Gainsharing vs Profit Sharing: How They're Different

When it comes to employee incentive programs, there are two strategies that often take center stage: gainsharing and profit sharing. Both of these approaches aim to have a motivational impact on workers, align their interests with the company's success, and drive performance. But what's the difference?

Gainsharing focuses on boosting short-term performance by rewarding cost-saving initiatives and directly links actions to financial gains. Profit sharing nurtures long-term commitment by sharing a percentage of the company's profits, which helps to foster loyalty.

In this short guide, we'll discuss both of these strategies to help you decide which one is better for your business and your employees.

What Is Gainsharing?

A gainsharing program is a an incentive plan that businesses use to motivate employees and, in turn, boost company profitability through this improved performance.

Gainsharing is a pay-for-performance strategy as it links employee bonuses to how well employees help the company make money. When their hard work helps company performance and boosts profits, they get a piece of these earnings as a bonus - it's like a way of saying 'thank you for your hard work'.

In regular wage systems, employees receive the same pay regardless of their performance. However, with a gainsharing program, their earnings are connected to their efforts and overall business performance.

This encourages employees to work harder and improve their baseline performance. It also increases efficiency and collaboration with their co-workers.

The fundamental idea behind a gainsharing bonus is to inspire employees to work together to enhance their productivity and eliminate any waste in company processes.

When these improvements lead to the company making more profit, the employees who positively contributed to the company's improved performance get to share in the reward.

A gainsharing program typically works best in industries where working together and collaboration are essential. A few good examples of this would be the healthcare, manufacturing, services, or distribution industries.

It's important to remember that there are downsides to gainsharing, too. Although gainsharing aims to give back to employees, the amount that they receive directly depends on how well the company is doing.

If the profits happen to be good, they're guaranteed more money.

However, the opposite is also true. This may potentially make employees more stressed since their own money is tied to the company's success.

Still, gainsharing creates a workplace culture that values always getting better, and where the employees are on the same page about the company's goals. This makes them feel as though they're part of the company's success - and who wouldn't be invested in a company that gives back to them?

Types of gainsharing plans

There are three main types of gainsharing plans, including the Scanlon, Rucker, and Improshare plans.

• The Scanlon plan is all about quantity. It pays close attention to how much work employees can produce and calculates the difference between the standard labor cost and actual labor cost per unit.
• For example, if you have an employee who is fixing a product, and they find a way to fix more of the product in the same amount of time, they would be eligible to get a piece of the savings as a bonus.
• In contrast, the Rucker plan is about quality. It shines a spotlight on excellence - on the quality of the work rather than how much work is being done.
• This plan is especially beneficial for industries where products need to meet high-quality standards. It might measure things like waste reduction or the number of defective parts that are produced.
• The Improshare plan takes a slightly different approach and is better for collaboration or teamwork. It's similar to the Scanlon plan but measures things in terms of the time it takes to produce a product rather than the cost of labor.
• If the team figures out a way to make things faster, everyone gets to share in the savings rather than focusing on individual merit.

Gainsharing example

Willow Coffee Shop is a well-known establishment that is famous for its delicious coffee and amazing service. Still, the managers here are on a mission of cost reduction without sacrificing the quality of their product.

To achieve this goal, they've introduced a gainsharing program as a way to reward employees for performance improvement by finding innovative ways to save money. They've also established a target for the strategy — they reduce the $50,000 in monthly operational expenses.

If they can come up with ideas that reduce their costs, the employees share half of the business savings. Of course, the employees embraced this challenge and put their heads together to come up with some creative solutions for continuous improvement.

Their ideas helped to:

• Optimize the scheduling system to reduce overtime

• Negotiate with suppliers for better prices
• Implement a highly efficient inventory management system to minimize food waste at the shop

These results not only improved performance among employees who were working together but also provided incredible results for cost reduction. Thanks to the employees' efforts, the shop's monthly operational costs were trimmed down to $45,000, which meant a savings of $5,000.

As a result of the gainsharing plan, the employees got to share $2,500 in bonuses.

What Is Profit Sharing?

Profit sharing plans are a type of compensation model that has gained a lot of popularity across several industries. These plans are based on the principle of sharing a portion of the company's profits (as profit sharing bonuses) among stakeholders - particularly employees.

Profit sharing systems are usually based on employees' roles or positions in the company and their performance. The approach is designed to foster a sense of shared success, where the company's mindset is 'If we work hard and the company does well, then we all do well!'.

As a result of this thinking, profit sharing systems actively incentivize employees to contribute to the company's growth and align their interests with those of the company.

In practice, profit sharing can take several forms. However, the two most common forms are cash bonuses and stock-based incentives.

Cash bonuses involve giving a percentage of the company's profits to act as financial rewards for the employees. This can either happen regularly, like a quarterly or annual bonus, or during specific financial milestones. For employees, cash bonuses represent a direct and measurable return on their contribution to the company's profitability.

Profit sharing plans can also be set up to contribute to employee retirement and 401(k) plans, enabling your employees to boost their retirement savings with company profits.

Another form of profit sharing is stock-based incentives. With this model, employees don't get a cash reward.

Instead, they receive shares of the company's stock or stock options. This is what gives them a vested interest in the financial performance of the business since any increase in the company's stock value directly benefits them.

There are various advantages to profit sharing. For employees, it gives them an additional source of income over and above their standard compensation.

This encourages them to work harder and more diligently so that they can positively contribute to the company's bottom line.

However, for profit sharing to work, the distribution of profits needs to be fair. Similarly, employees may not get bonuses with a set amount. Still, if it's done correctly, employers can gain a more motivated and productive workforce.

If you're ready to implement this system in your company, then let ShareWillow do the heavy lifting for you with this profit sharing plan template.

What Differentiates Gainsharing From Profit Sharing?

Gainsharing and profit sharing are both incentive programs used by businesses to motivate employees and boost company performance. However, the key difference lies in how the rewards are distributed.

Profit sharing directly rewards employees based on company profitability. So, higher profits mean bigger rewards.

In contrast, gainsharing focuses on specific improvements or cost-reduction efforts and isn't necessarily linked to how profitable a company is. This could lead to more frequent, but much smaller, rewards.

Gainsharing vs Profit Sharing: What’s Right for Your Business

Picking between gainsharing and profit sharing can be tricky. To do this, you'll need to examine some key areas of your business to find one that aligns with your specific needs.

These areas include:

• Alignment with organizational goals: Gainsharing is better suited for improved performance in operations, while profit sharing is ideal for fostering long-term loyalty and a commitment to success.
• Employee motivation and engagement: Although profit sharing encourages engagement because of the employees' sense of ownership in a company, gainsharing may be better for motivation. This is because there is a direct link between performance and rewards.
• Operational efficiency: Profit sharing isn't directly linked to operational efficiency and may not drive specific process improvements. However, gainsharing can have a significant impact on efficiency by driving improved performance.
• Financial implications: Gainsharing may potentially be more cost-effective for businesses since it involves sharing a portion of immediate cost savings. On the other hand, profit sharing may be more financially sustainable in the long run since it only shares a percentage of the overall profits.