Gain Sharing Plan - Explained
What is a Gain Sharing Plan?
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Table of ContentsWhat is a Gain Sharing Plan?Types of Gain Sharing Plan?The Scanlon PlanThe Rucker PlanAdvantages and Disadvantages of Gainsharing PlansAcademic Research on Gainsharing Plan
What is a Gain Sharing Plan?
A gainsharing plan is a type of management scheme that a firm utilizes to increase profitability by increasing the employees' financial and emotional stake in the success of the business. It involves offering employees financial shares of the business gains from improved performance in order to motivate them to perform better. Gainsharing plans provide an effectual alternative to conventional pay structures which are often perceived as uninspiring forms of remuneration. A gainsharing plan directly equates employee earnings with performance and as such, is an effective instrument in boosting performance and motivation levels. Gainsharing plans can be traditional or customized to suit a firms unique business environment and requirements. However, it is important to note that a gainsharing plan is in no way an individual incentive scheme.
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Types of Gain Sharing Plan?
There are three primary types of gainsharing programs -
- The Scanlon Plan, formulated by Joe Scanlon in the 1930s,
- The Rucker Plan, and
Of these, we shall study the first two in detail.
The Scanlon Plan
The Scanlon plan is in essence, the progenitor of all gainsharing programs. It is a cost-saving employee incentive program that correlates incentives with the ratio of production cost relative to production value. In simple terms, in a Scanlon plan, the higher the production output of an employee relative to his hourly compensation, the higher is his extra incentives. For instance, an employee working five hours a day at an hourly rate of $20 receives a compensation of $100 for a days work. Suppose his job is to fix windshields on pickup trucks, which he accomplishes at the average rate of six trucks an hour. However, with a Scanlon plan in place, the employee may increase his rate of production to eight trucks an hour, thus taking home an extra incentive in addition to the usual $100 he makes. In the absence of such a gainsharing plan, an employee working on an hourly pay basis has little motivation to perform better. As a matter of fact, such a worker may attempt to manipulate his timesheet by reducing his performance in order to show more hours for the same amount of work performed. A Scanlon plan eliminates the possibility of such misdemeanors by offering employees a real incentive to perform better. It also acts as a foundation for developing a workers production skills.
The Rucker Plan
The Rucker plan is another gainsharing program that aims to reduce production costs by correlating labour costs to a share of cost of production. It differs from the Scanlon plan in that its primary focus is an appraisal of quality and not quantity of output. Such an approach is especially suitable for industries with negligible variance in productivity figures, since it offers appraisal of other variables in order to measure performance. Rucker plans often consider parameters such as the ratio of waste to production volume or the number of defective parts per notation. The objective of a Rucker plan is to ensure optimal performance and cost savings. As such, Rucker plans incentivise high quality of work and reduction of production costs. While most companies that have employed Rucker plans are mechanized or automated enough to ensure fairly consistent production figures, they still depend on their workforce to ensure judicious use of raw materials as well as consistency in the quality of finished products.
Advantages and Disadvantages of Gainsharing Plans
Gainsharing plans benefit businesses by fostering better employee engagement in the production process and ensuring higher quality of work. Nonetheless, it may still be difficult for the average worker to fathom the inner workings of such a system. Gainsharing plans tend to correlate incentives to specific outcomes and ignore activities that do not show immediate results. As such, activities, such as ideation sessions, that are integral to the system or structure, are often conveniently ignored. This often results in employees being unenthusiastic about newer systems or ideas since any such change involves spending time in training sessions, which they consider non-incentivised work. Moreover, the primary objective of most gainsharing plans is to enhance productivity. However, there are several situations where high productivity is either not mandated or is a detriment. For example, companies that do not have steady orders can actually be negatively impacted by high production figures (in the form of warehousing costs of unsold goods). Gainsharing plans that incentivize high sales or higher bottom line profits also drive workers towards focusing only on products that typically offer higher margins. Workers often manipulate sales and marketing initiatives to favor such products. This can significantly damage a companys image by suggesting to its clientele that the business is only interested in selling products that offer higher margins. However, in spite of all their shortcomings, gainsharing plans are still popular and effective incentive schemes. A gainsharing plan not only motivates a worker to put in his best performance, but also cultivates in him a sense of pride in his achievements at the workplace. This results in indirect benefits such as lower levels of employee attrition and subsequently, lower time and money spent in training new workers. Gainsharing plans also assist businesses in managing their payroll and save on operating expenses when business is slow.