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PRODUCTIVITY BARGAINING

Productivity bargaining is a form of collective bargaining in whichincreases of pay are secured in return for changes in working

practices which allow labour productivity to be raised.

Collective bargaining refers to the process of bilateral negotiations

between representatives of management and labour representatives no

such issues as wages, wage grades, working conditions and other welfareamenities. At the end of negotiations both the parties sign an agreement

which has a stipulated duration.

THE COLLECTIVE BARGAINING HAS CERTAIN

DISADVANTAGES:

a) The issues involved in collective bargaining are not always fully

understood by all the members concerned. In the words of Prof.

Lupton

b) Collective bargaining does not always take into account the effect onoverall economy and industry, of the wage agreements whether at

local or national level.

c) The bargaining is not realistically oriented to the performance. No

mention is made of the productivity at the industry or at the plant levelduring the course of collective bargaining. It fails to obtain full union

and worker co-operation to promote productivity, remove restrictive

practices, re-development of labour in different craft. It fails to relate

wage increase directly to change in the value of jobs in terms ofincreased effort or responsibility.

d) Collective bargain is subject to political and social pressures and when

wage increases are un-accompanied by productivity increases, it gives

rise to inflationary tendencies. This is often reflected in terms of

enhanced prices for products and services and as such the community

has to bear the brunt of this inflationary tendencies. While the

productivity gain, if any, is absorbed as profits, without in any way

directly benefiting the consumers, wage increases are reflected as cost


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increases in case of no change in productivity.

Quoting the experience of Steel industry, Owen Smith observes:

Traditional bargaining techniques were employed by Steel company of

Wales. When using this method, both sides behave rather as if they are atan

auction, with much importance being attached to finding the highest point

to

which employers will go and the lowest point below which trade unions

will

not go. In both cases, it is usually assumed that existing employment

levels will be maintained. More important, both sides leave thenegotiating table uncertain as to the practicability of an agreement, let

alone its life expectancy. This does not mean that either side need be

dishonourable, but that short-run considerations transcend the long-term

need to anticipate productivity changes with both the waged structure and

any increases in earnings. Existing anomalies in a wage structure mightgrow worse as this type of negotiation proceeds and underpaid workers

will become more resentful of their overpaid colleagues. It has already

been established that, within limits, such a behaviour pattern will

probably always exist in a collective bargaining situation; the

introduction of measuring techniques will minimize this tendency.

e) When once the agreement is broken it is damaged beyond repair.

f) Collective bargaining does not take into account the consumers

interest in terms of reduced of or steady price levels. It does not

provide an effective check when either of the parties violates the

agreement. It is essential that any bilateral agreement should be

protected under law and any attempt by either of the parties to raise

disputes seeking to re-open existing agreements should not beconsidered.

NEED FOR PRODUCTIVITY BARGAINING

When the employers found that the increased productivity is theresult of technological change and because of sophisticatedequipment. So some employers argue that if the increased

productivity is not due to increased effectiveness of working of


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employees but due to better equipment, all the benefits shouldaccrue to capital alone.

They also consider the fact that the workers should also equally co-operate in the change, as otherwise it will not bear full fruits to themanagement.

It will not be possible to achieve these changes without theconsequent industrial strife if the management is unwilling to share

the gains of increased productivity.

Financial incentives if applied injudiciously can lead towidespread discontent and fall in morale.

HISTORY OF PRODUCTIVITY BARGAINING

The origin of productivity bargaining can be traced to the economicdifficulties experienced by Britain in the sixties. With wages and prices

more and more under government control, a lead was taken by ESSOs

refining affiliate, viz., ESSO Oil Company Limited in this new field.

ESSO took a close look at the wages, job classifications, overtime

practices and other practices and offered wage increases and other fringe

benefits in return for unions acceptance forincreased productivity andchanges in The object of the negotiations was to improve the basic

efficiency of the companies operations while evolving a moresatisfactory method of answering labours needs. In practice, Productivity

Bargaining in England has succeeded in raising the ratio of productive tonon-productive time spent on the job by maintenance and process

workers at several large factories. It has enabled capital intensive

production and distribution facilities to go to shift working and reduced

the time lost due to dispute arising from cumbersome wage structures.

work practices.

