What common condition is necessary for gainsharing to be successful in an organization?

(introduction...)

UNIT 1: LEARNING OBJECTIVES

Once you have learnt this unit, you will be able to:

1. Understand and explain the Gainsharing concept, its role and its main principles.

2. Understand the main reasons why organizations have introduced Gainsharing.

3. Explain the most important features, components and conditions for success of Gainsharing.

4. Make a clear distinction between Gainsharing and other payment schemes.

What organization would not like to combine communications, teamwork, common goal orientation, performance improvement, employee involvement and financial rewards into one system? This is exactly the reason why more and more organizations are turning to various forms of Gainsharing.

1.1 What is Gainsharing?

Gainsharing is a group incentive or bonus system that shares improved performance with most or all employees of a unit and thus motivates higher employee involvement. Some people include many systems under the heading of Gainsharing, such as profit sharing and small group incentive plans, whereas others exclude these systems.

In earlier days, the boundaries between Gainsharing and other motivation schemes were much more clearly defined, since many applications were “packaged” approaches and known by such names as Scanlon, Rucker and Improshare. Although the concept can be traced back to the 1940s and 1950s in both Europe and North America, it is only during the past 10-15 years that much interest has really been shown in the concept. In some firms, this interest was the result of increased competitive pressures; in others, people wanted to change their management system towards more participation, and thought a bonus was an important component of that change (e.g. Japanese firms, Volvo); still others wanted to link pay to organizational performance. We feel that these factors will continue to accelerate the installation of Gainsharing in many different applications and situations, with a wide range of motivational influences. Today, the trend throughout the world is more towards customized plans to meet the needs and degree of sophistication of a particular organization. As the Gainsharing concept has expanded, its flexibility and success have increased, and interest in customized approaches has probably increased too, even though these are perhaps more difficult at the outset. Most Japanese firms have a form of Gainsharing based on profits that includes most employees, but it is normally a form of contingent compensation.

Some important common characteristics of Gainsharing are as follows:

1. Performance improvement. A goal of all Gainsharing plans is to improve performance. This performance may be measured narrowly, using total actual time versus standard time, or physical measures of output versus physical measures of input, all the way to broad calculations based on improving profits or return on investments.

2. Gaining upon something. In the past, most Gainsharing plans were based on some measure of previous performance which made it easier to sell to employees. There seems to be a trend today towards basing the bonus on a combination of past and expected performance.

3. Sharing with all or most employees. In the past, Gainsharing plans would include select groups of employees such as hourly or factory employees, but the trend today is towards including almost everyone.

4. Includes employee involvement. Most private and public sector plans include considerable employee involvement since the emphasis is on developing better cooperation, communications, work and goal attainment. The concept of “working smarter” normally requires some form of employee involvement or empowerment.

5. Site specific. Although exceptions can be found, most plans are site specific, rather than including many locations in one plan.

6. Long-term oriented. Most Gainsharing plans are not installed for short-term results; the employee involvement aspects make this difficult. Few are installed on a pilot, small department basis for the same reasons.

7. Not individual oriented. Since Gainsharing is group oriented, individual and small group-oriented systems are typically excluded. Before installation, most firms eliminate individual-oriented systems.

1.2 Why organizations implement Gainsharing

Many forces are at work to promote Gainsharing's growth. These include more competition; more push for quality and cost reduction; more knowledge and resources to help; more flexible formulas; more employee involvement; more responsive managers; and a fairly high success rate of those organizations that have installed Gainsharing. Most interested firms can be grouped into three broad categories based on the reasons why they install Gainsharing:

1. Troubled firms. The need to change is apparent.

Situations:

- poor performance;
- poor labour-management relations; and
- deteriorating markets.

Important variables:

- need to change is apparent: can everyone agree on the need to change?
- desire to implement new philosophies and actions; and
- often a new management.

2. Successful firms. They install Gainsharing because they believe in sharing, more employee self-control, employee involvement, and so on.

