Types of Employee Gainsharing Plans

by Devra Gartenstein - Updated September 20, 2018
Employers who share savings gains with workers improve productivity and build employee loyalty.

The more your employees have a financial and emotional stake in your company's success, the better their work will be. Paying a simple, straightforward wage only rewards workers for showing up, clocking in and doing the bare minimum necessary to keep a job. Gain sharing plans offer an alternative to straightforward pay structures that neither motivate nor inspire. These plans are powerful tools that tie employee earnings to performance and output. You can use a classic traditional approach to gain sharing or you can devise your own plan, tailored to your company's unique challenges and performance metrics.

The Scanlon Plan

The Scanlon plan was the first gain sharing plan to be widely used. It ties extra earnings to the ratio of labor cost relative to production value. The greater the amount workers produce relative to the hourly wage they receive, the higher the extra compensation they'll earn. For example, you might base gain sharing pay on the number of thimbles produced relative to the cost of the payroll hours that went into producing them. If your employees produce 200 thimbles in two hours at a labor cost of $15 per hour, they'll earn a higher bonus than if they produce 150 thimbles in two hours and a lower bonus than if they produce 300 thimbles in two hours.

Without a gain sharing plan, employees who are paid strictly according to an hourly wage have little reason to produce more thimbles in less time. In fact, they may even have a perverse incentive to move and work more slowly because the longer it takes them to produce the required number of thimbles, the more they'll earn. However, workers who receive extra compensation for more productive work have a real incentive to produce more in less time. They earn more money per hour even if they work fewer hours. In addition to the undeniable appeal of finishing early but earning the same amount of pay, they may take extra pride in being able to complete work more efficiently as their skills develop.

The Rucker Plan

While the Scanlon plan primarily measures productivity in terms of quantity of output, the Rucker plan shifts focus to evaluations of quality. This approach is based on the idea that in some industries, productivity really doesn't vary much, but other variables can provide meaningful data about how well employees are performing. A Rucker plan might measure waste relative to production volume, rewarding employees for making a larger amount of finished product out of a particular quantity of raw materials. Alternately, a Rucker plan might measure the number of defective items returned and reward workers for lower rates of returns.

Like Scanlon plans, Rucker plans reward employees for working well and for saving the company money. They dedicate extra money to compensating workers for specific outcomes. An industry that uses a Rucker plan may have processes that are mechanized enough to ensure reasonably consistent rates of production while relying on employees to use materials judiciously or to inspect a finished product to ensure that defective items aren't packaged and sold. Scanlon plans and Rucker plans may measure different outcomes, but they are both geared toward improving sales, making the most of resources and rewarding employees for doing an outstanding job.

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Improshare Plans

An Improshare plan is similar to a Scanlon plan in that it rewards production efficiency. Unlike a Scanlon plan, however, the Improshare approach measures the number of production hours rather than the cost of labor. Performance measures according to a Scanlon plan will vary relative to whether the work has been performed by high-wage or low-wage employees because they measure total payroll cost, which is higher when the work is done by employees who receive higher hourly pay. In contrast, Improshare plans treat all employee hours similarly, whether those employees are the company's top performers or the lowest.

Despite its cumbersome name, an Improshare plan is easy to implement and track because all hours are entered in the same category. Instead of drawing from payroll records to determine how many hours at what rate of pay have gone into a production run, you can simply track the total hours and total output and then calculate the ratio between them. Factors other than quality of work and employee engagement can affect Improshare plan numbers, but use of the plan is based on the assumption that, for the particular industry, the effects of these variables are small relative to the human element. These other relevant variables include production volume, which may be associated with economies of scale, and product mix, which may make it easier or more difficult to streamline.

Worker Ownership

Worker ownership takes the idea of employee gain sharing to the next level. Not only do workers earn extra based on the performance of the business where they work, they actually own shares or equity in the company. An employee-owned company might also use a gain sharing plan that rewards staff members for specific accomplishments and benchmarks, but the nature of employee ownership in addition allows workers to earn extra income based on the overall performance of the company. The connection between individual work and extra compensation may not be as direct as with a Scanlon plan or Rucker plan, but the overall level of engagement, investment and pride in company achievements can be quite high. These intangibles manifest as the material benefits of quality work and excellent customer service.

