorities.
Another key feature of the proposed targets is that they must be something the employees can influence (not necessarily control, just influence). They also need to be measurable and relate to realistic comparators. Comparative information for improvement may be historical records of performance in this organisation, or bench-mark indicators from other comparable organisations.
A good way to set a target is to draw a line on a graph from where you are now to the performance level that is desired. Use a timescale that is acceptable and achievable, and then from that point onwards, level off the line to horizontal. This line can be your upper target for which 100% of the money available for this target is earned.
Note that this is a moving target up to the point where a satisfactory/good level is achieved.
The reason for continuing with the target even after the good/satisfactory performance level has been achieved, is because the organisation will continue to reap the benefits from this higher performance level so long as it is maintained.
Draw a parallel line below the target line, which represents the level below which no payment will be made from Gainsharing for that target. Common sense should be used in setting achievable targets whilst providing a level of challenge or "stretch", and it is important that the employees are prepared to work towards achieving the targets.
There should be about four or five targets, each counting equally towards the payment, each with an upper and lower bound to the range for performance and payment.
The next step is to work out how improvements in these performance areas could be measured. What records are already available? What new information-gathering procedures would be needed? Gathering measurement data and providing feedback to the employees should use existing reporting procedures where possible. This feedback is very important, and large charts showing progress are recommended. These should be placed in a prominent position, such as in the canteen/dining room, or near the entrance.
Develop a formula to calculate the dollar Gains that would be generated if target levels of improvement in the key areas were achieved. How much is a 3% improvement in this factor worth to the company, for example? Then this is the sum of money that would be available for sharing between the organisation and the employees if a 3% target is fully achieved. And it can be pro-rated back to zero for no improvement beyond current levels of achievement.
It is important to ensure that the sums of money that can be earned for 100% performance target achievement are sufficiently large to generate enthusiasm from employees, but not so large that the organisation might refuse to pay them!
In this way the links are designed between the targets, the Company improvements, and the payments to employees.
Consultative Groups:
A very important part of Gainsharing is to set up consultative groups to discuss and make improvements. These groups are drawn from the employees and their supervisors and managers; they meet regularly every fortnight or every month; they review the performance achievements to date, identify ways of improving performance and achieving the targets; and they plan and implement ways of making improvements.
Train: once the gainsharing details have been designed and agreed, the success of gainsharing then depends on adequate training for managers, supervisors, and those employees who will take part in the consultative process of improving performance.
There are three kinds of training that will be needed:
- training in understanding how Gainsharing will work in this organisation
- training in the skills needed to make Gainsharing successful
- training in performance improvement skills and knowledge
Training is probably the most expensive phase of introducing Gainsharing, but it is also one of the most important.
Implement: and the final stage is the implementation and monitoring. This involves holding the consultative meetings, measuring and giving feedback on performance, making sure the figures are being collected accurately, displaying the results in prominent places, making sure the initial assumptions were valid, making the payments, monitoring to see when changes are needed to the performance indicators.
An important part of the implementation is making sure that the resources and management support that are needed will be provided.
It is essential to have a consultative group review the system when it has been operating for about six months, to identify any anomalies, errors in calculation or in data collection, or unexpected factors. It is important that everyone understands that gainsharing is a flexible system, and that changes can be made at this stage if mistakes are identified. No system is every perfect, however good the advice.
Some eighteen months after implementation it will be time for a major review, to assess the results and plan improvements. This can ensure that Gainsharing is kept alive in people's minds. Experience shows that there are greater benefits to be obtained from "re-launching" gainsharing with modifications at the eighteen months to two years stage, than were obtained from the original introduction.
Results of Gainsharing:
There have been several studies of Gainsharing in the USA, all showing favourable results. The Puckett study (reported in Lesieur (ed) The Scanlon Plan....) in 1958 showed that in the first year of operation of Gainsharing, productivity improved by 22.5% on average, with a further 23.7% improvement (on average) in the second year.
Another study of 54 firms across the USA in 1981 included 36 firms with gainsharing (17 Scanlon Plans, 8 Rucker Plans, and 11 Improshare Plans). This study, by the General Accounting Office, showed that the labor cost savings attributed to Gainsharing plans averaged 17%. The longer the Gainsharing system had been in place, the greater the gains.
In 1988 Roger Kaufman obtained data from 104 US organisations that had introduced Improshare plans. These showed a median productivity growth in the first three months of 4.17%, with 5.9% during the first six months and 8.31% during the first year. Median increases over the first three years ranged from 5 to 15% during a period when there was an annual growth rate of 2% for all manufacturing industries. (Kaufman, "The effects of IMPROSHARE on productivity")
The American Compensation Association carried out a study in 1992 of 663 variable pay plans, which included 348 "Gainsharing" plans in one form or another. 68% of these plans were introduced with the aim of improving productivity. 55% of them provided information on the dollar value resulting from their productivity gains, and showed on average a 129% return on their investment in gainsharing. The average gains to employees were over $2,200 US per year.
