Gainsharing 101: Everything You Need to Know

What to expect in this article:

• What is gainsharing? And how does it work?
• The benefits of implementing gainsharing in your organization
• Challenges in implementing gainsharing and how to overcome them
• How to implement a successful gainsharing plan
• Gainsharing vs. Profit sharing
• FAQs

What is Gainsharing? And How Does it Work?

Businesses use gainsharing as an incentive plan to boost productivity and employee performance, and to foster collaborative employee involvement within their organization.

It's a system where employees receive a share of company profit based on key performance measures and metrics - usually in the form of bonuses or other incentive payouts.

This powerful strategy is about motivating employees for continuous improvement, allowing businesses to increase profitability in the process.

The idea behind a gainsharing program is to align the interests of employees with company objectives, fostering teamwork, innovation, and a joint effort toward achieving common goals.

Gainsharing typically applies to a stand-alone organization, as this supporting employee involvement system is part of a company's plan to drive improvement initiatives.

How Does it Work?

• A baseline performance grade is specified, often based on historical data. This serves as a reference point which future improvements are measured against. This base level needs to be realistic, ensuring employees feel it is fair and achievable.
• Next, performance metrics are set. These are company operational measures, such as cost reduction plans, productivity, quality control, and customer satisfaction.
• Gainsharing programs usually have a performance timeframe - either monthly, quarterly, or annually.
• At the end of this period, performance metrics are collected and compared against the baseline standard. A positive change (or difference) is considered a 'gain' - resulting in payouts. These financial payments can be equal among employees or based on individual merit such as KPI achievement, salary, hours worked, or job position.
• All calculation formulas and performance metrics must be communicated between all parties involved - ensuring transparency and minimizing potential disputes.
• Over time, the baseline benchmark may need adjusting to reflect changes in the business's operational performance - regularly review, update, and communicate any changes with all employees. This ensures the gainsharing program remains effective and relevant.

Many organizations have a gainsharing system in place that includes a year-end reserve fund to account for deficit periods.

There is no one-size-fits-all formula for gainsharing, as it depends on each company's specific targets. However, the objective remains the same - employee involvement for improved performance that leads to a share in the company's gains.

Gainsharing is commonly used in:

• Manufacturing
• Health care
• Distribution
• Service and retail
• Public sector
• Non-profit organizations

For instance, a furniture manufacturing company notices $1,000 wastage for every sofa produced. To combat this, they might consider a gainsharing program to boost employee involvement and reduce wastage costs.

These employees eliminate waste by 10% ($100) per sofa produced. With 400 sofas produced monthly, that's $40,000 in savings generated. These "gain share" payouts are self-funded based on the company's cost savings and are split amongst employees.

The Benefits of Implementing Gainsharing in Your Organization

Gainsharing is an excellent strategy for businesses to implement. Not only does it reward employees for their hard work and innovative input but it also reduces costs in terms of waste, while creating a collaborative workforce.

It also offers many other benefits, such as:

Increased Employee Engagement and Motivation

As mentioned, when employees benefit financially, they're likely to be motivated to work harder. Their improved performance effectively aligns their goals with the goals of the business. It creates a continuous culture for improvement and increases the feeling of pride and accountability.

Linking rewards to performance metrics brings the team onto the same page to strive toward a common goal - the success of the company.

Improved Operational Efficiency

Gainsharing programs allow employees to view company resources from a business perspective. They become more aware of how their performances and work outputs affect the company's bottom line.

Things like electricity saving, waste reduction, system optimization, and material usage start taking center stage. This focus not only benefits the business financially but also enhances overall operational efficiency.

Enhanced Employee-Management Relations

Transparency and an open communication system are essential elements of gainsharing. It allows employees and managers to walk side-by-side when it comes to decision-making, target objectives, and implementation of various operational strategies.

Employees are often involved in the design process of gainsharing programs. Company baseline benchmarks are discussed as a team to ensure they are fair and achievable.

This collaboration builds trust, improves relationships, and creates a sense of shared responsibility for the company's success. Employees also understand the repercussions if performance targets are not met.

Financial Benefits for Both Employees and the Organization

Gainsharing is a win-win scenario for both the employer and employees. Employers (i.e. the organization) benefit financially when performance improves, resulting in cost reductions and boosting company profitability.

As efficiency improves, the organization saves money. Employees then receive a fraction of these savings, benefiting from gainsharing.

This enhances employee engagement, boosts morale and job satisfaction, and fosters a culture of improved performance.

Challenges in Implementing Gainsharing and How to Overcome Them

Gainsharing has many advantages but there are also drawbacks you should be aware of. If ignored, they can severely undermine the effectiveness of gainsharing in an organization's operations.

Challenge 1: Setting Appropriate Performance Measures

Choosing the right Key Performance Indicator (KPI) can be tricky.

Businesses need a deep understanding of how operational systems work before they can decide on these metrics. These standards need to align with company goals and be achievable for employees to reach.

Overcoming this challenge:

• Managers need to go beyond the boardroom and actively engage with their staff to get a deeper understanding of system operations and how they function.
• These discussions embrace employee input, allowing for achievable KPIs.

Challenge 2: Ensuring Fairness in Reward Distribution

Maintaining a sense of fairness in gainsharing distributions is important. Employees who deem the distribution methods as unfair can lead to strained relationships and demotivation.

