Executive Summary

Incentives in the working world are meant to encourage and motivate employees to go
the extra mile to achieve and exceed goals. Incentives can take many forms, including the
common bonuses and reward programs, but a unique form is gainsharing.
Organizations that want employees to focus on efficiency may adopt a gainsharing
program, which measures increases in productivity and effectiveness and distributes a
portion of each gain to employees. Gainsharing addresses the challenge of identifying
appropriate performance measures for complex jobs. Even for simpler jobs, setting
acceptable standards and measuring performance can be complicated. Gainsharing frees
employees to determine how to improve their own and their group's performance. It also
broadens employees focus beyond their individual interests.

Chapter 1
INTRODUCTION
1.1: ORIGIN OF THE REPORT
Being a BBA student of this university, we are all required to prepare a term paper for
every course in each semester. For this course, our course instructor, Lecturer Ummya
Page | 1

Salma had asked us to submit a term paper as per our will. After thoroughly analyzing all
the topics, I have chosen the Gainsharing Approaches as my topic.
1.2: OBJECTIVE OF THE STUDY
Gainsharing approaches are important elements of the incentive plan. The main
objectives for this study include the following:
1. To analyze the impact of various gainsharing approaches
2. To explore the different types of gainsharing approaches
3. To explore the recommendations that can make the gainsharing approaches
programs more effective
1.3: SCOPE OF THE STUDY
The scope of the report outlines the various objectives of the report. The scope of this
report is to understand how comprehensive gainsharing approaches have become and to
understand the massive impact it has on employee performance.
1.4: METHODOLODY
I have gathered the information from various sources. The major sources of information
include the book on Human Resource Management by Keith Davis and William
B.Werther also Human Resource Management by Gary Dessler. For further elaboration
and clarification, I also took help for various websites.
I have mainly used secondary sources of data which was collected through various books
and websites.
1.5: LIMITATIONS OF THE STUDY
Research works are meant to face limitations. While completing this term paper I too had
to face a lot of limitations in gathering information. My limitations included:

Time constraint

Lack of pertinent information

Page | 2

Chapter 2
GAINSHARING APPROACHES
Gainsharing programs actively encourage employees and employers to work together to
solve the problems of cost, quality, and production efficiency. Where there is an
improvement in one of these areas-based on a comparison with predetermined
performance measures-employees share in any resulting financial gains.
Gainsharing is related to profit sharing in that both plans are designed to relate employee
compensation to the performance of the organization and to engender employee
commitment. However, gainsharing is fundamentally different from profit sharing
because gainsharing rewards are related to departmental and/or organizational
performance rather than profit. Therefore, in some circumstances gain sharing plans
Page | 3

provide employees additional rewards when the company is experiencing productivity

and performance improvements but not making a profit.
To be effective, gainsharing programs must have the full support of employees at all
levels of the organization: executives, managers, supervisors, union representatives, and
line employees. The three main components of effective gainsharing plans include:

A management philosophy emphasizing employee participation, potential, and

ingenuity;
A structured involvement system for gathering and implementing employee

suggestions toward performance improvements; and

A formula to share benefits of performance-generated savings between workers
and their employers.

Overall, gainsharing programs are designed to encourage employees and management to

work together in order to maintain or increase productivity and performance throughout
the organization.
There are a number of different types of gainsharing plans, but the "traditional" plans are
the Scanlon, Rucker, and Improshare plans. Most new gainsharing plans borrow elements
from one or more of the traditional gainsharing plans, but are customized to meet the
specific needs of the organization.

How Gainsharing motivates employees

Many firms have had a difficult time developing compensation systems that were
simultaneously motivational and cost-effective. Managers have reported that gainsharing
motivated employees in their organization in several ways. First, financial rewards,
applied in the proper setting and in the proper way, can be a powerful motivator. In
addition, gainsharing provides:

Financial participation, which is a powerful tool for increasing employee

commitment and loyaltythe same psychological processes that operate for
Page | 4

senior and middle managers are applicable to other employees;

The ability to see the outcomes of work in monetary terms;

Rewards that are directly tied to work behavior;

Group rewards that lead to group cohesion and peer pressure to perform;

An expanded role for employees in an organization that fulfills higher level

psychological needs by encouraging employees to take more responsibility, utilize
more talents on the job, and become a genuine partner in the operation of the
business;

An opportunity for expanded communication leading to greater trust in the

organizationthe calculation of the monthly bonus formula permits employees to
understand fundamental business problems;

An opportunity to unify the organization as many gainsharing plans include all

employees (hourly, salaried, clerical, and so on) as participants; and

An equitable distribution of the gains from productivity improvement.

