Gainsharing: A Lemon or Lemonade?

Woodruff lmberman

I n 1981, gain- sharing received attention from

the federal govern- ment when the U.S. General Accounting Office issued a re- port entitled Pvodlrc- titdty Sharing PK- g?zlm.s: Cur1 Tl!q Corltrihlcte to Pro- c4rtctiuiQ Impmr te- merzt? The conclu- sion of that report was that pay-for-

performance compensation system-known as gainsharing--“resiilted in labor cost savings aver- aging 2 7percetzt. along with improved work relations. reduced absenteeism, reduced turnover. and fewer grievances.”

What sort of elixir is this gainsharing? It is ~01 an incentive or bonus plan for individuals ex- ceeding a standard or quota. That’s the old piece- work system. Gainsharing is a group bonus plan aimed at modifying employee behavior. The en- tire factory work force--as ;I unit-is involved in an effort to exceed past performance. If success- ful, the gain is translated into cash and shurcd hetu~etw the compu~~~~~ n11$ the employec5. Nor- mally, the work force receives 50 percent of the gain in bonuses, and the comp:my receives an equal share in cost savings. This is gainsharing in its simplest form, a form that often works \:ery well.

Unfortunately, gainsharing programs that don’t work well are rarely mentioned in the lit- erature. Though gainsharing can be a great boon to a company and its work force, on occasion it turns out to be a lemon instead of lemonade. Uncler what circumstances does gainsharing hen- efit a company, and when does it become a det- riment?

Academic Interest

Gainsharing is not new. It originated around 1935 in the form of the Scanlon plan. But the federal government’s endorsement by the GAO in 1981 aroused the interest of the academic community, \vhich followed up with a whole series of erudite studies. I-‘rofessors R.J. Bullock and E.E. Lawler, for example, reviewed the experience of 3.3 com- panies with gainsharing and concluded in a 1984 report that in most cases “overall success was

found in organizational effectiveness, quality. innovation, lal,or-man;~gement cooperation. and pay.”

Thereafter, about 50 separate academic stucl- if3 were published covering the use of gainshar- ing in \3rious manufacturing 3rd service indus- tries. including banks, hospitals, and distribution. All studies were laudatory, finding that in various Rrays gainsharing helped boost productivity, qual- ity, and company earnings. In 1989 I’rofessor Paula B. Voos reported in the ,/olrr~zul oflabor Ke.search on gainsharing programs at unionized Wisconsin firms. Her conclusion was that gainsharing achieved “greater positive effects on productivity, flexibility in utilizing labor, and company performance outdoing other labor man- agement cooperation programs, including profit sharing, lal,or-management committees, and ern- ployee ESOPs.” I’rofessors T.L. Ross, L. Hatcher, and D. Collins found in 1992 that gainsharing showed better results than employee involve- ment, quality circles, quality of work life, sugges- tion boxes or suggestion systems, profit sharing, lal,or-management committees, employee stock ownership programs (ESOI-‘S), job enrichment. information sharing, job, rotation, survey feed- back, information sharing, or Total Quality Man- agement. The American Center on Productivity predicted that gainsharing “will become one of the fastest growing strategies in the U.S. in the 1990s and beyond.”

It does not, however, seem to have grown very fast. Only about 2,500 companies are using some variety of gainsharing today, the American Center reports. It is used mainly by larger compa- nies, such as Inland Container, General Signal, Eaton Corporation, TRW, General Electric, Cosco. Rexnord Fasteners, Federal Mogul, Cincinnati Milicron, Exide Electronics, Whirlpool, Rockwell International, Frigidaire, Ingersoll-Rand, and oth- ers. Why not more? And why not smaller compa- nies? Despite the voluminous and overwhelm- ingly positive literature on gainsharing, many of these programs have failed. But these failures are usually mentioned only in passing in the many publications on the subject. And no one seems really interested in ascertaining the extent or causes of unsuccessful gainsharing programs. Has gainsharing indeed often been a flop? If so, why?

No Garden of Eden

A study done at the behest of the American Man- agement Association and published in 1989 re- ported that gainsharing is not always a free ticket to an industrial Garden of Eden. Covering three years of experience with gainsharing in 83 com- panies, the AMA study reported that only oyle- third of the companies had success with gain- sharing, boosting their productivity handsomely and radically reducing the cost of waste, spoil- age, rejects, and rework. Two-thirds of the 83 company gainsharing plans were flops; they pla- teaued in a year or so, and were discontinued.