Overcoming this challenge:

• Transparency is key.
• Establish clear communication about how metrics are measured and gainsharing is distributed, so all employees are on the same page.
• It is crucial to openly share gainsharing calculations and performance benchmarks with employees so they understand how the rewards are calculated, ensuring trust and fairness for all.

Challenge 3: Maintaining Employee Trust and Engagement

Trust is the backbone of any gainsharing program. Without it, even your best-laid plans can come crashing down. This can affect employee engagement and commitment to shared company goals.

Overcoming this challenge:

• Building and maintaining trust is an ongoing commitment.
• Open communication and respecting all employees - regardless of their hierarchal position - is key to maintaining trust.
• Implementing visible changes based on collective input demonstrates that every individual's contribution matters, strengthening engagement and boosting employee trust and commitment to a company's gainsharing plans.
  

How to Implement a Successful Gainsharing Plan

Implementing a successful gainsharing plan involves various key steps to ensure clarity, fairness, and ongoing employee engagement.

Step 1: Setting Clear and Measurable Performance Standards

As mentioned, before any gainsharing plan can begin, you need to establish clear performance benchmarks for your company. Identify what matters the most to your business and figure out efficient ways to measure it.

These performance metrics should be directly connected to business goals and must be quantifiable (easily measurable).

For example, if increased productivity is what you aim to implement, a measurable metric like reduced wastage can be considered.

Step 2: Develop a Fair and Transparent Reward System

A fair and transparent reward methodology is at the heart of an effective - and successful - gainsharing plan. This system should communicate to every employee that they have a stake in the company's success in the form of gain share payouts.

Ensure understandable language is used to avoid any misunderstandings.

Step 3: Communicating the Plan Effectively to Employees

Similar to the above, effective communication is key. Employees need to fully understand how rewards are calculated and distributed.

Various communication channels, such as emails, board meetings, brochures, or webinars, can be used to convey the gainsharing details.

Regularly set time aside - say once a month - to drive improvement initiatives that reiterate baseline performance and operational measures.

Step 4: Regularly Review and Adjust the Plan

Regular reviews and adjustments are necessary to keep gainsharing systems aligned with the company's evolving needs.

These audits provide invaluable insights in assessing what's working and what needs tweaking. Employee involvement in this process reinforces a sense of trust and ownership, solidifying their commitment to the organization.

Gainsharing vs. Profit Sharing

Gainsharing and profit sharing are similar but vary in their focus and approach. They both involve and incentivize employee involvement.

What is Profit Sharing?

Profit sharing involves distributing a portion of a company's profits amongst stakeholders, typically based on their roles and performances. It's like an incentive program for employees or shareholders based on the business's financial success.

This can be in the form of cash bonuses or shares of company stock. For a better understanding, see our What is Profit Sharing article.

How is Profit Sharing Different from Gainsharing?

Gainsharing is mainly used to boost short-term performance by rewarding cost-saving initiatives amongst employees.

Key performance measures are tracked over a set timeframe to calculate a reduction in costs. This is compared against the baseline performance metric.

A positive change in improved performance and baseline benchmarks indicates a generation of savings. These "gains" are what are divided up among employees.

On the other hand, the benefit of profit sharing is that it drives continuous improvement and company profitability over the long term. Sharing profits amongst shareholders fosters a sense of loyalty, ownership, and long-term commitment.

When to Choose What

It's important to consider the structure of your company operations and business model, as gainsharing (or profit sharing) may not be best suited to your business.

• A gainsharing system is better suited for improving operational performance and can be more motivating to employees due to its direct link to financial gains and payouts. It drives specific improvements and can be more cost-effective for businesses by sharing immediate cost savings - in the short term.
• Sharing profits may not have the same effect that gainsharing does, as splitting profits does not directly impact operational performance improvements. However, when profit payouts are consistent, it fosters deeper loyalty for stakeholders and employees to stick around - in the long run. Sharing a portion of overall business profits is also more financially sustainable.

Choosing Profit Sharing to Incentivize and Reward Your People

For those looking to implement a successful profit sharing plan, ShareWillow offers services to streamline the process for you.

Our profit sharing plan template simplifies traditional management processes, providing transparency and efficiency without the headache of complicated procedures. Consider ShareWillow and explore this useful resource if you want a more automated and effective solution.

Frequently Asked Questions About Gainsharing

What is the main purpose of gainsharing?

The main purpose of gainsharing is to improve operational performance by aligning employee involvement with company goals. As a result of improved performance, the company significantly reduces costs, and the revenue "gains" are split amongst employees.

How is the gainsharing bonus calculated?

Gainsharing bonuses are measured over a set time frame, where improved operational measures are compared against baseline benchmarks or KPIs.

A simple formula is:

[Basline benchmark metrics] - [Improved performance metrics] = Gainsharing payouts

Can gainsharing work in any type of business?

Gainsharing may not be ideal for all businesses, but industries that successfully use it include manufacturing, service, retail, technology, and healthcare.

What are the potential downsides of gainsharing?

There are a few drawbacks of gainsharing, which include short-term focus limiting innovation, confusion in calculating correct baseline benchmark standards, risk of dissatisfied employees, and complex management in implementing and calculating performance metrics.