Chapter 3
TYPES OF GAINSHARING APPROACHES

3.1: Employee Ownership

Employee ownership means a significant and meaningful stake in a business for all its
employees. If this is achieved then a business has employee ownership and so it has
employee owners. What is meaningful is not confined to financial participation.
Irrespective of any financial participation, employees must have access to organizational
structures that ensure employee engagement. Where financial participation takes place
there is no set rule on what percentage of issued share capital is a significant and
meaningful stake.
Page | 5

Employee ownership can take one of three forms:

Direct employee ownership using one or more tax advantaged share plans,
employees become registered individual shareholders of a majority of the shares
in their company

Indirect employee ownership shares are held collectively on behalf of

employees, normally through an employee trust

Combined direct and indirect ownership a combination of individual and

collective share ownership

Employee ownership typically happens in one of the following scenarios:

Business succession or ownership succession- private owners, such as an

entrepreneur or family business, decide to sell to their workforce. The most
typical route into employee ownership.

Growth and Expansion- Partners, owners, or managers might decide to broaden

ownership to cover most or all employees, reflecting the need to attract, retain and
motivate talented people.

Public Service Spin-Outs- Sometimes called mutuals, these newly created

businesses including social enterprises and community interest companies
delivering public services may choose an employee led or owned solution as part
of their structure.

Insolvency or closure threat - employee buyouts can prove an effective route to

recovery for businesses that might otherwise fail.

3.1.1: Employee Ownership Benefits

The employee owned business tends to be more successful, competitive,

profitable and sustainable.
Page | 6

Employee owned businesses tend to be more entrepreneurial and committed to the

company and its success.

They have high employment standards, involve staff and give everyone a stake.
Employee owned businesses are better at recruiting and retaining talented,
committed staff.

These type businesses tend to have a strong commitment to corporate social

responsibility and involvement with the communities they operate in.

Employee owned companies are more innovative because managers go out of

their way to consult, share information about the company, and give staff
responsibility.

3.1.2: Employee Stock Ownership Plan (ESOP)

Employee ownership can be accomplished in a variety of ways. Employees can buy stock
directly, be given it as a bonus, can receive stock options, or obtain stock through a profit
sharing plan. Some employees become owners through worker cooperatives where
everyone has an equal vote. But by far the most common form of employee ownership in
the U.S. is the ESOP, or employee stock ownership plan. Almost unknown until 1974, by
2014 7,000 companies had ESOPs covering 13.5 million employees.
An employee stock ownership plan (ESOP) is a type of employee benefit plan which is
intended to encourage employees to acquire stocks or ownership in the company. Under
these plans, the employer gives certain stocks of the company to the employee for
negligible or less costs, until the options vests and the employee exercises them or the
employee leaves/retires from the company or institution.
These plans are aimed at improving the performance of the company and increasing the
value of the shares by involving stock holders, who are also the employees, in the
working of the company. The ESOPs help in minimizing problems related to incentives.

Page | 7

How ESOP works

In an ESOP, a company sets up a trust fund, into which it contributes new shares of its
own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to
buy new or existing shares, with the company making cash contributions to the plan to
enable it to repay the loan. Regardless of how the plan acquires stock, company
contributions to the trust are tax-deductible, within certain limits.
Shares in the trust are allocated to individual employee accounts. Although there are
some exceptions, generally all full-time employees over 21 participate in the plan.
Allocations are made either on the basis of relative pay or some more equal formula. As
employees accumulate seniority with the company, they acquire an increasing right to the
shares in their account, a process known as vesting.
When employees leave the company, they receive their stock, which the company must
buy back from them at its fair market value (unless there is a public market for the
shares). Private companies must have an annual outside valuation to determine the price
of their shares. In private companies, employees must be able to vote their allocated
shares on major issues, such as closing or relocating, but the company can choose
whether to pass through voting rights (such as for the board of directors) on other issues.
In public companies, employees must be able to vote all issues.

