Gainsharing

The Truth About Gainsharing: Why Most Companies Get It Wrong

Gainsharing programs can transform your company’s financial performance while significantly boosting employee motivation. In fact, organizations implementing these incentive systems typically see improvements across multiple performance dimensions, with one laptop manufacturer saving $150,000 by reducing production hours from 5,000 to 4,000 for the same output. Despite these impressive results, most companies implement gainsharing incorrectly or overlook this powerful approach entirely.

Unlike traditional compensation systems, gainsharing creates a direct link between employee performance and financial rewards. The concept is straightforward: when employees help improve efficiency and eliminate waste, they share in the resulting financial gains. Interestingly, gainsharing differs from profit-sharing through more frequent payouts—typically monthly or quarterly rather than annually—creating a stronger motivational impact. At Xerox, for example, their gainsharing planresulted in average bonus payments of around 2% of employees’ salaries, effectively aligning individual goals with company success.

We’ve found that successful gainsharing implementation requires employee involvement in both design and implementation. This crucial factor enhances ownership and accountability while fostering the teamwork culture necessary for these programs to thrive. Throughout this article, I’ll explain exactly what gainsharing is, explore different types of plans, share real-world examples, and help you understand why this self-funded approach deserves serious consideration for your organization.

What is gainsharing and how does it work?

“A good plan can help with risk analyzes but it will never guarantee the smooth running of the project.” — Bentley and Borman, Project management experts and authors

The concept of gainsharing centers around employee participation in driving organizational success. At its core, gainsharing is a management system where companies seek higher performance levels through employee involvement, with those employees sharing financially in the resulting gains. This team-based approach typically includes all employees at a specific site or operation, creating alignment between worker interests and company objectives.

Gainsharing definition and purpose

Gainsharing operates as a collaborative incentive system designed to boost company profitability through enhanced employee performance. Under this approach, workers receive a financial share of the profits generated by performance improvements they helped create. Furthermore, gainsharing aims to eliminate waste—whether in time, energy, or materials—by motivating employeesto work smarter as a cohesive team.

Unlike individual incentive programs, gainsharing doesn’t require extensive administrative costs for standards development and maintenance. Additionally, these plans foster employee flexibility and cooperation while enhancing quality standards and workmanship. Fundamentally, gainsharing systems are self-funded—the financial rewards come directly from the savings generated by improved performance.

How performance improvements are measured

For gainsharing to function effectively, performance improvements must be measurable and observable. Depending on the industry, these improvements might include:

• Increased customer satisfaction
• Reduction in process hours
• Increased sales figures
• Improved productivity metrics
• Enhanced quality benchmarks
• Cost reductions

Most gainsharing programs employ formulas to calculate employee shares, comparing current performance against predetermined baseline standards. These calculations can be assessed monthly, quarterly, or annually depending on the organization’s structure.

The most common financial measures include relationships between sales value of production and labor costs (Scanlon Plan) or production value and labor costs (Rucker Plan). Non-financial metrics often include output per hour, quality measurements, and engineered time standards. Companies generally use between one and six key performance measures, with most effective plans focusing on relatively few goals to ensure employee understanding.

The role of baseline metrics

Baseline metrics serve as the foundation of any successful gainsharing program. These standards, typically based on historical data spanning two to five years, provide the reference point against which future improvements are measured. This historical performance baseline is crucial because gainsharing rewards are calculated based on improvements over this established benchmark.

Consequently, the baseline must be realistic and fair to ensure employee buy-in. Most organizations experience initial productivity increases of 5-15%after implementing gainsharing, with some exceptional cases seeing jumps of up to 40%.

Over time, baseline benchmarks require adjustment to account for capital investments in new equipment and the continuous improvement needed to meet increasing customer demands. Without regular recalibration, the baseline becomes outdated and may undermine the gainsharing program’s effectiveness. Moreover, companies must ensure transparency in all calculation formulas and performance metrics, communicating changes clearly to maintain trust and minimize potential disputes.

For gainsharing to succeed long-term, both the company and employees must believe the bonus formula is reasonable, accurate, and equitable. Essentially, if an organization lacks a reliable measurement system upon which to base gainsharing, they should postpone implementation until appropriate metrics are established.