Situations:

- good past performance:
- good potential for growth:
- good pay;
- good communications (e.g. frequent meetings); and
- good involvement and/or empowerment.

Important variables:

- belief in fairness of sharing;
- past success with various programmes;
- high levels of commitment and effort;
- belief in capitalism and effect of money;
- common goals; and
- search for continuous improvement and change.

3. Contingent compensation firms. More and more firms are starting to tie pay or part of it to organizational performance.

Situations:

- new business may be going elsewhere;

- often part of union contract;

- would make wages more variable;

- sometimes part of wage concessions but not always; and

- similar approach to Japan (over 40 million Japanese have been reported to be in group bonus systems).

Important variables:

- most participants have to buy into concept of variable or contingent compensation;

- will concept be long lasting?

- will management attempt to control bonus?

- will participants change behaviour? and

- will participants change attitudes toward variable compensation after problems are overcome or improved?

Most installers of Gainsharing systems are manufacturing firms with 100 to 1,000 employees; perhaps 40 per cent of them are unionized; and most are plants or divisions of larger organizations rather than small, privately owned companies as was true in the past. Gainsharing is slowly moving into service sector organizations such as hospitals, banks and insurance companies, a trend which is likely to accelerate in the future.

Traditional systems such as Scanlon, which emphasizes heavy employee involvement; Rucker, which promotes value added as a calculation; and Improshare, which uses a standard-based calculation and traditionally has not promoted a need for formalized employee involvement, are still being installed but their frequency seems to be decreasing. As mentioned earlier, most firms today prefer a more customized approach.

Thus, different models of behaviour and expectations underlie each of these and other approaches. That is what makes Gainsharing so complex: it is applied in so many different situations for so many different motivational reasons.

1.3 Why Gainsharing works: Main benefits

Successful firms use Gainsharing constantly since it brings benefits for both employers and employees. These benefits are realized through the motivational forces developed by the scheme. Obviously, benefits differ greatly depending on the commitment to the change process and motivations. The commonly cited ones are examined below.

1.3.1 Possible organizational benefits

1. Improved productivity: reduced costs or increased output.

2. Improved employees' identification with history, problems, goals and opportunities.

3. Greater problem identification and solving.

4. Helps to link rewards with improved performance.

5. Improved communications and cooperation.

6. Greater organizational flexibility.

7. Greater employee involvement.

8. Greater competitive posture and job security.

9. Ideas as well as efforts are produced.

10. Improved planning and control systems.

11. Climate of efficiency, quality and competency is fostered.

12. Better labour-management relations.

The main benefits of Gainsharing are that it integrates communications, teamwork, goal orientation, quality/performance improvement, employee involvement and financial rewards into one system.

1.3.2 Possible employee benefits

1. More long-term job security because of increased productivity.

2. Greater recognition.

3. Improved communications/teamwork/cooperation.

4. Sharing in benefits of productivity increases; more money.

5. Feeling of contributing to organization.

6. Becoming more involved in changes.

7. Way to get things done.

8. Learn about the company, its history, problems and opportunities.

9. Better management planning.

10. Better labour-management relations.

This helps to develop a win/win type of situation.

Obviously, many motivational factors can help to make Gainsharing successful. If only the bonus is stressed, it becomes the most important variable.

Dozens of case studies document the merits of Gainsharing. Perhaps the most comprehensive study was done in America for the American Productivity and Quality Center (O'Dell, 1987), which included over 200 Gainsharing companies. Some of the results from the study are listed below:

1. Reason for implementing: performance improvement was important or very important to 93 per cent of firms.

2. Bonuses seemed to average around 7-8 per cent, depending on the plan.

3. Percentages indicating positive effects on productivity and costs ranged from an average of 98 per cent (Scanlon) to 84 per cent (customized plans) and somewhat lower for profit-sharing; many other variables also improved.