Anita Hattiangadi reports on these and several other studies of gainsharing in the USA in her booklet published in 1998. In her conclusions she wrote: "The evidence presented here shows that through gainsharing and employee involvement, firms are able to achieve significant and sustained productivity gains and raise the real wages of workers. Although gainsharing may not be for every firm, when properly implemented, it can significantly improve firm performance."
The evidence in favour of gainsharing from the USA is overwhelmingly favourable. It may not be so widely used in other countries, but the results can be just as dramatic, as the following case studies from Auckland, New Zealand, show.
Stagecoach Auckland (formerly the Yellow Bus Company):
Gainsharing was introduced to Auckland's Metropolitan Transport Company in December 1995 after an extensive period of consultation throughout the organisation.
At the time this Bus Company operated a fleet of just under 500 buses in the city of Auckland, New Zealand. It carried people on 25 million passenger trips each year, covering a total distance of around 22 million kilometers annually. There were close to 900 employees, all of whom were included in the Gainsharing system except the top management team of 4.
Gainsharing was a major part of the company's strategy for integrating its team and achieving a common set of aims, which brought them from a conflict-ridden bureaucratic loss-maker to the highly successful situation in 1998.
Features of the Gainsharing system include:
Everyone except top management is included
There is a Gainshare Team at each site
a Central Consultative Group monitors results and advises on changes
Everyone can earn the same money for 100% performance at their Depot
Payments are made quarterly
Each depot is measured separately on 3 targets; plus 2 company-wide targets
Initially there was an extensive training program;
In 1997 we re-launched Gainsharing with one new measure and some changes to the basis of calculation (to localize it).
Consistent support was given for Gainsharing most especially from the top.
Before Gainsharing this company had an entrenched public service culture, with many employees openly expressing their hostility to the very idea of seeking a profit from running buses.
Operating costs were extraordinarily high, and the company was losing some fifty-one million New Zealand dollars per year (about $26mUS), this loss being subsidised from local taxes (rates). There was strong resistance to change, a very poor attitude towards customers, and a tradition of hostile bargaining over wages and annual strikes at negotiation times.
Over a period of three years this culture was turned around and the company was sold in 1998 as a profitable enterprise to Stagecoach for a sum in excess of $100 million NZ. Gainsharing was a cornerstone of the management policies which brought about these changes.
Results from Gainsharing in this company include the following:
-greatly increased commitment to the Company
-increased customer focus
-improving contract negotiations with acceptable outcomes
-excellent improvements in performance target results
-valuable savings initiated by employees
The specific targets and their initial standard required (the 1st targets) are shown below, along with the performance levels being achieved in 1998.
Factor
Missed trips
Attendance
Lost Time Injuries
Bus Changeovers (on road) 1st target
0.1%
97.5%
5.3 hrs/100k
7.5% fewer Currently achieving
0.05-0.1%
97-98%
2 hrs/100k
35% fewer
New Zealand Can (a company in Auckland manufacturing cans for beer, Coca-Cola, etc.) This company introduced Gainsharing based on five factors, the percentage of metal spoilage, the number of cans produced per hour, implementing a programme for prevention of hazards, improved customer satisfaction, and implementing the involvement process.
The results over the first 18 months were:
- 25% reduction in metal spoilage
- 23% improvement in cans produced per hour
- Accidents became very rare and workplace cleanliness improved dramatically
- The company was recognised as a 1st class supplier by its major client
City Design (a professional consultancy organisation in Auckland) introduced Gainsharing based on three factors, increasing revenue from external clients, profitability, and customer satisfaction.
The results over the first (trial) twelve months were
- The revenue from external work doubled to over $1.6m
- Revenue per head increased by over 7%
- Controllable overhead costs were reduced substantially
- Customers expressed an 80% loyalty factor
- Substantially better ratings from customers on a wide range of indicators.
There were problems with profitability due to factors beyond the organisation's control, but because of its multi-factor nature, the City Design Gainsharing System still succeeded in motivating excellent results and rewarding staff for the performance improvements which were achieved.
Conclusions and Recommendations
The potential benefits of Gainsharing can be summarised as:
- the organisation and its employees make gains
- they develop a shared interest in the success of the organisation
- they generate improvements in key areas
- improvements in productivity, profitability, and reduced unit costs follow
- employees learn how the organisation works, financially
- the process can greatly improve communications
- strengthen involvement
- and help all to work together as a team.
The steps in a draft plan would include:
The future with Gainsharing should include:
- all working together
- improving the organisation
- reducing costs
- increasing revenue
- making the gains
- sharing the benefits