Employee-owned companies can take a variety of forms, from a business that gives its workers the opportunity to buy stock at an advantageous rate to an employee-owned company where more than half of the equity is owned by the workforce to a worker-owned cooperative, which is a nonhierarchical workplace democracy. Some businesses, such as Bob's Red Mill and Fat Tire Brewing Company, have embraced employee ownership as a strategy and a culture, bringing in employees as engaged partners even if they stop short of adopting a fully cooperative model. Their culture of engagement even becomes a powerful marketing tool, as customers embrace the idea of supporting businesses where employees are rewarded fairly and are actively valued.

When a business adopts a traditional gain sharing plan, all of the benefits go to the workers who have been involved in achieving the specific goal or metrics used as the basis for the extra compensation. When workers at employee-owned companies receive extra earnings tied to company performance, they usually receive the same dividends as employees who haven't been involved in the project that earned the extra income, as well as stockholders who aren't also employees. This arrangement may not necessarily compromise levels of engagement, but it is worth noting as a key difference between traditional gain sharing and the shared financial rewards that come with employee ownership.

In an employee-owned cooperative, gain sharing takes the form of patronage payments distributed to workers on the basis of how much work they have contributed during the period when the surplus, or profit, was earned. Co-ops can devise different plans for distributing surplus, including giving extra weight to member-owners who have been involved for longer periods of time. As with employee-owned companies that aren't structured as cooperatives, dividends or interest can also be paid to nonmembers or nonowners who have purchased preferred stock. However, co-op patronage payments get special tax treatment.

Gain Sharing Plans Pros and Cons

Gain sharing benefits a company by increasing employee engagement and improving the overall quality of work. However, it may not be clear to individual workers how their personal contributions have brought about the outcome being rewarded, especially in larger companies with many employees.

By tying rewards to specific outcomes, gain sharing plans may discourage the type of work that builds systems and infrastructure without necessarily showing immediate results. Meetings for sharing ideas and implementing new strategies can build workplace culture and bring about important changes to long-term direction, but they don't usually yield short-term rewards. In fact, these meetings may actually detract from calculations of productivity, especially when a company uses a plan that rewards tangible outcomes relative to payroll hours.

In addition to time spent brainstorming at meetings, many important innovations detract from short-term productivity because old systems must be dismantled and new systems must be learned to reap the benefits of these ideas. It would be demoralizing for workers to miss out on bonuses and extra gain sharing pay while new ideas are being implemented. Such a payment arrangement might even encourage workers to stick to outmoded processes that are easy and familiar.

Similarly, gain sharing plans may reward workers for productivity when there isn't any great or immediate need for the items being produced. It may be more efficient from a production standpoint to do a large run of a particular part, but if you don't have any orders for the product that uses that part, the manufactured items will just sit around gathering dust and tying up capital and space that could be used for products you'll sell more quickly. It's less efficient to do a small run of an item to fill a rushed, urgent order, but this will be better for your company's bottom line because the output will actually be sold. A profit-sharing or employee-ownership plan will offer rewards based on this bigger-picture productivity but a Scanlon or Improshare plan will not.

However, added rewards linked to sales or bottom-line profit have their own drawbacks. If employees know that certain items bring in far better margins than others, they may skew their sales and marketing to disproportionately promote these offerings. This may eat away at trust and compromise your company's long-term ability to retain clientele who receive the message that your sales force is more interested in profitability than in the well-being of its customers.

Despite these potential difficulties, gain sharing is an effective and widely used compensation strategy. It keeps employees motivated and it gives them the opportunity to take real pride in their work. Workers who are engaged and committed do higher-quality work and stay with your business longer, allowing you to build a deep and broad shared knowledge base and save money on training new employees and getting them up to speed. Engaged employees become ambassadors for your brand, reflecting well on your business with their enthusiasm and commitment.

By linking rewards to overall company performance, gain sharing plans can also help you to manage your payroll and keep it in line with your capacity to pay. When business is slow and goals haven't been met, your business won't have to pay out quite as much, allowing you to conserve cash for other operating expenses. Of course, it's never a good idea to balance your books on the backs of your workers. However, a plan that also offers generous rewards when the business or a particular group of its workers is performing well can bring in employees who truly act and work like business owners who reap benefits when company performance is strong and who are willing to make some personal sacrifices during leaner times.

About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.

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