3.2: Production-Sharing Plans

In this strategy, a standard of output is set before the manufacturing period on the basis of
production goals. If this predetermined level of output is reached by the employees, they
are qualified for the incentive. Basically production sharing plan is a short time tool. Its
best practiced with specific production target in a given period of time. When the target is
set, employees try harder to reach it at any cost. Since fulfilling the target ensures
incentive for them. The incentive can be cash or non-cash both type.
Page | 8

3.3: Profit Sharing

Profit sharing is an incentive plan which awards employees with a certain percentage of
companys profits. Under this variable pay plan, the management of the company sets out
a percentage of yearly profits as a pool for sharing with employees. The amount to be
distributed is decided on the basis of a formula which is devised for profit distribution.
Often, profit sharing results in more money shared with employees with higher salary and
lesser amount to the employees whose compensation is lower. Profit sharing works best
in organizations which have relatively stable earnings, or if the earnings are gradually
increasing.
3.3.1: Characteristics:
The following are the characteristics of profit sharing scheme:
1. Workers are provided a part of profits exceeding a certain limit.
2. The profits are paid to labor/ employees in addition to their normal wages.
3. The payment is made from net profits. This means that it is not a part cost of
production or a charge against profit and loss account.
4. The payment is based on seniority for wages calculations of the workers.

3.3.2: Objectives:
The following are the objectives of this scheme:
1. To recognize the right of workers for sharing the prosperity to the organization.
2. To help maintain cordial relations between employees and employers.
Page | 9

3. To make workers feel as members of the organization rather than only employers.
4. To supplement income of workers.
3.3.3: Advantages of Profit-Sharing:
This scheme is good both for employers and employees. The employees try to contribute
their maximum so that profits go up. Management gets willing co-operation of employees
for all its progressive schemes.
The advantages of this scheme are as follows:
1. Increase in productivity:
The workers will try to improve their efficiency so that costs are kept under check and
profits go up. They will realize that low productivity will mean less profits and their share
will also go down. The workers will take keen interest in raising output of the
organization between Employees and Management.
2. Cordial relation:
There will be cordial relations between management and employees. Industrial
atmosphere is generally disturbed by strike and lockout. A strike leads to low production
and less profits. Workers will try to avoid every type of conflict so that work does not
suffer. Management on the other hand, will not have any excuse to declare lock-out etc.
Both the parties stand to gain by virtue of industrial peace.

3. Reduction in labor turnover:

Under profit-sharing scheme, workers are paid according the length of service, etc. Those
who have stayed for long stand to be benefited more. Employees will try to stay in a
Page | 10

concern for longer periods so that they get more as their share between the year do not
become eligible under this scheme. This will prompt workers to complete at least a year
so that they get share in profits.
4. Additional income for workers:
The payment of profits is additional benefit. It results in additional earnings to the
workers. They are allowed to raise their standard of living with the additional income.
5. Less supervision:
The workers are motivated to work more and do not require much supervision. They will
keep on working without caring whether there is anyone to supervise them or not. Their
interest lies in raising output. Self-discipline inculcated by workers reduces the need for
supervision.
6. Team spirit among workers:
Profitability is the result of team work. Single persons performance cannot increase
profitability of the enterprise. All the workers will try to improve their performance. They
will co-operate with each other for raising the profitability of the unit.
7. Social justice:
The profits will be shared by both employees and employers. Instead of leaving all profits
for investors, the employees will also be able to increase their earnings by having a share
in them. This will bring equal distribution of income and social justice.

3.3.4: Limitations of Profit Sharing:

Following are the limitations of profit sharing scheme:
Page | 11

1. No distinction between efficient and inefficient:

The profits are shared in a specific ratio by all the workers without regard to their
contribution. There is no distinction between efficient and inefficient workers. It kills the
initiative of efficient persons. Rather, in efficient persons feel more satisfied because they
also get the same amount of profits as received by efficient workers.
2. Uncertainty of profits:
The profits are always uncertain. A number of factors, besides workers are responsible for
the profits of a concern. The demand and supply economic factors, government policies,
etc. may influence profits. There may be low profits in spite of best efforts by the
workers.
The workers will never be sure of the amounts of profits available to them. They will not
be able to make their plans in the absence of definite amounts of profits. They may feel
discouraged if there are losses due to reasons beyond their control.
3. Manipulation of accounts by management:
Management may indulge in manipulation of accounts. Profits may not be accurately
shown by under-valuing of closing stocks or by inflating expenses. This often leads to
disputes among workers and management. Workers generally, suspect that management
do not show real profits to avoid payments to workers.
4. Opposition by trade unions:
Profit sharing schemes are not generally supported by trade unions. Management try to
keep workers away from unions. This is not acceptable to unions and they oppose the
adoption of profit sharing plans.
5. Inadequate incentive:
Profit sharing plan does not create interest in hard work continuously because profits
Page | 12

