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.