CHARACTERISTICS OF PRODUCTIVITY

BARGAINING Productivity bargaining is a type of collective bargainnning In this method workers wages & benefits are linked to

productivity


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Without such productivity bargaining agreements workers may notrealize the importance of raising productivity for organizational

survival and growth.

In this ,a standard productivity index is finalized throughnegotiations, if they are able to exceed the standard productivitynorms, workers will get substantial benefits.

Productivity bargaining requires an explicit link between changesin work practices and changes in compensation

The real impact of productivity bargaining is in the attitude of theemployees they have.

ADVANTAGES OF PRODUCTIVE BARGAINING. It provides solutions to many of the typical problems of industrial

relations.

It closes gap between rate of pay and actual earnings. It enables demarcation difficulties to be eliminated and reduced It concentrates decisions at the level of the company and factory

GUIDELINES FOR THE ASSESSMENT OF

INCREASED PRODUCTIVITY

Productivity refers to the ratio of output and input i.e., it is the efficiency

with

which inputs are utilized and spent in achieving the output

Productivity =OutputInput

Or more precisely, productivity is the ratio of production to one of thefactorsof production viz, Land, Labour, Capital, etc. Thus we can arrive at

different

producrivity ratios for different factors of production. A distinction must

be

made between production and productivity. The former relates to the

production or volume of output whereas the latter refers to the ratio of

efficiency of utilization of different factors of production. That higher


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productivity implies higher and higher standard of living for the workersand

the community is a forgone conclusion.

1st GUIDELINE

It should be shown that the workers are contributing towards

the achievement

of constantly rising levels of efficiency. Where appropriate,

major changes in

working practice or working methods should be specified in

the agreement.

The objective of efficiency agreements is to make possible the constant

raising of efficiency; this will require close and continuing co-operation

between managements and workers so as to achieve and maintain the

highest standards in the use of both equipment and manpower. The

secondsentence has special reference to agreements which specify major

changes

in working practice to which workers have agreed. Such changes shouldalways be spelled out if there is any possibility that commitments in more

general terms will lead to difficulties of interpretation or will not be given

fullexpression in practice.

2nd GUIDELINE

Measurements of efficiency should be based on the applicationof relevant

indices of performance or work standards.

Management should devise and use appropriate yardsticks for measuring

the

contribution of workers of all kinds towards achieving rising levels of

efficiency and develop an information system which makes full use of the

data obtained as a result. For many manual operations work-studied

standards are applicable and should be used, but work measurement can


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also be applied to a wide range of clerical and other non-manual work.For

other situations it will be necessary to use more broad based indicators of

performance, if necessary on a group basis.

3rd GUIDELINE

A realistic calculation of all the relevant costs of the

agreement and of the

gain attributable in the workers contribution should normally

show that the

effect is to reduce the total cost of output or the cost ofproviding a given

service.

Relevant costs may include, for example, the cost of redundancy

payments

or a proportion of consultants fees where they are an integral part of anagreement, and these should be apportioned as necessary over a

reasonable

period rather than charged only to the first year following the agreement.Thegains attributable to the workers contribution may result from more

effectiveworking methods, the fuller utilization of existing capital equipment, the

adaptation of working practices to enable full and prompt use to be made

of

new equipment and reduced capital investment (if for example revised

scheduling and shift working make possible a smaller transport fleet).

Thereference to a reduction in cost assumes a calculation for the purpose of

which unrelated costs, e.g., the price of raw materials, are left out of

account.

4th GUIDELINE

There should be effective controls to ensure that projected increases in

efficiency are achieved and that higher pay or other improvements are

made


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only when such increases are assured.

In order to observe this guideline, managements must operate effective

controls, including an information system which makes it possible toestimate

in advance and subsequently monitor the extent to which increases theefficiency are in fact being achieved. In so far as the information system

shows that progress exceeds or falls short of the original projection, some

adjustment may have to be made. In any case, due allowance should be

made for the accrual of some of the achieved gain to the consumer.

Particular care also needs to be taken to distinguish the contribution of

workers from other sources of more efficient working.

5th GUIDELINE

There should be clear benefits to, the consumer by way of a

contribution to

stable or lower prices.

