August 2008 Edition
an executive view
Benefits of gainsharing
Number of companies using motivation technique is increasing
By A.A. Imberman, Ph.D.
Despite all the doomsayers, worker
productivity increased in the metal fabricating
industries at a faster pace in the first three months of
this year than previously estimated, wage pressures
moderated, and an important measure of business activity
showed that the manufacturing sector continued to be
lively in May.
Can this growth in productivity be
sustained? How does a company motivate its employees to
boost output per man-hour worked without increasing
labor time or expense?
Why is the topic so complex? The
history of labor compensation since about the 18th
century all depended on piecework-pay for motivation.
That is, employees will get paid so many cents for every
piece that they turned out; more pieces, more pay. This
capitalistic method with variations was carried over
until the beginning of the 20th century when the
assembly line production method was inaugurated.

During World War I, with its emphasis
on American production of vital military materials, a
new method of stimulating employees was developed. That
new method paid a bonus to the entire production crew if
they turned out the war equipment as promptly as
possible.
After the war, various production
managers began to experiment with other methods, such as
profit sharing, to motivate employees to increase
productivity.
By this method, employees were
rewarded at the end of the year by some designated
percentage of company profits. In some cases, the profit
sharing was paid as a lump sum; in other cases, it was
paid partly at year’s end and the remainder retained
toward a retirement pension.
Profit sharing is beloved mainly by
company executives. As far as the hourly employees are
concerned, profit sharing is no motivator. A company’s
profit depends not only on production costs and other
internal factors, but also almost equally important are
cost of raw materials, competitive factors, market
conditions, etc. In short, employee effort has little to
do directly with company profits.
During World War II, there also
developed a major interest in productivity, that is,
output per man-hour worked. For example, if 100
employees produced 1,000 units in 1,000 hours in a given
month, and the same 100 employees produced 1,000 units
in 900 hours in the next month, that was a gain of 100
hours. Thus, if labor is $10 an hour, then the gain is
worth $1,000.
That monthly gain, if divided between
the workforce as a bonus and the company as a cost
reduction, began to interest many companies. As a
result, this whole new practice of Gainsharing began to
replace profit sharing.
Under Gainsharing, a group can see
its efforts rewarded, output quality improved, accidents
eliminated, and total incomes soar for employees and the
company. The experience of companies during World War II
led the federal government to look into this new method
of motivating employees. According to the Bureau of
Labor Statistics, some variety of Gainsharing is being
used by about 18 percent of manufacturing companies, the
number increasing every year.
Some companies, on the other hand,
drag their heels on Gainsharing mainly because they are
satisfied with their current, mediocre performance. That
explains why a few consultants, the author included, are
often called in to outline, design, and administer a
Gainsharing program for a company for a year or two.
The common result of most Gainsharing
programs, says a General Accounting Office report, is
often a 22 percent decrease in waste, spoilage, and
customer returns; a consistent boost in productivity;
and a 17 percent increase in net profit for the year.
To explain the ins and outs of
Gainsharing, I have delivered two lectures on
Gainsharing, one at Indiana University entitled "Gainsharing:
Lemon or Lemonade?" and the second at Northwestern
University entitled "Gainsharing: The Wave of the
Future?"
Under Gainsharing, a company can
expect to reduce costs, have more effective management
control, and provide better service to its customers and
suppliers. Employees would get a return on the savings,
usually in the form of a lump-sum bonus, based on
productivity.
According to the GAO study, "While
productivity sharing plans are not a panacea for every
firm or the solution to the nation’s economic problems,
they warrant serious consideration by firms as a means
of stimulating employee performance, enhancing their
competitive advantage, increasing the monetary benefits
for employees and company, and reducing inflationary
pressures."
A.A. Imberman, Ph.D., is retired from
the University of Chicago Economics Department. Readers
interested in reprints of his two lectures may request
them at www.imbdef.com .
What do you think?
Will the information in this article increase efficiency or
save time, money, or effort? Let us know by e-mail from our website at
www.ToolingandProduction.com or e-mail the editor at
dseeds@nelsonpub.com.