Types of gainsharing plans explained

Several distinct types of gainsharing plans have evolved since the concept’s inception, each with unique approaches to measuring and rewarding performance improvements. The four primary models—Scanlon, Rucker, Improshare, and custom plans—offer different frameworks for organizations seeking to align employee efforts with business objectives.

Scanlon plan

The Scanlon plan, developed by Joe Scanlon in the 1930s, stands as the original gainsharing program focusing primarily on output and quantity improvements. This approach measures savings by calculating the difference between standard labor cost per unit and actual labor cost per unit of production. For instance, if an employee who normally fixes 15 air conditioners daily increases production to 20 units while maintaining the same work hours, they receive a portion of the resulting financial gains.

What makes the Scanlon plan distinctive is its emphasis on:

• Active employee participation through suggestion programs and committee involvement
• Establishment of employee-led committees focused on identifying efficiency measures
• A collaborative work environment promoting problem-solving and continuous improvement
• A gainsharing formula that employees can easily understand and track

The Scanlon plan effectively creates a platform for employees to contribute ideas that directly impact organizational success, fostering a sense of ownership throughout the workforce.

Rucker plan

In contrast to the Scanlon plan’s quantity focus, the Rucker plan (developed by Dr. Elton Rucker in the 1950s) emphasizes quality metrics instead of production volume. This approach proves especially valuable in industries where high-quality standards matter more than production quantity.

The Rucker plan typically measures performance using waste-to-production ratios or defect reduction metrics. For example, a manufacturing company might track the average number of defective parts produced daily. If this number decreases from 40 to 25 defective parts after implementing the plan, employees would share in the financial benefits generated by producing 15 more functional parts.

This quality-focused approach links employee bonuses to the value added to products or services, encouraging workers to improve overall value delivery to customers.

Improshare plan

The Improshare plan (Improved Productivity through Sharing) evaluates performance based on production hours rather than labor costs or product quantity. Similar to the Scanlon plan but with a crucial difference, Improshare calculates gains when the average time required to produce something decreases.

Consider a bicycle manufacturer that typically requires 4 hours to build one bicycle. After implementing an Improshare plan, employees collaborate to improve efficiency, reducing production time to 3 hours per bicycle. The financial gains from this time saving would then be shared among the workforce.

Notably, Improshare is calculated based on team productivity, intentionally encouraging interaction, support, and collaboration among employees. This approach works particularly well in environments where time efficiency directly correlates with business success.

Custom gainsharing plans

Beyond the standard models, many organizations develop customized gainsharing plans tailored to their specific operational goals and performance metrics. These personalized approaches begin by establishing measurable objectives and creating formulas for calculating gainshare payments.

A hospital, for instance, might implement a custom plan centered on patient satisfaction scores. If satisfaction ratings increase from 85% to 90% over six months, employees would receive incentive payments based on this 5% improvement.

Custom plans offer flexibility to focus on the metrics most relevant to a particular business, whether that’s customer satisfaction, safety improvements, or other key performance indicators. The critical factor remains establishing clear, measurable goals that employees understand and can influence through their daily work.

Regardless of which gainsharing model an organization selects, employee understanding of the calculation method remains essential for program success, as emphasized by Scanlon himself who believed transparency was fundamental to maintaining engagement and trust.

Real-world gainsharing examples

Experience proves that gainsharing delivers tangible results when properly implemented. Let’s examine three illuminating examples that demonstrate how different industries have successfully applied gainsharing principles to achieve remarkable outcomes.

Manufacturing efficiency case

A laptop manufacturing company brilliantly showcased the power of gainsharing through process efficiency improvements. Initially, the company required 5,000 working hours to produce 10,000 laptops. After implementing a gainsharing initiative, employees collaborated to streamline operations, reducing production time to just 4,000 hours for the same output—a 20% efficiency gain. This improvement generated savings of INR 12,657,067, which the company subsequently distributed equally among participating workers.

Similarly, a car manufacturer tackled waste reduction through gainsharing. Originally, the company generated approximately INR 421,902 in waste material per vehicle. Through collaborative problem-solving encouraged by their gainsharing program, employees reduced this waste to INR 253,141 per car—a 40% decrease. For a monthly production run of 50 vehicles, this translated to cost savings of INR 8,438,045, which was shared among team members who contributed to the waste reduction effort.