Three major causes of these failures were found. The first was the faulty payout formula by which the gains were to he measured and bo- nuses paid. Reasonable care was not taken to define the short-term performance objectives to be measured. and to ascertain that they were relevant to the company’s long-term goals. Deci- sions on gainsharing plan objectives cannot be made by an auditor or plant manager with a spare hour or two to do the calculations. When the payout formula devised by management was too “tight’‘-that is. no matter how hard the work

force tried, the payout was minuscule-failure was a sure thing. When the formula was based on the expectation that the work force would achieve zero defects overnight, or that a 100 per- cent boost in productivity would instantly emerge in the first months of the plan. failure ensued. Guidance in formula determination is almost mandatory.

Second, the plan itself was initially presented to the employees in an overly optimistic manner, “oversold” by a fervent management. Anxious to gain the cooperation of the work force, some managements made seductive sales talks to em- ployees, leading them to believe that a gain- sharing plan virtually guaranteed an automatic, substantial bonus with little or no special effort. The work force became disenchanted when no bonus or only a small bonus was forthcoming. Under those circumstances, employees concluded they had been purposely misled “to push the wheelbarrow faster“ without any adequate rec- ompense or management support. This sort of disenchantment occurs when a zealous manage- ment devises a plan and tries to “sell” it without input or suggestions from the work force. Ex- plaining to employees what a gainsharing plan is, how it works, and what employees must do to make it successful and earn bonuses has to be done carefully, adroitly, and cautiously. Such presentations must be conservatively structured. and employees must be given enough time to digest the information and ask questions. Again, some guidance is helpful.

Third, lack of support by middle managers cropped up in most instances of failure. Middle managers resisted the need to spend more time on the factory floor-in short, to act as “internal consultants” to employees seeking to develop new problem-solving ideas for improving pro- ductivity or quality under gainsharing. When

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employees take 3 gainsharing plan seriously and hegin to generate ne\v ideas for improving plant performance. exccutices must enthusi:istic:dly and resolutely insist that prompt energetic action be taken on all reasonable, safe suggestions for improvement. This applies to ideas concerning process, methods, products, safety, inventory

control, and scheduling. Not a11 ideas and sugges- tions will be earthshaking, hut the cumulative effect of many small. suggested improvements often turns out to he quite large in total. This means that executives must pay more attention to the factory work force, \\,hich often requires some indoctrination and training. If senior man- agement supports the training efforts and sends proper signals to middle management and super- visors to alter their style-to lead IW example and persuasion rather than simply by giving orders- then most middle managers will make the transi- tion gladly and successfully.

Update

Now the 1989 AMA study has been updated. From 1990 to lc)‘)S, I conducted a study of 147 companies that had gainsharing programs. Had anything changed from the 1989 findings that two-thirds of the gainsharing programs flopped? Not really. The numbers had changed slightly. hut the basic findings were still the same. Of

those 147 company plans, 63 (43 percent) failed to achieve the employee payouts pictured hy management \?-hen the plans were first installed. Again, in most cases this W;IS I,ecause manage- ment had set the productivity-quality goals too high; no matter ho\v hard the work force scrambled, no reasonable effort could achieve those goals. So the payout was either miserly, minuscule, or nonexistent, and after a year or so the plans were discontinued.

Twenty-six percent of the companies failed

mainly because the product mix or the marketing strategies changed consicleraldy. In those cases the plans Lvere not redesigned to take care of altered circumstances. For instance. in one surgi- cal products company in western New York, the gainsharing emphasis ~3s on reducing the cost of poor quality--cLlrt~lilinfi rejects and rework while maintaining productivity. The company employed 170 people and produced a wide array of scalpels. needle holders. clamps, retractors. and other devices ~lsed by surgeons. The real challenge was not how to boost productivity. but how to improve quality performance. The gain- sharing program \\orkcd extremely well until the company radically changed its product line by adding metal hospital lXds, which became about 70 percent of the company’s sales volume. Metal hospital beds called for no SLI& quality precision as scalpels and other surgical instruments. The

result: Interest in quality performance diminished as the hospital beds were produced in volume hut the company made no change in its gainshar- ing plan. After ahout a year of this situation, the plan was dropped.

