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Gainsharing Q & A

Gainsharing Questions and Answers

Gainsharing Chat Session
Mr. Masternak recently led a chat session with compensation professional and moderated by WorldatWork. The following are some of the questions and answers from the session.

Measures

  1. What does a company typically measure? It all depends on what is important to the organization and what employees can control. There are almost as many Gainsharing models as there are companies with Gainsharing plans. However, I find most plans focus on measures related to productivity, quality, cost, and service.

  2. How many measures do companies generally use? Initially three or four if the company is interested in having a plan that helps maximize the employee line of sight. Over the years companies may add measures.

  3. Does a plan "burn out" over time? I have never had a plan fail, because there was no more opportunity for improvement. A good Gainsharing plan typically evolves over time. Measures change, and new ones may be added. If Gainsharing is truly a "working smarter system with teeth," there should never be an end to achieving gains. There is always a better method, procedure, or way of doing one's work.

Results

  1. What is the average return that a company achieves from a gainsharing plan? As a rule of thumb, I find that for every $3.00 gained, employees receive about $1.00 and the company $2.00.

  2. Are gains typically greater for the first year of a plan? Oftentimes managers think that the first year results will be greater than subsequent years, since there may be a lot of "low hanging fruit." However, Gainsharing is a tool to drive change, and change, takes time. Initially, many people are on the fence, and they take a "wait and see" attitude. Therefore, many plans get off to a slow start and gain momentum over time.

Payout Frequency

  1. What works best in terms of payout frequency: monthly, quarterly, or annually? Typically I would avoid designing a plan with only an annual payout frequency. The employee line of sight would be too far.

  2. What works better, monthly, or quarterly? I personally prefer monthly if the data permits. However, sometimes because of month-to-month swings, a monthly frequency is not possible. I have some plans that have monthly, quarterly, and annual measures.

    The payout frequency is also impacted by the dynamics of the workforce. If an organization's workforce consists primarily of skilled and professional employees, a less frequent payout system may be appropriate. On the other hand, if the workforce is made up primarily of manual laborers, the payout may be more frequent than monthly. Again, I typically prefer monthly as compared to quarterly, since an organization can celebrate 12 times a year rather than just four.

  3. Does a plan "burn out" over time? I have never had a plan fail, because there was no more opportunity for improvement. A good Gainsharing plan typically evolves over time. Measures change, and new ones may be added. If Gainsharing is truly a "working smarter system with teeth," there should never be an end to achieving gains. There is always a better method, procedure, or way of doing one's work.

Payout Amount

  1. What is the typical size of the employee payout over a year? I have found that payouts average from a range of 4% to about 12% of an employee's compensation. However, it is not unheard of to have a bonus of over 20% of compensation. I should point out that there are plans out there that are designed to pay out less than 4%. However, I question their long-term success and whether they are truly driving performance improvement.

  2. Initially, how large a payout is required for employees to maintain interest? I find that in the first year if the payout averages about 3% of compensation, it's enough to generate interest. However, longer term I think it takes around 4 to 5% to maintain interest.

Other Incentives

  1. If a company has an individual piecework incentive plan, does Gainsharing overlay the current system? No, generally the individual incentive plan should be eliminated. Gainsharing promotes the team concept and is philosophically counter to a piecework incentive plan.

  2. Then how do companies eliminate the piecework incentive plan without jeopardizing productivity? Many companies incorporate employees' piecework incentive into their base pay. In turn, the incorporated rate is "red circled" until the employees move to a different position. Of course, there are many other details that need to be worked out.

  3. If a company "buys out" an individual incentive plan, isn't there a considerable drop in productivity? Surprisingly I haven't found this to be the case. A recent case for a plant in St. Louis is a good example. After the piecework system was eliminated, the management team found that people continued to work at about the same rate. There were a few cases in which individuals "slacked off." The management team addressed this issue like any other individual performance problem.

  4. Are managers who are eligible for a management incentive included in Gainsharing? It varies; sometimes they are included, and sometimes they're not. I prefer that they be included in both, since the management incentive plans are generally based on profit and individual performance. On the other hand, Gainsharing is typically based on operational (more control oriented) measures. Some companies include managers 100% in gainsharing and reduce the potential dollars generated from the management incentive plan. In these cases, the combination of Gainsharing and the management incentive have a greater bonus potential.

Gains vs. Profits

  1. What happens if a company pays out Gainsharing and finds lower profits for the year? It depends on why a company installed Gainsharing in the first place. Some companies feel that Gainsharing is for the long term, and that if they hadn't made the operating improvements from Gainsharing, profits would have been even lower. It is important that the measures are based on "green dollar" savings.

  2. Why not have a profit gate? In other words gains would not be paid unless some predetermined profit level is achieved. I find that some companies are successful with this approach. This would be more typically for a smaller, privately held company as compared to a larger, multi-site corporation. The culture may be much different. Smaller organizations often have greater employee identity to the organization. Employees in this type of organization can better relate to profitability, and therefore, their "buy-in" is greater than employees in a larger company.

Employee Buy-In

  1. How does a company get employee buy-in? The key to buy-in is to get employees involved. In other words, employees have to have some role in the plan development. Once top management determines why they want to install a Gainsharing plan and have examined the critical upfront issues, the best approach is to form an employee Design Team to develop many of the elements of the plan. The team consists of a cross section of employees that mirrors the total organization.

    Depending on the size of the organization the team may have as few as 4 or as many as 30 employees. Typically, the group consists of about 10% of the workforce. Of course, in larger organizations the percentage is less. The group typically meets once a week for approximately 4 hours in order to develop many of the plan's policies, etc. It generally takes about a four-month period before they are able to get approval and roll out the plan.

  2. Does this take a lot of time away from other things? It sure does. However, if you short circuit this process, a company will fail to build the commitment and employee identity to the plan. It's like building a house or any thing else; if you build it yourself, you'll take pride in the home and take good care of it.

Eligibility

  1. Who's included? My advice is to typically include everyone, unless there is a logical business reason to exclude some groups. Also, I would encourage including new-hires the first day they join the organization. Some organizations also include temp or contract employees. After all, Gainsharing brings everyone together as one team.

Readiness and Failure

  1. What is the success rate? My experience has been that about 85% to 90% of the plans that I helped install five years ago are still in existence today. Of course a number of potential failures are headed off by fully exploring an organization's readiness.

  2. Why wouldn't an organization be ready? For many reasons. However, the most important thing is that the management team must truly be committed to the process. They need to recognize that Gainsharing isn't a cure-all or quick fix. I can remember one manager saying "This is great; it will run itself." Wrong! Just remember the 3 C's of gainsharing. Communication, communication and communication. Also, communication requires listening. If an organization shares gains, employees will start asking more questions. If management fails to listen and respond and fails to act on employee ideas and suggestions, the whole system will collapse.

  3. What is the most common reason for failure? Again a lack of management commitment. In part, commitment requires reporting results on an ongoing basis. Not just posting results, but moreover, talking about results. It's important to have regular department and facility-wide meetings to report results and review the business. Also there must be some type of structured system for employee involvement. Employee involvement will help drive performance. On-going training is also extremely important, not only training on the gainsharing plan, but also on other initiatives that develop the workforce. The more the training, the greater the success. Also, it's important to celebrate organization successes.



Gainsharing plans typically show a 3-to-1 ratio of gain to dollars paid in employee bonuses


Gainsharing: A Team Based Approach to Drive Organization Change
Gainsharing: A Team Based Approach to Drive Organization Change

By Robert Masternak


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