Healthcare cost reduction

The healthcare sector has likewise embraced gainsharing to combat rising costs while maintaining service quality. In one notable example, a private hospital implemented a pay-for-performance program between July 2006 and June 2009 that resulted in an impressive INR 2,109.51 million reduction in costs.

Southern Memorial Hospital took an innovative approach to healthcare gainsharing by focusing primarily on patient throughput. Staff members developed new services to reduce wait times and streamline procedures without compromising care quality. As patients moved through the system more efficiently, the hospital shared resulting cost savings with the employees who generated these improvements.

Xerox gainsharing success

Xerox stands as perhaps the most comprehensive gainsharing success story. Their program measured quarterly plant performance against predetermined standards based on added value (calculated as total output less material costs and controllable overheads).

The company’s approach yielded multiple benefits:

• Implementation of self-managing work teams and special problem-solving task forces
• Greater workplace flexibility and decentralized decision-making
• Reduction in status differences among workers
• Informal grievance resolution mechanisms

Financially, productivity improvements during the first three years generated a positive gain share pool split evenly—50% to employees and 50% retained by the firm. By fiscal year 1995, the program delivered cash payments averaging approximately 2% of employees’ salaries. When comparing three Xerox plants using gainsharing against those with conventional management practices, the gainsharing facilities consistently demonstrated higher productivity and lower operational costs.

Gainsharing vs profit sharing: Key differences

While both gainsharing and profit sharing reward employees for organizational success, they differ fundamentally in several key aspects that significantly impact their effectiveness in driving performance.

Basis of reward

Gainsharing and profit sharing operate on distinctly different foundations. Profit sharing directly ties rewards to the company’s overall profitability—higher profits mean bigger rewards. As opposed to this broad approach, gainsharing focuses on specific operational improvements and cost savings that aren’t necessarily linked to overall profitability.

The critical distinction lies in clarity: gainsharing explicitly outlines what employees need to do to drive gains, whereas profit sharing simply rewards when company goals are met without specifying how to achieve them. In essence, gainsharing targets the most important costs in a company’s financials, while profit sharing encompasses the entire profit and loss statement—you simply can’t focus on everything simultaneously.

Payout frequency

Secondly, the timing of rewards creates a substantial difference between these approaches. Gainsharing systems typically provide more frequent potential payouts, often monthly or quarterly. Conversely, profit sharing plans generally distribute rewards annually. This difference in frequency isn’t merely administrative—it fundamentally changes how employees experience and respond to incentives.

Motivational impact

Undoubtedly, the motivational effects of these systems vary considerably. Throughout a gainsharing program, employees experienceimmediate feedback on their efforts, creating a powerful motivational link. The close connection between specific actions and rewards helps employees see how their daily work drives gains.

In contrast, profit sharing may become perceived as an “entitlement” since people often don’t understand the precise connection between their efforts and profits. Furthermore, the annual payout cycle can dilute the immediate motivational impact. Many employees may not believe their individual efforts significantly influence company-wide profitability, particularly when external factors beyond their control affect financial results.

For organizations seeking to align employee activities with specific operational goals, gainsharing provides a more targeted approach with clearer behavioral guidance and more immediate reinforcement of desired performance.

Pros and cons of gainsharing incentive plans

“Few things are more important during a change event than communication from leaders who can paint a clear and confidence-inspiring vision of the future.” — Sarah Clayton, Senior Partner at Korn Ferry

Implementing gainsharing incentive plans comes with substantial benefits alongside some notable challenges. Before diving into a gainsharing program, I’ve found that understanding both sides of the equation helps organizations set realistic expectations.

Advantages: motivation, efficiency, teamwork

Primarily, gainsharing creates a powerful motivational environment where employees become genuinely invested in company success. When workers receive a direct financial stake in performance improvements, their engagement levels naturally increase. This enhanced motivation translates into measurable efficiency gains as employees view company resources from a business perspective, focusing on electricity saving, waste reduction, and system optimization.

