Linking Gainshare Plans to Strategic Performance Assessment

Strategically aligned performance assessment processes have given attention to increased creativity in reward programs. A suggested rewards program can include gainsharing. While gainsharing has existed for many years, most equate it with profit sharing or a way to legitimize previously scheduled bonus payments. In this two-part Astronology®, we will discuss how to increase organizational success by combining gainsharing and the “Balanced Scorecard” strategic performance method.

Curiously, with combining the use of a simplified two-page performance assessment outline, focusing primarily on "Balanced Scorecard" strategic objectives and each employee's contribution to the organization through his / her essential functions, a strategic performance assessment plan can be created to give an organization enhanced success. How so? If designed properly, gainsharing can focus on the behaviors of individual employees and employee teams, resulting in a more motivated, successful organizational culture.

The U.S. Office of Personnel Management (OPM) website describes gainsharing as: “a reward program that allows employees to share in an award based upon productivity gains or savings in excess of a predetermined baseline of performance. If an organization's goals include improving productivity, reducing waste, reducing costs, and/or creating a savings in production costs, a gainsharing program focuses employees on those goals.”

Organizations should keep in mind when considering any form of gainsharing that

1. An organization cannot expect its employees to continuously improve organization performance when:

• Their jobs limit their latitude & ability to change work processes, and
• When they are given little information about the business and / or management systems' focus on control.

2. Gainsharing’s primary goal is to support a philosophy of participative management. When commitment to change is lacking, the involvement process will be ineffective. Gainsharing then will fall short of expectations.

There are six basic components of and processes to build a successful gainshare program.

1. Define the group to be included. Many organizations attempt to make these programs all-inclusive. However, one must address the "line of sight" issue. All-inclusive programs sometimes lose their effectiveness since employees may not understand how they personally impact results.
2. Define the formula for measuring success and funding the share. According to the OPM website, “a gainsharing program is self-funding. Therefore, it requires reliable financial measures to calculate the ‘gains’ (i.e., profits or savings) that the organization and employees will share.” This is where the strategic balanced scorecard comes into play. Most organizations focus only on the financial aspects of the scorecard. While this financial emphasis ensures the funds for rewards will be available, this approach jeopardizes the other scorecard components. On the other hand, having four or five objectives can complicate the formula to the point that all are confused and have little trust in the outcomes.
3. Set the baselines and targets. The baseline for measurement should focus on historic information from the past fiscal year or quarter. Three levels of targets work best for all types of reward and recognition programs: threshold, target, and optimum. However, most gainshare programs focus on one specific level at which the actual share begins.
4. Determine the share between the organization and the employee. While organization culture often defines this, the most common ratio is 25% to employees and 75% to the organization. Some organizations first determine what percentage they want to reserve as retained earnings and then calculate the share. This ensures the ability to invest in future organizational improvements and, in public companies, to provide for stockholder equity.
5. Determine payout frequency. Many manufacturing organizations focus on an annual gainshare payout. There is an increasing trend towards quarterly shares to quickly reinforce the behaviors exhibited by employees. However, there may be financial reporting barriers that prevent this from happening. Those on a quarterly program commit to a payout within thirty days of the end of the quarter.
6. Develop the method to distribute shares to employees. Many advocate an equal share to all involved so as to reinforce the team aspect of the program. Some creative methods include distributing equal shares based on the total hours actually worked during the measurement period. Another determines the share based on the pay grade in which the job is classified. Care must be taken when distributing funds to non-exempt employees. Overtime payment is required on gainshare distributions.

Naturally, the next questions are “what are some critical tips in developing a strategically aligned gainshare program?” and “are there any negative impacts to using such a program?” In our next Astronology® article we will discuss these topics in more depth.