Incentives to motivate employees have been around for a long time, but few offer the flexibility and potential of what is commonly referred to as “gainsharing”.  Gainsharing is a program that rewards a company’s workers for increased production, improved quality, cost reductions, and other achievements through the payment of regular cash bonuses.  Properly conceived and implemented, a successful gainsharing program can produce significant benefits for a company.

Typically, an effective gainsharing program can increase productivity by as much as 15%.  Equally important, gainsharing establishes a direct relationship between a company’s performance and what it pays its employees.  When business is soft, bonuses are reduced or even eliminated, but when conditions are good, the work force shares in the company’s gains.

How it works

The first requirement for a successful gainsharing program is that it establishes easy-to-understand performance standards for particular work tasks.  These performance standards determine whether employees in a specific job earn a cash bonus.  Gainsharing bonuses are usually paid monthly because employee motivation is strongest when employees receive their bonuses as soon as possible after they’ve achieve their performance goals.  To draw attention to the unique nature of a gainsharing bonus, it’s usually paid separately from the payroll check.

It’s these two aspects of gainsharing – frequent payments and a direct link to job performance – that make a gainsharing plan different from a profit-sharing plan.  In most profit-sharing plans, workers don’t receive benefits until retirement, and the company’s annual contribution to a profit-sharing plan is often taken for granted as an automatic donation rather than a personal reward for good work.

Setting performance standards

The formula used to determine a gainsharing bonus must be acceptable and equitable to both the company and its employees.  The best way to achieve this is to base the formula on a reporting system that has proven itself to be reliable.  Two major standards must be set:

  1. The size of the bonus, which can be established in several ways – for example, the ratio of labor costs to sales.
  1. Justification of the bonus as a true reflection of the company’s improved performance – for example, production units per hour.

Bonus performance standards should be based on the company’s reasons for adopting a gainsharing plan.  Typical standards involve ratios between various factors such as production value, cost of quality, units of output, labor hours, and cost of goods.  Improvements in any of these areas should be measurably beneficial to the company’s performance.

It’s important not to build too many standards into a plan because a plan must be easy to understand so that employees will respond to it.  Standards must be chosen carefully so that bonuses are paid only if the company benefits financially when its employees meet the standards.

Getting the most out of gainsharing

  • Gainsharing works best in companies that have fewer than 100 employees. Although it can also work in larger companies, gainsharing is more difficult to administer and implement in larger companies.
  • A gainsharing plan is more effective if it begins at a time of the year when a company is traditionally busy. This permits employees to achieve results and earn gainsharing bonuses right at the beginning of the plan.
  • Gainsharing will work best in a free-standing facility where the production mix is not too broad.
  • Management should design a gainsharing program so that while both the company and its employees benefit, higher productivity does not result in layoffs.
  • Gainsharing plans should not be used in companies where employee relations are poor, where operations are highly automatic, where departments work independently of one another, or where certain workers in a particular department won’t be included in the program.