This guideline is of particular importance in areas of rapid economic

expansion, since the most needs to be made of opportunities to reduceprices

in these areas in order to contribute as much as possible to raising the real

incomes of the community as a whole. In some cases the community may

benefit by an improvement in quality while prices remain un-changed or

by

the use of the gains to complete more effectively in export markets.

6th GUIDELINE

An agreement applying to one group of workers only should

bear the cost of

consequential increases to other groups, if any have to be

granted.


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An example would be if supervisors have to be given a pay increase toprevent the disappearance of a differential as a result of a pay increase

granted to the workers whom they supervise. The need for consequential

increases unrelated to increases in efficiency should, however, be reducedas

much as possible by enabling other groups of workers to conclude theirown

efficiency agreements or by including them within the scope of the

original

agreement.

7th GUIDELINE

Negotiators should avoid setting levels of pay or conditions

which might have

undesirable repercussions elsewhere.

Where large increases in pay are shown to be justified, negotiators should

consider the possibility of staggering the increases over a period of time

or,

alternatively, of a non-recurring lump sum payment. Failure to do so,

mightraise expectations for future increases which could not be fulfilled and

might

also, because of the exceptional size of the increases, have repercussions

which would eventually rebound on the undertaking granting the originalincrease.

REQUIREMENTS OF PRODUCTIVITY

BARGAINING

The fundamental requirement of productivity bargaining is that a sincere


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attempt must be made to raise productivity through positive increase inefforts.

The bargain should aim at reduction in unit costs or at least try to de-

escalatethespiraling price increases. A careful application of Productivity

techniquesfor improving over-all performance is essential to achieve this.

A systems approach can help considerably in designing a productivity

agreement. The inputs in the form of changes in operational procedures,

reorganization

of workers or work-place are to be clearly and unambiguously

spelt out and a schedule of completion of such inputs stage by stage

shouldbe clearly defined. The output in the form of increased productivity and

rewards should be worked out on the basis of guidelines discussed earlier.

The most important limb of a system is its control points. The system

should

constantly check whether the output as envisaged is achieved or not. It isthus useful at times to implement the system in stages, in which case we

may

draw from experience gained in preceding stages.

When a productivity agreement is signed covering only part of the

workers in

the plant, a question arises as how to compensate those workers who are

not

covered in these agreements. One possibility is to grant pay rises to only

such of those staff who are covered under the agreement. But obviously

this

would not be very conducive to harmonious industrial relations. The

PIBs

guidelines suggests that all rewards must result from the direct savings

accruing out of implementation of the agreement. Thus all the workersmay

be partly compensated through this change, the rest being given after theother set of workers are brought into the purview of the agreement.

In large plants or companies with more than one plant, if a productivity

agreement is envisaged forming part of a single or a few sections or

plants, it

is desirable to relate pay increases to the overall improvement of the plant

rather than that achieved in the particular section or plant. If a job

evaluation


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is simultaneously carried out, it can help to reduce the disparities in wagestructure and ensure that increases in earning do not distort the existing

wage structure.

The reward for increased Productivity may also take the shape ofnonfinancial

perquisites such as improved status, free grants or more welfareamenities, though it may be difficult to tell this idea immediately.

Consumers must also have a share in the benefits of increased

productivity,

in the form of lower prices or stable price levels. If an agreement provides

also for the growth of the organization in terms of re-equipping through

sophisticatedequipments and as a consequence the productivity improves

enormously, then it would be wrong for all the benefits to be enjoyed bythe

workers and owners of the company. A reasonable share must be

provided

for the community as a whole.

It is essential that all the implications of a productivity agreement areunderstood by all the levels of management. This calls for educating all

of

them through negotiations and other means.

There must be suitable organizational set up with qualified personnel to

undertake productivity measurement collection and proceedings of

relevant

information, etc., within the company itself. Also other aspects such as

maintenance, safety and protective measures which are incidental to

productivity increase must be taken care of in course of agreement.

DIFFICULTIES IN INTRODUCING A

PRODUCTIVITY BARGAIN

Productivity bargain is a more through attempt to achieve productivity

rise in

the company and increased earnings to the workers than what is

attemptedwith conventional collective bargaining. However there are several

difficulties

to be encountered while introducing a productivity bargain in a company:

i) The chief difficulty is to get over the inter and intra union rivalry.


