The Difference Between Gainsharing & Profit Sharing
Many people who confuse
Profit Sharing and Gainsharing view them as being one in the same.
Employees have an opportunity to earn a
bonus under both approaches, but that is where the similarity ends.
There are always exceptions, but the
following provides a general outline of the major differences.
Gainsharing
Profit Sharing
Purpose
To drive performance of an organization by promoting awareness, alignment, teamwork, communication and involvement.
To share the financial success of the total organization and encourage employee identity with company success.
Application
The plan commonly applies to a single facility, site, or stand-alone organization.
The plan typically applies organization-wide; companies with multiple sites typically measure organization-wide profitability rather than the performance of a single site.
Measurement
Payout is based on operational measures (productivity, quality, spending, service), measures that improve the “line of site” in terms of what employees do and how they are compensated.
Payout is based on a broad financial measure of the organization’s profitability.
Funding
Gains and resulting payouts are self-funded based on savings generated by improved performance.
Payouts are funded through company profits.
Payment Target
Payouts are made only when performance has improved over a historical standard or target.
Payouts are typically made when there are profits; performance doesn’t necessary have to show an improvement.
Employee Eligibility
Typically all employees at a site are eligible for plan payments.
Some employee groups may be excluded, such as hourly or union employees.
Payout Frequency
Payout is often monthly or quarterly. Many plans have a year-end reserve fund to account for deficit periods.
Payout is typically annual.
Form of Payment
Payment is cash rather than deferred compensation. Many organizations pay via separate check to increase visibility.
Historically profit plans were primarily deferred compensation plans; organization used profit sharing as a pension plan. Today we see many more cash plans.
Method of Distribution
Typically employees receive the same % payout or cents per hour bonus.
The bonus may be a larger % of compensation for higher-level employees. The % bonus may be less for lower level employees.
Plan Design & Development
Employees often are involved with the design and implementation process.
There is no employee involvement in the design process.
Communication
A supporting employee involvement and communication system is an integral element of Gainsharing and helps drive improvement initiatives.
Since there is little linkage between “what employees do” and the “bonus,” there is an absence of accompanying employee involvement initiatives.
Pay for Performance Plan versus Entitlement
Gains are generated only by improved performance over a predetermined base level of performance. Therefore, Gainsharing is viewed as a pay-for-performance initiative.
Profit sharing often is viewed as a entitlement or employee benefit.
Impact on Behaviors
Gainsharing reinforces behaviors that promote improved performance. Used as a tool to drive cultural and organization change.
Little impact on behaviors since employees have difficulty linking “what they do” and their “bonus.” Many variables outside of the typical employee’s control determine profitability and the bonus amount.
Impact on Attitudes
Heightens the level of employee awareness, helps develop the feeling of self worth, builds a senses of ownership and identity to the organization.
Influences the sense of employee identity to the organization, particularly for smaller organizations.
The Differences in the Performance Pie
The Profit Sharing Pie
Based on year end profit
Paid annually
No employee involvement
The Gainsharing Pie
Based on operational performance
Paid more frequently than annually
Employee involvement critical
Masternak & Associates
Liberty Tree Plaza
1114 North Court, Suite 195
Medina, Ohio 44256
Phone: (330) 725-8970 robert@masternak.com
If you would like to learn more about Gainsharing or our consulting services, please contact us.
