Difference Between Gainsharing & Profit Sharing

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A company’s human resources division can use various methods to motivate their employees. Two such financial motivations are profit sharing and gainsharing. Both methods allow employees to receive monetary benefits from their high-quality work and results. However, while the two methods have similarities, they have significant functional differences and can motivate different people differently.

Program Application

Gainsharing and profit sharing programs are similar in that both take a portion of overall profits and give it to the employees. Profit sharing, however, is broader in this regard by taking the percentage of a company’s overall profit and distributing it evenly among all employees. Gainsharing, on the other hand, takes a number of other operational factors into consideration, such as quality, service and cost reduction by individual employees. As a result, those employees receive a share of the financial benefits resulting from those actions. Additionally, profit sharing typically covers all of the company’s divisions, while gainsharing programs may only apply to some divisions.

Program Goals

There is no absolute profit sharing goal. Most companies award employees with benefits as long as the company generates a profit for the year. Gainsharing programs, on the other hand, have defined goals that individual employees must successfully reach before sharing in profits. An example of a gainsharing goal would be for a specific store to reach a target net profit or cost reduction during the first quarter of the year. Goals might also include skill building as well; for example, when employees successfully complete a new training program, they get a boost on their next paycheck.

Program Management

Profit sharing programs typically pay on an annual basis and are usually in the form of year-end bonuses or benefits. However, while these are company-wide, some businesses exclude unions from profit sharing programs because of the established contract terms between a company and the union. Gainsharing programs can be specific and created to only apply to certain sets of employees. There is a higher degree of communication and feedback between employees and management as well; meetings may happen on a weekly basis, with plans discussed regarding daily output levels.

Expert Insight: Effects on Employee Motivation

HR experts agree that companies must choose which program to implement, depending on the nature of the company and management goals. Profit sharing programs can help employees identify with the company and be on equal footing with their peers. However, company-wide bonuses can have little effect on individual drive to increase revenue. Gainsharing, on the other hand, can build a subculture within a company. Performance is linked to each employee and can build self-worth and ownership, based on the success of organization.