Gain Sharing Plan – Definition

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Gain Sharing Plan Definition

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 customised to suit a firm’s unique business environment and requirements. However, it is important to note that a gainsharing plan is in no way an individual incentive scheme.

A Little More on What is a Gain Sharing Plan

There are three primary types of gainsharing programs –

  1. The Scanlon Plan, formulated by Joe Scanlon in the 1930s,
  2. The Rucker Plan, and
  3. Improshare.

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 day’s 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 worker’s 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 company’s 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.

References for Gain Sharing Plan

Academic Research on Gainsharing Plan

•    From individual incentives to an organization‐wide gainsharing plan: Effects on teamwork and product quality, Hatcher, L., & Ross, T. L. (1991). Journal of Organizational Behavior, 12(3), 169-183. The authors employ various procedures to analyze the effects of a company’s transition from an individually oriented piecework plan to a gainsharing plan. The transition involved the following actions: Termination of the individual incentive system. Introduction of performance bonuses on a plant-wide basis. Facilitating employee participation in management decisions through an ‘idea’ system. An analysis of a survey conducted post-transition revealed that there were noticeable improvements in employee perception of teamwork and interest in performance.

•    Implementing a gainsharing plan: What companies need to know, Beck, D. (1992). Compensation & Benefits Review, 24(1), 21-33. This paper studies the various procedures involved in implementing a gainsharing program and offers insights to businesses planning such a move. The author reiterates the importance of factoring in employee values and prescribes gainsharing programs that not only suit the financial situations of individual businesses, but are also able to measure changes in performance.

•    Attributions for participation and nonparticipation in gainsharing-plan involvement systems, Hatcher, L., Ross, T. L., & Collins, D. (1991). Group & Organization Studies, 16(1), 25-43. The authors survey 149 supervisors and non-management employees of five firm with active gainsharing programs in order to explain variations in employee willingness to participate in such programs. The study found that an employee’s motivation for improved performance and involvement in management decisions had a direct impact on his willingness to offer suggestions. As such, employees harboring apathy towards the gainsharing program or the management as a whole, were a lot less likely to offer suggestions.

•    The impact of union-management cooperation on productivity and employment, Schuster, M. (1983). ILR Review, 36(3), 415-430. Schuster’s paper scrutinizes the impact of union-management cooperative programs on productivity and employment. The author samples productivity and employment data collected from nine manufacturing plants both before and after the introduction of the respective cooperation programs. The data samples are duly supplemented by qualitative data that the author obtains from company records and personal interviews with employees. A regression analysis of accumulated data concludes that six out of eight firms with measurable productivity statistics displayed noticeable increase in productivity levels. Moreover, eight out of the sampled nine firms demonstrated stable employment figures.

•    An examination of changes in work group communication behaviors following installation of a gainsharing plan, Hanlon, S. C., & Taylor, R. R. (1991). Group & Organization Studies, 16(3), 238-267. The authors analyze a tailor-made gainsharing program in effect at a Fortune Service 500 package delivery firm and study the program’s effects on work group communication behaviors. The authors report that the program has positive effects on task-specific and idea communication in the first six months since its implementation. They conclude that a gainsharing program that focuses on its intervening effects successfully creates positive economic outcomes for employers and employees.`

•    Improving the effectiveness of gainsharing: The role of fairness and participation, Cooper, C. L., Dyck, B., & Frohlich, N. (1992). Administrative Science Quarterly, 471-490. The authors scrutinize gainsharing plans and indicate limitations affecting productivity gain levels. The paper asserts that by rewarding selfishness and enabling free riders, gainsharing programs have essentially become counterproductive. It also explains the effect of a fairer distribution rule on productivity. The authors illustrate the above hypotheses with the help of two experiments. The results of these experiments show that fair distribution rules that are developed by participation can help resolve social dilemmas intrinsic to gainsharing plans.

•    Team-based pay: new wave strategic incentives, Ost, E. J. (1990). MIT Sloan Management Review, 31(3), 19. This paper offers an insight into how gainsharing systems evolved from being tactically-planned reward programs into the strategic management systems that are prevalent today. The author samples 60 manufacturing and 42 service sector businesses within the United States and presents the scope and attributes of pay-for-performance programs. He concludes that there exists no universally-accepted definition of gainsharing. However, all gainsharing programs associate productivity or financial goals with cash rewards.

•    Factors influencing organizational performance in gainsharing programs, Kim, D. O. (1996). Industrial Relations: A Journal of Economy and Society, 35(2), 227-244. Kim samples survey data collected from managers of 269 U.S. and Canadian businesses in order to scrutinize the various factors that determine the outcomes of a gainsharing program. The study concludes that the following factors significantly influence outcomes of such a program: Involvement of employees and consultants, Bonus payouts and employees’ share of the bonus, Size of the bonus group. Management of employee votes, Labor intensity, Market conditions, Financial situation of the business, Average seniority level of employees, Union status and support

•    An exploratory examination of gainsharing in service organizations: Implications for organizational citizenship behavior and pay satisfaction, O’Bannon, D. P., & Pearce, C. L. (1999). Journal of Managerial Issues, 363-378. This paper studies dissimilarities in cognizance of organizational citizenship behavior in two separate organizations, one employing a generic individual incentive system and the other, a gainsharing program. The study involves observing altruistic and cooperative behavior and pay satisfaction levels in employees of the respective organizations. The study concludes that employees of the organization employing a gainsharing program display noticeably higher levels of cooperation and job satisfaction.

•    Designing a gainsharing program to fit a company’s operations, Ringham, A. J. (1984). National Productivity Review, 3(2), 131-144. This paper attempts to assist businesses in developing customised gainsharing programs to suit their individual requirements and operations. It encourages businesses to select either of the three generic gainsharing programs – Scanlon, Rucker and Improshare as is pertinent to their business needs. In the event that none of the above three programs suits a particular business, the author suggests formulating custom-made gainsharing programs that take into account the company’s specific objectives and modes of operation.

•    Is gainsharing the wave of the future?, Imberman, W. (1995). Strategic Finance, 77(5), 35. Imberman’s paper samples three different firms with gainsharing plans to demonstrate the workings of such programs and also prove their effectiveness. Imberman also introduces five ground rules of successful gainsharing programs and attempts to analyze the reasons behind the low acceptance rates of such programs. He also demonstrates how gainsharing fosters total quality management (TQM) and steady development within firms.

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