Ball Metric Measured

Gainsharing Best Practices – Gain Share Overview and the Performance Calculation

If you have a Gainsharing plan  in your organization, is it successful?  Hopefully the answer is "yes."  Are you satisfied with your organization's Gainsharing plan?  Hopefully, the answer is, "no, we want to make it better!"

In order for your Gainsharing plan to be truly successful, you should be continually looking for ways to further advance the plan. 

I had the pleasure of facilitating a conference for Human Resources Managers from 17 North American facilities.  Each facility had its own Gainsharing plan which was designed locally with my assistance. The purpose of the conference was to discuss the effectiveness of each site's Gainsharing plan.  The HR Managers shared experiences on what was working well and what could be working better. More specifically, we explored what practices they found to be most helpful in advancing their Gainshare plans.  The objective was to learn and openly share with their counterparts in order to help to make their respective plan more successful. 

It was, indeed, a rich exchange.  The "lessons" that emerged were noteworthy for the range of detailed, practical, and creative insights into making a Gainsharing plan a success.

However, before proceeding with the lessons learned, the following provides an overview of Gainsharing for those who may not be familiar with the concept.

Gainsharing, defined?  Gainsharing may be best described as a system of management in which an organization seeks higher levels of performance through the involvement and participation of its people.  As performance improves, employees share financially in the gain.  It is a team approach; generally all the employees at a site or operation are included.

The typical Gainsharing organization measures performance and through a pre-determined formula shares the savings with all employees. The organization's actual performance is compared to baseline performance (often a historical standard) to determine the amount of the gain. Since gains are measured in relationship to a historical baseline, employees and the organization must change in order to generate a gain.  This point needs to clearly emphasized; Gainsharing is best viewed as an "organizational development" tool, rather than strictly as an "incentive plan."

Employees have an opportunity to earn a bonus (if there is a gain) generally on a monthly or quarterly basis.  The bonus is typically paid as an equal % of earnings or the same cents per hour.

Even though many Gainsharing companies may not follow the practice, it's best to hold back a proportion of the employees' monthly or quarterly share and defer the monies to a year-end reserve account.  The reserve account is established in order to offset deficit periods and to reinforce longer run thinking.  In other words, if the employee's share for a month is a loss (for example minus $10,000) the $10,000 is used to offset the reserve balance.  Moneys in the reserve pool will be accumulated to the end of the Gainsharing plan year.  At the end of the year an annual payment will be made from a positive reserve pool.  If the reserve is negative, the company generally absorbs the loss.  In other words, employees will be motivated even during a troubled period.

Rather than having a management designed plan, many organizations have a "design team,"  (a cross- functional group of employees), assigned to help develop, communicate, and promote the Gainsharing installation.  Obviously this is done to form a group of disciples to help bring the balance of the work force on board.

Gainsharing - Best Practices

Now that you have an overview of the Gainsharing concept, what are the best practices?  Basically, the HR Managers brainstormed ideas regarding what worked best and then discussed each of the listed practices in more depth.  In other words, what specific practices have these facilities found to be most helpful in advancing their gainsharing plans?  These practices focus on the following areas:

Calculation

Employee Involvement

Communication

Recognition

This article is the first in a four part series that will address each of the four best practice categories in greater detail.

* Calculation: The "calculation" refers to the technical aspects of a Gainsharing plan.  In other words, practices related to the formula, measurement, baselines, and other aspects of a plan's design.  No doubt the calculation is an important element in a Gainsharing plan.  However, there is no one best formula.  Moreover, the calculation itself is not the key to the plan's success. Just like baseball, the calculation defines the rules of the game.  Three strikes, four balls, nine innings.  Knowing these rules allow the team into the ball park.  However, in the final analysis it is how you play the game (involvement, communication, and recognition) that determines whether you win or lose.

-  Line-of-sight.  The most often cited best practice related to the calculation is to have a strong line of sight between what employees do and what they are paid.  Plans that have measures with a higher degree of employee control and understanding appear to demonstrate better results. 

The feeling from the Human Resources Managers is that employee behaviors and actions should have a direct impact on what is measured.  Obviously, if there is a weak line of sight there is no reinforcement of positive behaviors.  On the other hand, it's very important to point out that employees do not have 100% control of any measure.  No matter what the measure: productivity, cycle time, quality, spending, or on time delivery, there are always outside factors that will influence the result. 