given only once in a year. On the other hand, if workers are paid incentive amount
regularly then they will continuously feel attracted towards their work. In case
management decides to credit share of profit to workers provident fund then it will cease
to offer an incentive for hard work.
3.3.5: Basic Principles for the Success of a Profit-sharing Plan:
These are as follows:
1. In order to enhance the team spirit of the organization, the management is always
interested in installing the profit sharing plan.
2. This system provides sufficient incentive to the workers and remove the feeling among
them that major share of their contribution by way of extra effort will go to the
management.
3. The workers feel that the incentive they are getting is the fair share of the profits they
have helped in generation. This generates faith among the employees in the working of
the incentive plan.
4. An atmosphere of understanding among the employees and management should be
created so that both of them consider themselves partners in the welfare of the
organization so that whenever company goes in loss, the loyalty and interest of
employees is not lost.
5. Employees should be well represented in the administration of the plan.
6. Management should have the abilities to manage.
7. Profit sharing plan should not be adopted as an alternative for paying less than the
prevailing wages.
8. The working of profit sharing system should be simple and easy to understand for
workers.
Page | 13

9. The plan should be dynamic both in technical details and method of administration of
the plan.
10. Management should not consider profit sharing as an answer to all troubles. It must
improve industrial relations by providing dignity and welfare of employees.

3.4: Cost-Reduction Plans

Cost reduction plans are effective principles or methods for increasing operations
efficiency. Cost reduction strategies can reduce operations costs while increasing
productivity, allowing for strategic reallocation of resources. These cost reduction
strategies provide additional benefits that ripple throughout the business by eliminating
waste, accelerating processes, and utilizing resources effectively.
With reduced cost in production, the organization can refocus budgeted resources on
expanding operations or new market expansion. This supports the strategic alignment of
goals as well as innovation and increasing market share.
Conditions to be considered for the plant-wide incentives plan:1. Technology
2. Size of the firm
3. Corporate culture
4. Historical performance
5. Stability of the product market

Three major types of Cost-Reduction Plans1. Scanlon Plan- This type of plan rewards labor savings, most appropriate for the
organization that has high labor content.

Page | 14

2. Rucker Plan- This plan is useful for the companies that want to improve other elements
such as energy consumption or scrap reduction in addition to labor.
3. Improshare- This plan is the easiest of the profit sharing plans to install and
understand.

Advantages1. Increase in the level of cooperation.

2. Improved quality.
3. Decrease in the measurement difficulties.
4. Eliciting active employee input.

Disadvantages1. Results in the protection of low performers.

2. Management-labor conflict.

3.4.1: Scanlon Plan

Joseph Scanlon designed this plan in the early years of the Great Depression to save
enterprises threatened by the economic collapse. Scanlon believed that if the workmen
are allowed to contribute to an organizations decision-making process, the goals of the
workmen and the employer would be common and both would work in co-ordination to
achieve such goals. Such plans were instrumental in ensuring stability in the labormanagement relations in a highly volatile era.
Scanlon Plan is cost-saving, gain-sharing, productivity-incentive plan in which any
saving (agreed upon standard labor cost per unit of output subtracted from actual labor
cost per unit of output) is shared equally between the workers and the organization. This
plan requires formal employee participation along with frequent performance reviews and
Page | 15

employee reporting.
This type of a gain-sharing program seeks to involve employees more directly in an
organizations decision-making process. Since the employees and the employers are set to
benefit from the plan, both should acknowledge the importance of each others
suggestions and contributions. For such plans to work, the relations between employers
and employees need to be relatively stable and the employees should feel a sense of
belonging to the organization.
Procedure
1. Employees provide suggestions to the department level committee
2. The suggestions seek to identify ways to improve productivity
3. The department level committees then transfer the suggestions to a
screening committee
4. The screening committee includes members of the workforce and the
management
5. The screening committee reviews the suggestions and designs measures to
improve performance
6. The screening committee periodically reviews performance and computes
the amount of bonus to be paid to workmen as their share of performance
improvements.
3.4.2: Rucker plan
The Rucker plan, almost as old as the Scanlon plan, was developed in the 1930s by the
economist Allan W. Rucker. The Scanlon formula measures performance against a
standard of labor costs in relation to the value of production, whereas the Rucker formula
introduces a third variable: the value of all materials, supplies, and services that the
organization uses.
The Rucker formula is calculated as follows:
$ Value of Labor Costs
$ Value of Production - $ Value of Materials, Supplies, Services
Page | 16

The objective of the Rucker Plan is to increase value added. When there is an increase in
value added, a fixed percentage of that increase is paid out as a bonus.
Concept of Value Added
Value added is commonly used in measures of an organizations productivity. It
represents the wealth created through its production process or provision of services.
Wealth is generated by the combined efforts of those who work in the organization
(Employee) and those who provide capital (Employers and Investors). It must therefore
be distributed among them.
To set standards for a Rucker Plan, an employer must examine accounting figures over a
long period of time to find a stable ratio between labor costs and value added. For each
accounting period, the following figures should be examined:

Sales value of finished goods;

Costs of raw materials, supplies, and services; and
Payroll, including wages and fringe benefits for direct and indirect employees.

