Variable Pay Plan: Gain Sharing

Employers are often faced with the challenge of looking for ways to boost productivity and profitability while at the same time, motivating employees to accomplish organizational goals. For many employers, variable pay plans have risen to meet this challenge. A variable pay plan ties pay increases to increased performance and productivity. One of the more popular group variable pay plans is called gain sharing.
Under gain sharing pay programs, both the employer and the employee benefit from increased productivity. Therefore, gain sharing has often been referred to as a win-win pay program since it is an incentive strategy that ties pay to productivity. Gain sharing is a type of incentive plan designed to increase productivity by linking pay directly to specific improvements in a company”s performance.
Gain sharing is used primarily when quantitative levels of production are important measures of business success. Gains are shared with unit/department employees on a monthly, quarterly, semiannual or annual basis according to some predetermined formula calculated on the value of gains of production over labor and other costs. The plan lets employees reap some of the rewards of their efforts through teamwork and cooperation and by working smarter and harder.

Gain sharing plans offer the following:
· Directly ties pay to some important measure of company performance
· Results in productivity improvements when installed
· Appropriate for all groups of employees
· Improves communications and teamwork among employees
· Increases employee awareness of “the big picture”
· Improves job satisfaction and employee relations
· Increases employee participation through involvement in the system
Gain sharing pay programs have the following disadvantages:
· Time consuming to design, implement and administer
· Requires employee orientation, education and training
· Accurate and timely production and cost data must be available
· If not already in place, gain sharing requires a shift to participative management and employee involvement
Once you decide to add a gain sharing plan to your company you must pick the type of plan you wish to implement into your company. The following is a description of different types of plans a company could implement. A Value Added Plan is the cost of materials and services is subtracted from sales to determine a value added figure. Employee costs are then compared to this figure to arrive at a value added index. This index is compared to value added for future periods to determine if there has been an improvement in productivity.
To the extent that employee costs are less than would be the case by applying a value added index to a value added, there is a productivity gain to be shared. A major challenge with this type of plan is removing the effects of automation from productivity gains. The Rucker Plan, essentially, this is a value added plan that contains special adjustments to account for base wage and other price changes, capital expenditures, and other costs unrelated to employee productivity. The Scanlon Plan is one of the more familiar gain sharing plans.
It involves calculating total payroll costs and dividing by sales plus finished inventory figures to determine a plan ratio. Employee shares of productivity gains are determined by improvements of this ratio. The Improshare plan tells that increased productivity is determined by looking at the number of working hours that are saved in producing a number of finished units in a given period of time as compared to a base period. Its proponents stress that this measure leads to less waste and better quality control since only finished products are used in measuring the gains. The next is the Par Plan.
This plan goes beyond other gain sharing plans by rewarding any successful effort to improve productivity. It does not single out gains solely from a productivity improvement standpoint. A “par” figure is determined based on all manufacturing costs compared to sales. Any improvement in this ratio determines the gain to be shared. The Gallway Plan gives employee incentives. The incentives under this plan are based solely on reduction in labor costs. The labor value of each product is determined and becomes a basis for determining the gain in productivity that is shared with employees.
The first step in designing a gain sharing program is to determine what is to be accomplished by instituting a gain sharing plan. Is the objective to improve productivity? To reduce costs? To maintain or increase market share? Is the objective to improve organizational communication, employee relations or to promote employee participation in the organization? Is the objective to replace a compensation structure that no longer reinforces organizational goals such as improved product quality or customer service?
The next stage is to determine how employees will be grouped under the program. Will employees be grouped by geographic location, product or service line, organizational group, payroll category or other employee characteristics? However the group is defined, it is important that it be self-contained and able to function as a “team. ” The third step in developing a gain sharing plan is to determine what measures of performance are necessary to meet the stated objectives of the gain sharing plan.
Measurements may be financial, operational or a combination of financial and operational. The fourth step in developing a gain sharing plan is to design the key elements of the program. Key issues at this stage include how do you measure productivity measures and award bonuses, handling variations in performance, and allocating or sharing the gains. After the plan has been developed and administrative issues addressed, the next step is to implement the plan and get employees actively involved in a team approach to performance improvement.
This step might be accomplished by using formal or informal suggestion systems, quality circles, training sessions or set managed work groups with regular meetings. The final step after the plan is implemented is to ensure that it stays current with the development of the organization. During this phase of the process, a clear statement of plan documents outlining conditions under which the plan may be suspended, terminated or modified should be developed.