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Speaking at a recent seminar on Multiplicity of Trade Unions and itsEffect on Industrial Relations and Productivity on June 15, 1972, the

President Mr. V.V. Giri reiterated the slogan of one union in one

industry and said that multiplicity of trade unions is neither conduciveto the promotion of good industrial relations nor did it help increase

production and productivity so essential to national prosperity. Itweaken the power of collective bargaining and reduces the

effectiveness of workers in securing their legitimate rights.

ii) The management must spend considerable time and effort to keep the

required information ready and this calls for an effective information

system. Also this information must be circulated in advance, so that

the union can check the information and get all the clarificationsrequired.

iii) Alternate avenues of employment must be ensured for redundant

labour to ensure productivity without tears. This would call for

expenditure for retraining labour in new skills.

iv) There must be a continuous appraisal of the job evaluation system,

since the skill requirements vary from time to time. There would also

be difficulties arising out of the subjective elements of a job evaluation

system and the irrational conceptions of individuals about their own

importance.

v) The management must realize the productivity agreements are not

solely intended to reduce labour costs, but have wider benefits also

and as such should try to maximize the potential benefits from

productivity bargaining.

vi) Greater knowledge of management and unions about the productivity

techniques, its concepts and implications leads to removal ofhesitation and hostility by both sides towards productivity agreements.

CONCLUSIONS

1. Productivity Bargaining is different from collective Bargaining,

even though both have some similarities.2. Mutually accepted guidelines/models help in sharing the gains

of productivity equitably.


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3. Introduction and implementation of productivity bargainingagreements involve considerable preparation.


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GAIN SHARING


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Introduction:-

Gainsharing is a system ofmanagement used by a business to increase

profitability by motivating employees to improve their performance

through involvement and participation. As their performance improves,

employees share financially in the gain (improvement).

Gainsharings goal is to improve performance and eliminate waste (time,

energy, and materials) by motivating employees to work smarter as ateam rather than just working harder.

Definition

Gainsharing is a program that returns cost savings to theemployees, usually as a lump-sum bonus. It is a productivity

measure, as opposed to profit-sharing which is a profitability

measure.

An employment arrangement in which an employee benefits fromhis or her contribution to improved performance of the

organization.

For example, a hospital might offer physicians a share of any cost

reductions in patient care attributable to actions taken by physicians. Gainsharing attempts to motivate employees through financial rewards.

An incentive plan in which employees or customers receivebenefits directly as a result of cost-saving measures that they

initiate or participate in the companys gainsharing program tiesbonuses directly to team performance

Employee motivational technique where compensation is given formeasurable performance gains in such areas as sales, customer

satisfaction, and cost reductions. The compensation is often given

to employee teams for achieving specified goals.

Gainsharing history
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One of the first Gainsharing plans dates back to the 1930's. In the 1930's alabor leader and MIT Lecturer Joe Scanlon, preached that the worker

had much more to offer than just a "pair of hands" (manual labor).

Scanlon believed that the person closest to the problem often has the bestand simplest solution. Also, if the worker is involved in the solution hewill make the solution work.

In an effort to help a troubled company, Scanlon and the company owner

asked employees' for their ideas and suggestions to help reduce waste andlower cost. Many improvements were made. The company became more

successful. Joe was asked to save other companies who had barely

survived the depression. He eventually became the Acting Director of the

Steelworkers Research Department and used his skills in creating joint

labor/management improvement committees to help the war effort forWWII.

After the war Joe became a lecturer at MIT and went on to develop a

system for organizational development and gainsharing that becameknown as the Scanlon Plan.

As the Scanlon Plan developed a method to measure (calculate) gains

(improvements) was created. The monetary gains were then shared with

all employees. This calculation represents the bonus (monetary incentive)element of Gainsharing. This concept addresses the principle of equity.

"It is fair to share." Everyone in a company makes a contribution to the

organization's success. Why limit bonuses to the select few? People

typically take pride in their work and have a strong desire to be respectedfor what they do. By sharing the company is communicating an important

message to the work force: "We all contribute. That contribution isrespected. Let's share in the financial benefits."