Another significant advantage is the development of a collaborative workplace culture. Gainsharing fosters teamwork by aligning individual efforts with organizational goals. This alignment builds a sense of ownership and accountability throughout the workforce. The participative management style required for gainsharing also promotes positive attitudinal changes, with employees demonstrating increased pride in their work and more favorable views of the organization.

Disadvantages: stress, group vs individual, limited scope

Admittedly, gainsharing programs can increase organizational stress levels as employees face greater pressure to achieve financial targets. When personal financial rewards depend on collective performance, the workplace sometimes becomes more intense and competitive.

Tension between group recognition and individual merit presents another challenge. Gainsharing emphasizes team performance over individual contributions, potentially overlooking exceptional performers. This group-centric approach might frustrate highly productive individuals whose efforts get diluted in team measurements.

Finally, gainsharing implementation often requires substantial time investment. Organizations with more than 100 employees might need nearly a year to properly develop and launch an effective plan. The leadership requirements are also demanding—many successful programs need managers with prior gainsharing experience. Furthermore, the transparency required can create information-sharing concerns, as sensitive financial data must be disclosed to more employees than under traditional compensation systems.

Conclusion

Gainsharing represents one of the most powerful yet underutilized compensation strategies available to modern organizations. Throughout this exploration, we’ve seen how these programs create direct financial connections between employee efforts and company success, fostering ownership mentalities that traditional compensation systems simply cannot match. Despite the clear evidence of effectiveness—from Xerox’s sustained productivity improvements to healthcare facilities reducing costs while maintaining quality—many companies still hesitate to implement this approach.

The differences between gainsharing and profit sharing deserve careful consideration. Gainsharing delivers more frequent rewards based on specific operational metrics rather than overall profitability, thus creating stronger motivational links between daily work and financial incentives. This immediate feedback loop significantly enhances employee engagement compared to annual profit-sharing distributions.

Organizations should remember that successful implementation requires genuine employee involvement in both design and operation phases. Without this crucial element, gainsharing programs risk becoming merely another top-down initiative rather than the collaborative performance driver they’re meant to be. Additionally, companies must establish realistic baselines and transparently communicate all metrics and formulas to maintain trust.

Certainly, gainsharing comes with challenges. The potential for increased workplace stress and tension between group recognition versus individual contributions requires thoughtful management. Teams larger than 100 employees might need a full year for proper implementation, demanding significant time investment and leadership commitment.

Ultimately, gainsharing transcends simple incentive structures. This approach represents a fundamental shift toward participative management that aligns individual goals with organizational success. Companies willing to navigate the implementation complexities will likely discover what numerous case studies confirm—gainsharing delivers sustainable performance improvements while creating workplace cultures where employees genuinely care about company outcomes as if they were their own.

FAQs

Q1. What is gainsharing and how does it differ from profit sharing? 

Gainsharing is an incentive system where employees receive a financial share of the profits generated by performance improvements they helped create. Unlike profit sharing, which is based on overall company profitability, gainsharing focuses on specific operational improvements and cost savings, with more frequent payouts (usually monthly or quarterly).

Q2. What are the main advantages of implementing a gainsharing program? 

The key benefits of gainsharing include increased employee motivation, improved efficiency, and enhanced teamwork. It creates a direct link between employee efforts and financial rewards, fostering a sense of ownership and accountability throughout the workforce.

Q3. Are there any potential drawbacks to gainsharing? 

Some challenges of gainsharing include increased workplace stress due to performance pressure, potential tension between group and individual recognition, and the time investment required for implementation. Additionally, the transparency needed for these programs may raise concerns about sharing sensitive financial information.

Q4. Can you provide an example of a successful gainsharing implementation? 

Xerox is a notable example of gainsharing success. Their program measured quarterly plant performance against predetermined standards, resulting in productivity improvements and cash payments averaging about 2% of employees’ salaries. Xerox plants using gainsharing consistently demonstrated higher productivity and lower operational costs compared to those with conventional management practices.

Q5. How are performance improvements measured in gainsharing programs? 

Performance improvements in gainsharing are typically measured using specific metrics relevant to the organization’s goals. These may include increased customer satisfaction, reduction in process hours, improved productivity metrics, or cost reductions. Most programs use formulas to calculate employee shares, comparing current performance against predetermined baseline standards.