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What Is Gainsharing?

Employee incentive programs can encourage employees to perform at their best to benefit your business. Gainsharing is one type of employee incentive program that ties incentive pay to performance improvements. Read on to learn more about what it is and explore the pros and cons of implementing a gainsharing plan.

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What is gainsharing?

Gainsharing is a type of employee incentive program that rewards employees when the organization or the individual employee achieves specific operational improvement goals. Depending on the business, these goals may relate to:

  • Company spending
  • Customer service
  • Efficiency
  • Productivity
  • Quality control

Related: Employee Incentive Programs: Examples for Your Business

Types and examples of gainsharing

There are four main types of gainsharing: Scanlon, Rucker, Improshare and custom.

The Scanlon gainsharing plan

The Scanlon gainsharing plan encourages employees to increase their output, emphasizing the quantity of goods produced. It rewards employees when they produce more of something or complete a task more frequently.

Here’s an example of Scanlon gainsharing. Say an employee at a tool and die shop earns $32 per hour. When the program begins, they typically make 20 tools per hour. After the gainsharing program, the employee begins producing 28 tools per hour. Now, their employer is able to provide eight more tools per hour to their customer, leading to a gain. The employee will receive a portion of the money gained in the form of incentive pay.

The Rucker gainsharing plan

The Rucker gainsharing plan emphasizes quality over quantity. It provides incentive pay when an entire organization makes improvements in areas like waste or defect reduction. This type of gainsharing is a good choice for organizations focused on delivering a better product or reducing production costs.

For example, say a company currently produces an average of 40 defective parts per day. Because these parts can’t be sold, the labor and materials that went into making them end up wasted. After the company establishes aRucker gainsharing plan, its employees focus more on quality control during the manufacturing process. As a result, the company produces an average of only 25 defective parts per day during the next quarter. Employees would then receive a portion of the gains that the company would benefit from by making 15 more functional parts.

The Improshare gainsharing plan

Improshare gainsharing rewards employees when the average amount of time that it takes for a company to produce something decreases. Like Scanlon gainsharing, it places emphasis on quantity, but it uses the number of hours the production process takes rather than the number of products produced per hour as its basis.

For example, imagine a company that manufactures custom bicycles. It typically takes the company 4 hours to make one bike from start to finish. The company implements an Improshare gainsharing plan, and its employees work together to improve efficiency and productivity. Six months later, the average amount of time it takes to produce one bike is only 3 hours. Employees would then receive incentive pay based on the increase in productivity.

The custom gainsharing plan

A custom gainsharing plan is one that a company develops on its own. To do so, the organization first establishes a measurable operational goal and then establishes an equation for calculating thegainshare payment.

As an example, say a hospital hopes to improve patient satisfaction. Each quarter, the hospital sends out patient surveys that it uses to evaluate overall satisfaction. It establishes a gainsharing plan based on the results of this survey. At the start of the program, the most recent overall patient satisfaction score was 85%. Six months later, the score increases to 90%. Employees would then receive an incentive pay based on the 5% increase in satisfaction rates.

Benefits of gainsharing

Here are some of thekey benefits of gainsharing.

Puts focus on productivity and efficiency

Gainsharing motivates employees to perform at their best. When they know that they will be financially rewarded for their efforts, employees may be more willing to go above and beyond rather than doing the bare minimum.

Aligns employees with the organization’s success

With a gainsharing plan, employees benefit when the company is successful. They feel more invested in helping the company achieve its operational goals.

Increases employee retention

Gainsharing plans allow employees to see why what they do every day matters. When they understand that they are valuable to the company, they’re more likely to feel satisfied with their positions and less likely to look for employment elsewhere. Increased compensation through gainsharing can also lead to improved employee retention rates.

Related: Building a Compensation Strategy for Your Business

Fosters teamwork and creative-thinking

When gainsharing plans focus on company-wide or department-wide improvements, employees must work together to accomplish the goal. In this way, gainsharing incentivizes teamwork and encourages team members to think creatively to come up with ways to improve processes.

Aids in recruitment

Having a gainsharing plan can set your organization apart from competitors that don’t offer similar incentive pay. Your program becomes a selling point that you can emphasize on job listings to encourage quality candidates to apply for your open positions.

Drawbacks of gainsharing

Gainsharing programs do have some potential drawbacks.

Not tied to profitability

Many factors contribute to a company’s profitability. Because gainsharing only focuses on one aspect of operations, it’s possible for the organization to achieve a goal even if its profits don’t increase during the same time frame. During times of financial hardship, organizations may struggle to continue making gainsharing payments.

Increases in workplace stress

The downside of encouraging employees to increase their productivity and efficiency is that doing so may raise levels of workplace stress. With a gainsharing plan in place, employees may feel like they have more on the line, so it’s important that the organization develops programs to help employees manage stress.

Emphasis on the group over the individual

Many forms of gainsharing focus on the efforts of a group rather than each employee. As a consequence, the individual merit of top performers may go unrecognized. At the same time, employees who aren’t meeting performance standards may be able to coast by unnoticed. Over time, this can lead to resentment between team members and poor morale.

Singularity of focus

With gainsharing, employees may focus on a single metric at the expense of others. For example, they may ignore workplace safety rules to increase productivity, resulting in more on-the-job accidents, or they may sacrifice the quality of goods produced to boost hourly production rates.

Gainsharing FAQs

How is gainsharing different from profit sharing?

Profit sharing is when you give employees a percentage of profits that your organization has made at the end of the year, tying the financial success of your business to your incentive program. With gainsharing, employees receive gainshare bonuses when the organization meets or exceeds operational benchmarks. Gainsharing connects your incentive program to things like productivity, quality, customer service and spending rather than profits.

What is the difference between gainsharing and shared savings?

In health care, a shared savings program is when providers receive a bonus from insurance companies for consistently recommending the lowest-cost services to their patients without deviating from the traditional standards of care. A gainsharing program in the health care industry involves the hospital, clinic or private practice compensating its employees when operational goals, such as improving patient satisfaction rates or reducing costs, are met.

Will a gainsharing plan work for all organizations?

For a gainsharing plan to be useful, an organization must have a way to measure the efforts of its employees. Most businesses can develop a method of measuring performance compared to pre-established goals. However, some organizations within some industries will find this easier to do. As a result, gainsharing is most commonly used in the service, manufacturing and health care industries.

How can you make a gainsharing plan launch successful?

A successful gainsharing plan has a clear, measurable goal that directly benefits the organization. When establishing a program, consider getting input from your employees and your management team to ensure the program sets realistic expectations. Once you’ve created your plan, share the details of the plan with managers and supervisors to help them understand the benefits of the program and how their teams can earn the incentive pay. Then, they can motivate and coach their teams to help them strive toward the goal.

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