Nineteen (or 13 percent) of the 147 company gainsharing plans did not sc~cccecl hecause man- agement changed its basic personnel policy. Lsu- all).. the company president, the \.ice president of operations. the plant manager, or some other key executive left the firm, and the new executi\.c had other aims, perhaps thinking the factor) personnel should perform at top sped u,ithout :m incentive plan. For example, in XI Ohio grey iron foundry, the object of the gainsharing plan ~vas to re\varci employees for a cut in manhours per ton of good output (minus rejects, spoilage, and rework). During the base period of 1990, the number of manhours per good ton averaged 28.4 for the year: in 1993, the average ~‘21s 22.58 iiun- hours--a gain of 6.21 manhours per good ton, and :I consideulde savings in money with 7 5,000 tons produced per year. Vat new company offi- cials torpedoed the gainsharing plan by maintain- ing there should 1~ no additional bonuses fat such improvements. “Top performance is \vhat the work force is being paid for.” the executives maint:iined, “so \vhy should they he paid any extras?” Goals were boosted to unreasonalde heights and payouts were cut; top performance ~vas not maintained, and giinsharing uXs eventLl- ally elimiruted.

Only 45 firms (31 percent) in the sample had successful gainsharing plans and results-almost identical in percentage to the previous 1989 study. The earlier study had found that when the gainsharing formula Kts well researched and the work force properly indoctrinated as to the goals and rewards. not only were productivity and quality improvements forthcoming. hut collateral benefits accrued 3s well:

l On-time shipments rose 18 percent. l Customer returns decreased 12 percent. l Absenteeism dropped 84 percent. l Lost-time accidents fell 69 percent. The 1993 study found the same general col-

lateral benefits among the companies that had successful gainsharing programs. Thus, the data for success and failure with gainsharing were remarkably consistent: upproxinlut~(~ om-t&d of’ the conqx~~~ its had smashi~~g s~~ccess, u hike tuw thilzls of them e”~~~cri~wced,fuilrtr-cs.

Rules for Success

Is there any way to change these proportions? Having examined scores of gainsharing plans and

installed :I variety of successful programs in 23 companies to date, I suggest six rules to ensure a successful gainsharing plan in any company:

1. The payout formula must be reasonabk and doable. A formula that pays minuscule bo- nuses or is based on the illusion that large im- provenl~nts will result instantaneously is doomed to failure. Some expert guidance is helpful in setting the formula. “Everything You Ever Wanted to Know About Gainsharing l3ut Were Afraid to Ask” (1993) provides a detailed description of how formulas are devised in different industries.

2. The first six to nine months of a program are vital to long-term success. Key detern~ina~ts of that success are employee involvement in devising the plan and employee understanding of the details. Consequently, a program of employee education must accompany the introduction of the gainsharing bonus formula. Mere, too: guid- ance is helpful.

3. Employee participation in drafting the gainsharing plan has a stronger effect in motivat- ing the work force to improve productivity and quality than even bonus share or bonus fre- quency. “Employee Participation: What Is It, How It Works” (1993) describes how to achieve that participation.

4. Though some executives like to pay gain- sharing bonuses quarterly, this is usually too long an interval to maintain a high level of motivation. Monetary rewards should follow performance with minimal delay. Monthly payouts seem to function best: weekly payments are sometimes possible.

5. Unionism per se is neither a plus nor a minus in gainsharing. Of the 23 company gain- sharing plans I have designed and installed, about half are in unionized plants and work as well as in ~~onunion plants. Preliminary education about the plan is vital. With gainsharing, union leadership and management can concentrate on problem-solving and rewarded improvements rather than sparring with each other.

6. As was emphasized in the 1989 American ~~anagement Association study, the greater the degree of expert guidance, the better the result- ant gainsharing performance. All successful plans are tailor-made for particular plant situations.

D espite the rate of failure reported in the two AMA studies, gainsharing obviously has its phenomenal successes. Recently,

Grain k Chicago Business (1994) published a chart summarizing the experience of 110 plant managers with their gainsharing programs. Shown in the Figure, the chart indicates that of the 110 managers studied, 93 reported highly favorable results in producti~i~ inlproveillent,

Examples abound. At Kaiser Aluminum in Jackson, Tennessee, a manufacturer of auto com- ponents, the use of gainsharing contributed to an 80 percent productivity boost over five years and a 70 percent decrease in poor quality costs-all

Gainsharing: A Lemon or Lemonade?

