Gainsharing: Boosting Team Performance and Profits

Gainsharing boosts business profitability by rewarding employees for performance improvements that increase efficiency and reduce costs. This team-based approach aligns staff efforts with company goals, creating a more motivated and collaborative workforce.

By Douglas Wade, Attorney

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Table of Contents

1. What does gainsharing mean?

2. What does “better performance” actually mean?

3. How does the gainsharing process work?

4. Examples of gainsharing

5. Profit sharing versus gainsharing

6. Kinds of programs for gainsharing

7. Benefits and drawbacks of gainsharing

What does gainsharing mean?

By encouraging higher staff performance and involvement, gainsharing seeks to increase business profitability. Employees who assisted in designing a performance improvement are entitled to a monetary portion of the company’s profits.

Gainsharing seeks to reduce process waste and inspire hard work from staff members. It’s a team-based program where workers collaborate to increase output, which brings financial benefits to the company.

What does “better performance” actually mean?

Improved performance could mean different things in different industries. It must, nevertheless, be quantifiable and visible. Here are a few instances of enhanced performance:

A higher degree of client satisfaction
Reduction of a specific process’s hours
A rise in the quantity of sales

Specific goals must be decided upon beforehand. A one percent improvement is likely not enough to qualify as a considerably better performance in the majority of circumstances.

How does the gainsharing process work?

A formula is typically used in a gainsharing program to determine how many shares should be divided among employees. Performance improvement is evaluated in relation to the starting point. Any profits can be evaluated on an annual, quarterly, or monthly schedule.

Since employees may directly influence operational KPIs (efficiency, decrease in waste, lowering expenses, etc.), gainsharing is typically tested against them. These kinds of programs are frequently seen in the manufacturing, service, and healthcare sectors.

Gainsharing is self-funded, meaning that the employees who have improved the company are the ones who contribute to the gains.
Usually, employees participate in the process of developing the gainsharing program’s guidelines.
Gainsharing functions best in an environment that values cooperation and support.

Examples of gainsharing

A manufacturer of laptops

Consider a corporation that manufactures computers. They manufactured ten thousand computers in five thousand working hours the previous month. The team saved $150,000 after coming together and brainstorming different approaches to streamline their process. The next month, they produced ten thousand computers in four thousand hours.

After that, the company’s group members divide the gains equally. This is an illustration of gainsharing where a team of employees increased productivity.

A vehicle manufacturer

An organization that successfully reduces costs is another example of gainsharing in action. An automobile manufacturer found that for every vehicle manufactured, waste material amounted to about $5,000.

Through the strategic use of a gainsharing scheme, the organization was able to bring the waste down to three thousand dollars per car produced. If the factory produces 50 automobiles in a month, that’s a $100,000 cost savings. This sum was divided among the project participants.

Plan for Xerox gainsharing

Gainsharing was introduced by digital and print document goods and services provider Xerox with the goal of inspiring staff members and increasing productivity.

Gainsharing increased worker motivation and improved manufacturing process efficiency, among other noteworthy operational advantages. Workers were more involved and proactive because they understood how their actions directly affected product quality and cost reductions. Productivity within the company increased as a result of this involvement, and the gainsharing program helped to reduce waste and increase efficiency.

The plan financially produced gainshare incentive payments to staff members, which represented an average of 2% of their compensation and served as a motivator for increased performance as well as a link between staff objectives and business success.

Profit sharing versus gainsharing

Systems that use gainsharing often have more frequent payment potential. Profit-sharing plans usually distribute funds once a year. The potential reward’s motivational influence increases, naturally, the closer it is linked to performance.

Employee benefits under profit-sharing agreements are inevitably correlated with the overall profitability of the business. The amount of profit sharing increases with profits. Gainsharing, on the other hand, calls for particular advancements that aren’t necessarily connected to profitability. For instance, there can be a rise in revenues or a decrease in expenses.

The key distinctions between profit sharing and gain sharing are as follows:

Gainsharing

Promotes targeted efficiency gains and performance enhancements inside departments or teams.

Based on particular enhancements (such as a rise in sales or a decrease in costs) that aren’t usually connected to profitability.

Potential payout frequency is higher; it’s usually monthly or quarterly.

High motivational effect because immediate performance and rewards are closely related.

Profit sharing

Employee rewards are determined by the company’s overall financial performance.

Closely linked to the total profitability of the business; a larger share size corresponds to better profits.

Payouts are usually annual.

Although the annual payout may lessen the immediate incentive impact, the motivational impact can still be rather substantial.

Kinds of programs for gainsharing

The Scanlon scheme

The main focus of the Scanlon strategy is output. Any savings are taken and divided equally between the staff and the business. The standard labor cost per unit less output is deducted from the actual labor cost per production unit to determine the savings.

For instance, if a worker puts in ten hours a day and is paid $15 per hour to install fifteen air conditioners, they will make $150 per day. After putting the Scanlon plan into practice, the worker now fixes twenty air conditioners every day. The difference between the rate of production of 15 and 20 air conditioners per day would be the gains.

The Rucker scheme

The Rucker plan’s primary goal is to examine output quality rather than quantity. This works well in sectors of the economy where the value placed on the quality of the output generated is greater than the degree of productivity.

The Rucker plan typically uses waste-to-production ratios as a variable. “Number of faulty parts per production” is another possible measure.

Improshare scheme

An Improshare plan is comparable to a Scanlon plan; however, it utilizes the quantity of production hours rather than labor costs. When productivity exceeds the first measured baseline, employees split the difference in savings.

Interaction and backing are two of the main results of this kind of gainsharing, as Improshare is determined by the team’s total output.

Employee ownership

Employees who practice worker ownership can own genuine firm shares and earn additional compensation based on their performance.

Benefits and drawbacks of gainsharing

Pros

Gainsharing encourages people to perform well, which raises a company’s performance levels.
Because performance enhancement is self-funded, a corporation saves money.
Individual efforts are matched with the objectives of the team and the organization.
Expenses are decreased.
There is an improvement in efficiency.
A supportive culture is established at work.

Cons

In certain cases, payouts must be made even when the business is underperforming.
It could lead to conflict and entitlement at work.
Because everyone is aiming for the same financial goal, it may lead to more stress.
Individual merit may be disregarded in favor of team objectives.
Other areas that aren’t receiving incentives, including safety ratings, can see declines.

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