4. Gainsharing firms disclosed much more information to employees than non-Gainsharing firms.

5. A percentage of pay was the most common bonus payment method.

1.4 Supportive conditions for success

If one assumes that a major, long-term change process is desired, some specific conditions are important for the success of any Gainsharing system. Some of them are:

1. Commitment from top management.

2. Need to change or a strong desire to do better.

3. Management acceptance and encouragement of employee input and education.

4. Higher interaction and cooperation.

5. Absence of major job security threat or business problems.

6. Adequate information on productivity and costs.

7. Performance goal setting.

8. Commitment on the part of all employees to the change process.

9. Agreement on a gains calculation which is relatively simple, perceived as fair and meeting management objectives.

At this point discuss some of these conditions in detail along the following lines and try to answer the points raised, relating them to your own business environment.

1. Commitment or identity: Need to change. Mandates or expectations towards:

- clients and customers;
- the organization itself; and
- each other.

Who is accountable for what?

How much change do we expect from everyone?

When shall we know whether Gainsharing is working or not?

2. Involvement: Help to build identity. Could include:

- no formalized system;
- steering committee to help with design;
- department or area teams to work with implementing ideas;
- Gainsharing review board for broader issues; and
- see unit 3 for more detailed discussions of different involvement systems.

3. Equitable sharing of benefits: The bonus system. Examples of outcomes which might result in bonuses:

- reduction of one or many costs;
- reduction in hours of work;
- improvement in quality;
- reduced absenteeism; and
- increased profit if it is a profit-oriented organization.

4. Competent management

Characteristics:

- good planners, organizers, communicators;
- risk-takers; and
- not too defensive: Gainsharing does open up the organization.

5. Other factors

- Top management is committed to the plan;
- agreement from headquarters;
- workload can absorb increased productivity (e.g. up to 25 per cent); and
- good relations with any existing unions.

Certainly, important factors in the success of Gainsharing include the availability of a good coordinator, good labour-management relations and inside pressure for the system to be installed.

1.5 Major features of Gainsharing

Different Gainsharing systems concentrate on different features, depending on specific conditions and on the organization. Discuss the following subsections.

1. Performance - or productivity related

- Narrow examples:

coalminer producing 40 tons of coal in 40 hours;
reducing supply costs; and
improving quality or response time.

- Broader examples:

increasing profits in a profit-oriented firm; and
reducing most or all costs in a profit or non-profit organization.

2. Gaining upon something

- Most plans (perhaps 65-75 per cent) are based on bettering past performance. The base period could be as short as 1 month or as long as 10 years, but the most recent year or two is typical.

- Other plans are based on reaching a targeted level of performance; this is becoming more common. Examples include not paying a bonus until a targeted level is reached for reducing budgeted payroll or other costs, improving specific quality/customer service measures such as returns or on-time shipments, or improving upon forecasted shipments.

- Combinations are also possible in practice, e.g. combination of reducing past and forecasted costs or quality measures: some organizations have a series of pools for labour productivity, quality-related issues and controllable costs, for example.

3. Sharing with participants: A group bonus system

- Range: may be a small group to include everyone; and

- emphasis is on teamwork, and so individual-oriented systems are frequently excluded from the concept of Gainsharing.

4. Includes employee involvement

- Emphasis is on “working smarter”; some method must exist to allow this to occur;

- studies show this is often the most important factor; and

- with this component, Gainsharing activates both intrinsic (behavioural) and extrinsic (bonus) motivational variables.

5. What Gainsharing is not

- Short-term-oriented in most situations;

- easy to do well;

- a substitute for wage increases in most situations; and

- individual or typically small-group-oriented; it is normally carried out for entire units, such as a plant. Multiplant operations are normally not combined to form one Gainsharing unit (each unit is separate, but Gainsharing is not normally applied on a department basis, because of interdependencies).

Questions for discussion

1. What is Gainsharing? Why it is considered as a concept for change?

2. Why do organizations install Gainsharing?

3. What are the necessary general conditions for successful Gainsharing?

What is the focus of gainsharing?

Why is gainsharing important?

What are the pros and cons of gainsharing?

Which of the following is an advantage of gainsharing plans?