-  Family of measures.  The HR Mangers thought it was best to utilize a "family of measures" approach as compared to employing a broader single measurement such as the ratio of spending to revenue or cost to output.  Basically the family of measures approach uses 3 to 6 drivers of performance.  The drivers are measured, and gains and losses calculated for each respective measure.  The gains and losses are shared for each measure and then aggregated into an employee distribution pool.  The pool is distributed to all participants.

Generally the measures are interrelated, so it is extremely important to aggregate the gains with the losses.  For example if productivity and quality were treated independently, there might be the tendency to focus only on one metric at the expense of the others.  There needs to be a consequence for both good and bad performance.  (insert Chart)

-  Keep it simple.  The group emphasized that initially it's best to use about two or three measures.  As employees develop understanding and as the organization gains confidence with the system, addition measures may be incorporated into the plan.  However, the feeling is that companies should shy away from more than 6 measures for fear of making the plan more complicated and thus causing a loss of employee focus.

-  Change is good.  In addition to keeping measures simple, it's good to have a dynamic plan that has some measurement modifications every few years.  The group commented that the plan must be managed in order to fully support the business.  For example, some organizations may change the employee sharing percentage for a particular measure from one plan year to the next, depending on economic conditions.  In other words, if a recession is anticipated, a company may decrease the sharing percent of the productivity measure and increase the sharing for the cost measure.  The result will be better employee realignment with the organization’s objectives.  The plan should be "fine tuned."  Overhauls are primarily intended only when serious issues arise.

-  Frequency of Payout.  An annual payout will not cut it.  Those HR Managers that had plans that afford the opportunity to pay out monthly strongly felt that monthly, not quarterly, was the only way to go.  Their feeling is that monthly payouts help maintain focus, that having opportunity to get a bonus check at the end of each month is a good way to keep score.  On the other hand, those HR Managers that had plans that afforded a quarterly payout felt that a quarterly distributions was best. However, in all cases managers felt that an annual payout system would not get employee attention and motivate change.

-  Baseline attainability.  All the Human Resources managers stressed, if the baseline is too high, people give up and may become demoralized.  It appears that the organizations that have a more attainable baseline have had greater success in terms of improved performance.  These organizations used a historical average for the baseline when their plan was initially implemented.  Initially, the prior year's performance was often used.  Also, the feeling was that the higher the bonus potential for a given level of performance, the greater the focus. As one person said, "If the bar is too high, the pole-vaulter won't jump."

-  Baseline changes.  Typically baselines change from year to year. The feeling among the HR Managers was that employees need to know this upfront rather than being surprised at the end of the Gainsharing plan year.  Moreover, it is best to have a clear methodology for defining annual baseline adjustments.  Also, it is far better to have the Design Team be involved in how the baseline should be changed.  The baseline, like a goal, should have the stakeholders involved in its development.

-  Midyear revisions.  Generally, plan modifications are made at the beginning of the plan year.  However, some facilities have made interim adjustments when employees perceive that the calculation is not fair or appropriate.  Flexibility is the key.

In this article we've focused on an overview of Gainsharing and best practices related to the Gainsharing calculation.  However, there are many other factors related to Gainsharing that have not been discussed.  It is important to note that there are pitfalls to be avoided.  Considerable care must be taken before a plan is installed.

Moreover, the calculation side of Gainsharing just gets an organization into the ballpark; it defines the rules of the game.  However, no matter what the rules, it is how and organization plays the game that will determine its final success or failure.  Therefore, the reader needs to further focus on the best practices related to employee involvement, communication, and recognition which will be described in parts two through four of this series. 

About the Author

Robert Masternak, founder of Masternak & Associates a specialized consulting firm focusing in Gainsharing design, installation, training, and monitoring activities.
Mr. Masternak is an internationally recognized consultant with over 22 years of Gainsharing experience and is the author of the book Gainsharing - A Team Based Approach to Drive Organizational Change.
He has installed “tailor-made” plans in well over 200 companies including: chemical, plastics, iron, steel, aerospace, health supplies, healthcare, pharmaceuticals, machining, lighting, energy, automotive parts, mining, footwear, glass, defense equipment, distribution, aluminum, metal fabrication, printing, paper products, food manufacturing, and furniture.
If you are interested in further exploring Gainsharing, please call Mr. Masternak at (330) 725-8970 or email at robert@masternak.com

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