The Power of Gainsharing

You’ve seen the signs over the last few years – employees not cooperating, resulting in inefficient operations. Incentive plans like “Employee of the Month” and bonuses are given to improve employee sentiment. However, it seems like nothing has changed, and in fact things are only getting worse.

The problem may be that your incentive system may be inadvertently sabotaging your group’s performance. So how can you improve individual performance and also foster a collaborative environment?

One idea – implement a gainsharing program.

So what is a gainsharing program? At its simplest level, it’s a group incentive plan designed to improve company performance. By designing a plan that rewards employees for developing and sharing ideas to increase company productivity, employees and management are working towards the common goal of improving the company. Typically, companies will reward employees on an individual basis. While this may improve the productivity of one employee, he or she may not want to share their secret process or tool that increases their performance. Employees will fight to maintain a competitive edge over each other, when the real competitor should be their rival down the road. When this happens the company suffers.

Gainsharing programs by design are meant to be simple in order for there to be complete understanding by all parties. Metrics used to measure performance are in step with the activities of employees. For example, a reduction in total worked hours to produce a given volume of goods or services. Unlike financial measurements, which can be complex and subject to manipulation, these are straight forward and easily understood by employees. Their direct actions are measured in a way to positively affect the bottom line a company. If employees don’t see the value or don’t understand how they earn a bonus, the gainsharing program will likely fail.

The focus on gainsharing programs is to tackle the biggest costs first. If a company spends 90% of their product cost on material, then a gainsharing program designed to reduce material waste and rejects would be appropriate. If the costs are more evenly mixed than the previous example, then a gainsharing program designed to equally incent both actions may necessary e.g. reduce hours worked and material waste for a given product.

At the outset, it may seem impossible if an organization has a lack of good records on activity. Even at the base level of measurement e.g. total product cost, a gainsharing program can be put in place. Over time, information tools can be put in place to better measure activities. As the more useful information becomes available, a refinement of the gainsharing program metrics may be possible.

Although it is not unheard of for companies to initiate a plan for the entire company, gainsharing plans are typically done for a certain set of employees within one set location. For example, sales staff are typically paid on commission, so it may not be necessary to include them unless there is evidence of overuse of company resources and time to acquire a new client. Back office staff may be rewarded by a gainsharing program in such a way that fits their supportive role to the operations team.

Each company is unique, so it is important to keep that in mind when tailoring the gainsharing programs. One area of importance can be the current employee-management relationship environment. If there is a lack of credibility by the managers to their employees, there may be further prep work needed to be done. Other factors include determining why the gainsharing program need is there in the company – a gainsharing program takes significant effort by all parties and may not be necessary for small issues. Also, review the data for accuracy before designing a formula. The article “All You Ever Wanted to Know about Gainsharing but Were Afraid to Ask” by Woodruff Imberman provides great insight into what a gainsharing plan is and how to implement it.

As employees improve over time, the new base efficiency can be raised to further improvement. One way that is fair to all parties is “ratchet” the base e.g., add 50% of improvement from last year to this year’s base. This allows the base to grow without employees feeling like their efficiency will punish them in the future. Also, one-time improvements in new equipment or reductions from government regulations should be considered when setting the new base.

Although a gainsharing program is designed to benefit everyone, it shouldn’t be presented as an easy fix. Employees that are given unrealistic expectations about their new business structure may feel less motivated to fully buy in when they do not see the desired results. Management across the board need to be active in promoting and nurturing improvements in the organization, not sit on the sidelines.

Perhaps the idea of creating a collaborative bonus structure has come up in the past, but the structure hasn’t been there to create it. There are numerous materials online that go into detail on how to create a proper gainsharing program. The key is to be diligent and patient with the program – your company will be rewarded by their efforts. One of our clients implemented a gainsharing program 18 years ago, and has seen a vast improvement in productivity:

“The program we implemented in 1998 is the best management and employee motivation tool we could have implemented. There is a strong correlation between the installation of the gainsharing program and the success of the company during this period. After running this factory for 31 years I believe gainsharing is the single best thing I did for the company.” – Gary Hicks, General Manager, Dongan Electric Manufacturing Company

If you’re ready to see your company move in the right direction, but may not have the right systems in place, give us a call to help set you on the path towards excellence.