Management And Accounting Web

Imberman, W. 1995. Is gainsharing the wave of the future? Management Accounting (November): 35-39.

Summary by Zuwena De Freitas
Master of Accountancy Program
University of South Florida, Summer 2002

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In this paper Imberman looks at case studies of three different companies that use gainsharing to illustrate how it works in practice and to prove the effectiveness of the gainsharing programs. He also suggests five rules to ensure a successful gainsharing program and attempts to answer the question of why more companies are not using gainsharing. Finally, he includes an article by the controller of Volvo GM to show how gainsharing creates an environment that supports TQM and continuous improvement.

What is Gainsharing?

Gainsharing in its simplest form is a group bonus plan where the entire workforce of an organization is involved in an effort to exceed past performance and achieve target gains. The achieved gain is then translated into cash and shared between the workforce in the form of bonuses and the company in the form of savings. So basically, employees are rewarded based on their performance and they are encouraged to share ideas for improved productivity with management.

There are many different variations of gainsharing plans and many different subvarieties of each plan. The type of plan depends on a company’s cost structure, the type of products or service produces, the manufacturing process, kinds of materials, and so forth.

The oldest plan, which is the Scanlon Plan, was developed in the 1930s and introduced the concept of gainsharing. The plan involved the reduction of payroll cost relative to sales. The savings, which results from this cost reduction, would be split 75/25 between workforce and company. The fact that many companies are reluctant to share data related to cost and sales may be a possible downside of this plan.

Another variant of gainsharing is the Rucker Plan developed in the 1940s. Not only does this plan provide an incentive to reduce labor cost like the Scanlon Plan but also to save materials. The savings that results under this plan are usually split 50/50 between workforce and company.

The ImproShare Plan, which was developed in 1973, measures only labor cost and uses time standards and past production records to set a production criterion. The difference between current labor hours to produce a given amount of output and past labor hours on similar output is the basis of the bonus formula.

Gainsharing at Actual Companies

At a box company gainsharing was introduced to cut labor cost and thereby lower prices, through higher productivity. The gainsharing formula was designed to reward the workforce for lowering cost and involved convincing the workers that if they worked harder, smarter, neater and more carefully, savings could amount up to $70,000 on the next $1 million production run. This saving would be shared equally and each employee would receive a $194.44 bonus. The standard of productivity was set by a careful investigation of past experience. This showed how many hours were required to reach average output.

At a factory in Michigan that manufactures brushless motors, gainsharing was used to cut the number of staff hours needed to produce a given quantity of output. As table 1 shows, 64,216 staff-hours were required in January1990 to produce a similar output as was produced in 1988-89, which required 71.315 staff-hours. The workforce was able to gain 7,099 staff-hours by working harder, smarter and more carefully. This saving translated into a 5.25% gain for the month and a bonus of $133.69 for each employee. The company saved the same amount.

In an Ohio gray and ductile iron foundry, gainsharing was implemented to reward employees for a cut in staff-hours per ton of good casting output. 1990 was used as the base against which future output was to be measured and in that year it took an average of 28.4 staff-hours to produce a ton of good output. Table 2 partially summarizes the results for 1991, 1992, and 1993.

The gainsharing plan included “ratcheting the base". This involves tightening the base against which improvements are measured annually, in line with market realities. Each year, 60% of the improvement (reduction in staff-hours) was deducted from the base, which created the base for the following year. This approach reduced the amount of staff-hours from 28.4 in 1990 to 25.78 in 1993. Gainsharing offers a direct, immediate link between performance and employee compensation. Through the ratchet concept, continuous improvement was also promoted. The gainsharing motivates employees to give their full support to continuous improvement and TQM programs.

Gainsharing Creates an Environment that Supports TQM

By including an article by McAninch, the Controller of Volvo GM, Imberman illustrates how gainsharing can create an environment that encourages employees to take ownership in their job and create a TQM culture with continuous improvement.

In order to support a TQM culture, changes in the behavior of those involved is required. Having a reward and recognition system is also a very important aspect of TQM according to McAninch. The gainsharing program satisfies both these requirements and supports TQM for the following reasons:

The program can be implemented company-wide by individual units or a combination of company-wide and individual units.

If set up correctly, the program will create an environment for earning and not entitlement. Meaning that employees are not entitled to any rewards until targets are met and exceeded. This is essential in creating a TQM culture as it changes employees’ attitude of entitlement.

If designed correctly, the program will use pay to drive results, which creates a win-win situation for the company and the employees.

The reward system gives validity to TQM- the company is walking the talk.

The Gainsharing program was implemented by using four principles: involvement, identity, equity and commitment.

Involvement entails employees’ participation in making suggestions and decisions. This promotes cooperation and teamwork. The identity principle helps the company recognize the need for change by making sure everyone is aware of what is expected from them. Equity is achieved through the bonus system, which aligns employees’ goals with those of the company. Commitment entails employees’ dedication to continuous improvement.

The key points in the gainsharing program are: participation by all employees, quarterly payout, reward only performance improvement, create a natural progression toward total employee involvement. Employees must understand that they can make a difference and view themselves as stockholders. If the gainsharing program is designed properly it will support TQM, increase recognition, promote cooperation and teamwork, and provide a feeling of contributing to the organization.

Rules for Success

Imberman lists five rules to ensure a successful Gainsharing Program in any plant.

1. The payout formula has to be reasonable and doable. A formula is destined to fail if it pays out very small bonuses or assumes that large improvements will result right away.

2. Better results will be achieved if employees are involved in devising the plan and understand the details of the gainsharing program. Employee education is essential when introducing the program and involving them in the development of the plan will motivate them to improve productivity and quality.

3. The bonus payments should follow performance with minimal delay to remind workers of the rewards of gainsharing.

4. Unionism is not necessarily an advantage or disadvantage to gainsharing. It is more important that union and management trust each other.

5. Expert guidance should be sought to help ensure the success of the gainsharing program and to help device a tailored-made plan.

Why aren’t More Companies using Gainsharing?

In answering this question Imberman quotes Peter F. Drucker, a noted management authority. He said "inertia in management is responsible for more loss of the market share, for more loss of competition, and for more loss of business growth than any other single factor." So in other words Imberman believes that management’s apathy for change is the main reason why gainsharing is not being used in more companies.

However, he notes that the American Productivity and Quality Center predicts that gainsharing “will become one of the fastest growing strategies in the U.S. in the 1990s and beyond.”

Table 1. Brushless Motor Case (partial)
Period
1990
Current Hours
1990
Standard Hours
1988-89
Hours Gained
100%
Gain
Share
January 64,216 71,315 7,099 5.52%
February 76,005 90,913 14,908 9.80
March 61,350 72,133 10,783 8.78
April 57,690 62,186 4,496 3.89
May 55,458 54,666 -3,792 -3.41


Table 2. Foundry Case (partial)
  1991 1992 1993
Monthly average staff-hours per ton achieved 26.79 24.68 22.58
Bas staff-hours from which improvement is measured 28.40 27.43 25.78
Monthly average tons improved over previous year’s base (60% ratchet) 0.97 1.65 1.92
Base for 1991 = 28.4 staff-hours (from previous year).
Base for 1992 = 28.4 – 26.79 = 1.16 x 60%= .97;28.4 - .97 = 27.43 (base for the next year).

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