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What is Gainsharing?

By H. Terry
Updated May 17, 2024
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Gainsharing occurs when employees are offered incentives, such as bonuses, to participate in seeking out new ways to save on costs. This system of management can promote a spirit of cooperation and solidarity by showing employees that their opinions and ideas are being listened to and valued by the management. Gainsharing recognizes employees as valuable not only for the work they do but also in terms of how their input can inform effective cost-saving measures.

An important feature of gainsharing plans is the opening of new channels of communications — such as employee committees, suggestions boxes or simply an open-door policy — to help good ideas reach members of the management. For example, perhaps an employee of a cleaning company uses two garbage bags instead of one because those being purchased by the management do not hold enough weight. If it would be less expensive to buy stronger bags rather than twice as many weaker ones but the cleaner feels that this expense is not his or her concern and does not report the issue, then the company is spending more money than it should. With a gainsharing plan in place, the cleaner would have the means to communicate the problem and understand — through the existence of communication channels and by the promise of monetary reward — that his or her opinions are highly valued.

In gainsharing, the term "gain" is synonymous with savings. Employees stand to gain as much as they initially help the organization save on costs. Gainsharing is based on comparing historical data to current costs, so it is important to note that new gains need to be made in order for employees to receive a bonus or other benefits. It is sometimes wrongly confused with profit-sharing, another organizational development tool that is alike in terms of offering incentives but distinct in its aim. Gainsharing rewards employees for improving productivity; profit sharing rewards increased profitability.

There are three main types of gainsharing plans, distinguishable in terms of the formulas they use to calculate gain and productivity. The first to be documented, and still the most widely applied, is called the Scanlon Plan. This formula contrasts labor costs with the value of production; production value, in this case, is based on total sales. The Rucker Plan considers the cost of utilities and materials, as well as labor, in assessing how much value has been added to a product in a period of time. Finally, Improshare, which refers to improved productivity through sharing, measures the hours needed to produce something against the amount being produced to determine and reward the gain.

These three models represent the standard gainsharing plans. Many companies create custom plans in order to better fit their particular needs. What all gainsharing plans have in common is the aim of linking the economic interests of employees and employers to create a work culture that is oriented toward positive change and in which improved performance savings can benefit both parties.

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