Figure Gainsharing Gains of 110 Plant Managers in Michigan, Ohio, Indiana, Illinois, Wisconsin, and Minnesota

/

42 reported prodilctivity

gains af 10% to A

1 rep01 gains of than 109

/

\-

and dis- continued the

Source: Grain’s Chicugo Bzrsinrss, April Zi/May 5, 1994, p, 1.

with its effect on the bottom line. General Tire’s 1,950-employee plant in Mount Vernon, Illinois, found that its gainsharing program generated $30 million in savings over a five-year period, $20 million of which was paid out to workers in the form of bonuses while the company profited by $10 million. “It is the basis of our operations now,” said Floyd Rrokman, coordinator of the program. Federal mogul Corporation’s bearings plant in Greensburg, Indiana realized productivity and quality savings worth nearly $400,000 in the first seven months of its gainsharing plan, which were shared 50/50 with the site’s 500 employees. Maytag Corporation cited enhanced manufactur- ing efficiency in reporting an income jump of 90 percent while gaining market share as a result of its gainsharing program.

Wrought Washer Manufacturing Company of Milwaukee, Wisconsin, producer of a full line of washers and stampings, reported its first year’s experience with ga~nsharin~. According to Tool- ing i; P~~~~c~~~~~ (“Investing in People Pays Oft 19941, the company‘s productivity grew by a cumulative 39 percent in 1993, earning the work force $165.737 in extra bonuses over their regular earnings and saving the company an additional Sl10,490. And productivity and quality continue to improve. At whirlpool Corporation’s Benton Harbor, Michigan plant, where metal rods are turned into parts for washers and dryers, produc- tivity and quality improvement came as a result of a gainsharing program that reduced costs, bolstered profits, benefited customers, and raised

blue-collar take-home pay by an average of about $3,000 a year. Since the onset of the gainsharing plan in lc)88, the plant has shown productivity gains of about 19 percent anmal(y,

with each year building on the previous year. And quality? The number of parts rejected has sunk to 4 per million from 837 per million. Other firms that have learned how to successfully man- age their gainsharing programs are Speed Queen, Merck & Co., Solar Turbines, Corning, Sony Elec- tronics, Carrier, Dresser-Rand, Consolidated Die- sel, Georgia-Pacific Paper, Federal Mogul, Colgate-Palmolive, Allstate, CIGNA Corp., Travel- ers Insurance, several financial institutions, and a number of other producers of durable and non- ciurat~le goods.

Gainsharing is used by many companies to achieve top quality output and bolster the bottom line. So why don’t more of these programs pro- duce lemonade rather than lemons? Gainsharing is not a procedure that can IX done with the left hand while the right hand concentrates on other matters. It requires management‘s attention, en- couragement, and support. The ultimate explana- tion for the number of failures may lie along the lines suggested 1,~ the noted management au-

thority, Peter Trucker: “Inertia in management is responsilde for more loss of market share, more loss of competitive position. and more loss of business growth than any other single factor.” 0

References

Peter F. Drucker. hlanaging,fi)r the F&we: 7be 1990s

ad Bqmnd (New York: Harper‘s. 1992).

Woodruff Indxrman. “Employee Participation: What It Is, How It Works,” Target .2fqpzirze (Associ;ltion for Manufiwturing Excellence). Januq-Felxual7im-y 1993, pp. 20-28.

Woodruff Imlxrman. “Everything You Ever Wanted to Know Ahout Gainsharing Rut Were Afraid to Ask.” Tavgct Mapzinc (Association for Manufacturing Excel- lence). May-june 1993. pp. 39-26.

“Investing in I’eopl~ Pays Off. .. *’ 7holirlg crd Pmci~-

tiwz. August 1994. pp. 21-24.

T.L. Ross. L. Hatcher, and 11. Collins. “Why Employees Support (and Oppose) Gainsharing Plans.” Cbn1pe)w- tim ~~1x1 Bclwf:llt A1um~ge?mwt, 8. 2 (1992): 17-27.

Paula \bo.s. “Influence of Cooperative Programs on I Jnion-hlan~lgement Relations.” jvz~r~zul of Labor- Kc>-

.srrrrch. 20, 1 (1989): 1w11i.

Woodruff lmberman is the president of lmberman and DeForest, Inc., a manage- ment consulting firm in Evanston, Illinois. Copies of his articles cited may be ob- tained by faxing him at 708-733-0074.