Boosting company performance through team rewards

by Kevin M. Paulsen, Peter Wirtz & Associates

Many companies today are realizing that they need a better way to retain, reward, and motivate their employees. The age-old practice of annual raises does little to excite a worker's discretionary effort, and is rarely tied to an employee's performance. That is what gainsharing is all about. It is a mathematical system in which exceptional team effort and involvement turns into additional rewards for everyone.

As the chief operating officer of one gainsharing user puts it, "Our goal in putting in place a gainsharing plan was to establish an environment in which ownership, management, and the productive crew were all members of the same team. When we have problems of any sort it should be a concern of every member of the team."

Basic mechanics—how gainsharing works

The basic idea behind gainsharing is to offer an incentive to the entire workforce to improve the performance of the business and to reward them immediately when they do. As the old saying goes, "What gets measured gets done. The measurement system must be directed towards the activities that are most important to the company."

Gainsharing bonuses can be based on a variety of criteria through a measurement that is either financial or goal-based.

With a financial based formula, rewards are based strictly on factors related to revenues, value added, and/or costs. (See Table)

Table 1: Sample financial based report
Revenues from shipped jobs $200,000
Less: Credits to customers $5,000
Less: Cost of material/supplies $55,000
Value added by people $140,000
Targeted team cost: 30% $42,000
Actual team cost $40,000
Gainsharing pool $2,000

A second, goal based, approach would base employee bonuses on a combination of financial results and other ratios. Possible measures include

  • customer retention rate,
  • new customers,
  • customer satisfaction index,
  • on-time delivery,
  • inventory turns,
  • project cycle time,
  • employee suggestions,
  • orders processed, and
  • credits received.

The formula may still include a financial measure, but that would be just one piece of the overall formula. (See Table)

Table 2: Sample goal based report
  Baseline to beat Period results Gain Formula Pool
Gross margin
(allocated billing--direct costs)
40.0% 41.6% $6000/1% $8400
Average response times
(hours to address requests
12 hrs. 13.6 hrs. $2500/hr. (4000)
Absenteeism rate
(unexcused absences)
3% 2.65% $2500/1% 1000
Performance reward pool       $5400

Using either method, the measurement system works because it is simple, straightforward, and goal-oriented. Unlike profit sharing, all criteria are achievable and controllable. The bottom line: If group performance is effective enough and a bonus is deserved, then a separate check will be passed out to each employee as an immediate reward.

So what are some of the specific benefits a gainsharing plan offers?

  • Better teamwork and communication among employees
  • Improved attention to quality from employees
  • Improved employee involvement
  • Greater profits

Teamwork and communication

Because employees, along with management, will have a common goal to reach, any adversarial feelings that are present will gradually deteriorate. This encourages employees to work cooperatively among themselves and with their supervisors because everyone is on the same team. A manager at an Indiana foundry puts it this way, "Now our employees are increasingly likely to take up the slack without being asked. I am also able to move people around without them saying, 'Hey. that's not my job.'"

Quality

High quality products and services are absolute requirements in today's competitive business environment. But top management and supervision cannot work alone and expect to meet the quality goals. Gainsharing encourages everyone to focus on quality output and service because if shoddy workmanship or poor communication causes customer rework, then gainsharing bonuses are lowered immediately.

At an Illinois metals manufacturer bonuses were reduced by poor work. Employees saw it on the scoresheet and in their pocketbooks. Scrap rates have now dropped over 50 percent to bring the bonuses back.

Employee involvement

Employees quickly see that their productivity improvement ideas can turn into gainsharing money, which also benefits the company through increased profits. Some employees promote on-the-floor communication between the supervisors and employees. Others find productivity committees or meetings to be exceptional methods to air ideas and suggestions. However employees become involved, it is one of the key areas that separates the gainsharing winners from the losers.

Improved profits

Gainsharing allows everyone in the company to share in the bonus pool. If the company has a successful period, both the company and the employees benefit. The reverse is also true. If the employees fail to earn a bonus, the company will not reach its profit objectives.

Future competitiveness demands gainsharing

As Tom Peters puts it, "Provide bold financial incentives for everyone. Incentive pay for everyone is the 'clincher,' the ultimate recognition for a contribution to improved company performance." He's absolutely right! A productive company providing superior services and sharing its success with its employees is a team that is hard to beat.

CIRAS News, Vol. 32, No. 1, Fall 1997