The key element in a Rucker Plan is the productivity standard. Specifically, if

productivity is too low, payments will not provide sufficient worker incentive; if it is too
high too much will be paid in bonuses.

3.4.3: Improshare plan

Improshare is Improved Productivity through Sharing and was coined by Mitchell Fien.
Improshare is a type of group bonus that is gained depending on the productivity of the
team. Productivity is measured through amount of output produced in a given time
period. The bonus amount depends on both employees who contribute directly and
indirectly to the output.
Page | 17

The bonus is calculated by finding the difference between standard working hours and
actual hours to produce the required output and divided by the actual hours. The
employers and the employees share 50-50% of the bonus. The employees 50% is split
between all the members in the team that contributed towards productivity improvement.
An advantage of this method of bonus is that it promotes team work and collaboration,
resulting in positive group dynamics as well as increased productivity for the
organization. Furthermore the employees are aware that they will receive the bonus if
they finished their work quicker, hence improving efficiency as well as reducing the cost
of production.
However the drawback is that it only focuses on the reduction of cost of production and
does not consider reduction in other types of cost. Hence those employees involved in
other cost savings will not be benefited by the Improshare system.
Unlike some other plans, Improshare programs are not influenced by outside factors
beyond an employee's control, such as sales value or market conditions. Product changes
do not upset the plan because labor hours per product are being measured and
productivity bonuses are not affected by sales volume.

3.5: Incentive Matrix Summary

This is more like a tool that helps to analyze different types of incentives and gainsharing
approaches that are been practiced in any organization. Some programs may generate
cash for employee, where some may provide other benefits. Redesigned job can be one
sort of award too. However, fractional ownership of the organization can be offered to the
employee for his/her performance at one point.
Page | 18

Incentive matrix helps to differentiate if the approach is generating cash or non cash
incentive for the employee. It shows another important distinction which is between
individual and group incentive. When cooperation is expected, works must be assigned in
groups. However, when cooperation is comparatively less important, individual
incentives are better choice. But individual incentive might work against teamwork since
it puts employees into competition with each other. So depending on the need of
affiliation in work, incentive program has to be designed with the help of incentive
matrix.

Chapter 4
FINDINGS AND RECOMMENDATIONS
4.1: Findings
Gainsharing plans measure changes in critical relationships between inputs and outputs,
employees must understand the variables-that they can control-which affect
Page | 19

organizational performance. Many gainsharing plans create an esprit de corps between

interdependent work groups, and between labor and management, which usually reduces
conflict, improves cooperation between related work units and benefits labormanagement relations.
It's not uncommon for these quality-of-worklife benefits to have a positive effect on
absenteeism, turnover and tardiness. Also, companies may report considerable reductions
in their cost drivers (e.g., labor costs, product/service quality, purchased goods or
services). Lastly, gainsharing plans motivate employees to improve the performance of
key success factors within an organization.
4.2: Recommendations

Realizing the employee need is important so that the incentive program can be

designed accordingly.
Proper gainsharing approach should be chosen based on the organization structure

and condition.
Transparency in the incentive programs is unavoidable matter of concern
Must be consistent with the organization's existing beliefs and values

Conclusion
Gainsharing is a structured program to increase productivity and decrease costs. A
gainsharing program is setup so employees who reduce cost or increase profits, receive
regular cash bonuses. Gainsharing differs from profit sharing in that employees know
exactly the goals they have to achieve in order to receive the bonuses, more feedback is
needed and payouts are more frequent.

References:
Page | 20

Beck, D. (1992). Implementing a gainsharing plan: What companies need to

know. Compensation & Benefits Review, 24(1), 21-33

Bullock, R. J. & Lawler, E. E. (1984). Gainsharing: A few questions and fewer

answers. Human Resource Management, 23 (1), 23-40

Gowen, C. R., 111. (1990). Gainsharing programs: An overview of history and

research. Journal of Organizational Behavior Management, 11, 77-99

Masternak, R. L. (1992). Gainsharing boosts quality and productivity at a B. F.

Goodrich plant. National Productivity Review, 1202, 225-238

Schodlatz, W. C. (1955). The Rucker share of productivity plan. Management
Record, 17, 239-240

Page | 21