Gainsharing today

Today, companies use Gainsharing to both measure performance and

reward employees when it improves. Companies use a pre-determined

calculation (formula) to share the savings with all employees. The goalsof a companys Gainsharing plan depend on its cost structure and long-

term competitive strategy and are tailored to fit the industry

(manufacturing, service, or corporate). Information regarding the

measures, formula, and gains (savings) is regularly and openly shared

with all employees. Since the monetary gains are shared with employees,
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people develop more of a sense of ownership for their work and thecompany. People have a better understanding of how they influence thecompany's success.

Gainsharing develops the work culture

It should be noted that in a Gainsharing plan, the company's current

performance is compared to its historic performance (baseline period).

The savings above the baseline period determine the gain or loss. This is

a very important point. Since gains are measured in relationship to ahistorical period, employees and the company must improve in order to

make a gain. Performance thresholds must be corrected periodically for

the effects of capital investment in new equipment as well as for thecontinuous improvement needed to meet ever higher customer demands.

When people do their work differently they must change. However, as

everyone one knows, it is difficult for people to change. On the other

hand, do people like money? Most people would say, "Yes." Therefore,

Gainsharing can be a very powerful tool. Gainsharing promotes the needfor continuous improvement and eliminates employees' sense ofentitlement.

The employee involvement element

A very important part of a successful Gainsharing plan is the employee

involvement element of Gainsharing. In order to foster a culture of

positive change, a successful Gainsharing plan needs to incorporate a

structure system of employee involvement. It is common for Gainsharing

plans to have a "team-based" suggestion system in place.

How does a team-based suggestion system work? First, teams are formed

in order to gather suggestions from employees on ways to improve, (inother words, suggestions on how to work "smarter"). To avoid

unnecessary bureaucracy, most companies ask managers/supervisors to

lead departmental teams whose goals mesh with the overall objectives ofa companys Gainsharing plan. The teams are permanent groups. The

teams meet on a regular basis to discuss the ideas and suggestions. They

make decisions on approving or declining the ideas. Also the teams are

given limited spending authority to approve and implement the

suggestions. Suggestions that are approved by a team, but are beyond

their spending authority, are advanced to a higher level in the
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organization for final approval. Unlike a traditional suggestion system, ateam-based system does not provide individual monetary rewards. This is

because everyone works together and shares in the gain together.

Gainsharing is not an individual incentive plan.

The bonus calculation element

In terms of the calculation, a Gainsharing plan may have from one to six

key performance measures. The most effective Gainsharing plans have

relatively few performance goals because employee understanding ofthem is necessary for success. Examples of measures include

productivity, quality, waste, spending, and customer service which are all

factors employees can control. The gains (savings) from each measure arecalculated separately. Then gains and losses from each measure are added

to determine the total gain. A portion of the total gain goes to the

company and a portion is shared with all employees. Generally, from10% to 50% of the gain is shared with employees. The percent of the gain

shared with employees depends on employee controllability and

importance of the measure to the organization. The pool is distributed to

all participants, typically on a monthly or quarterly frequency. The

frequency of payouts depends on the employee line-of-sight (employees

ability to identify what they do today to earn a payout at the end of the

Gainsharing period). Companies with unskilled and semi-skilled

employees typically have plans calling for payouts at shorter intervalsthan those with highly skilled workers.

Gainsharing implementation

It is very important to note that the development and implementation of a

Gainsharing plan involves employees and that its goals are within

employee control. An employee committee called the "Design Team"

helps to make policy decisions on issues such as the plan's measures,employee eligibility, frequency of payout, and method of communication.

Next the design team gets upper management approval before

implementation. After approval, the Design Team is responsible for

conducting meetings with all employees to communicate the details of theplan. Follow-up training should also take place.


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Elements of Gainsharing

Element Gainsharing

Purpose

To drive performance of an organization by promoting

awareness, alignment, teamwork, communication and

involvement.

Application

The plan commonly applies to a single facility, site, orstand-

alone organization.

Measurement

Payout is based on operational measures (productivity,quality, spending, and service), measures that improvethe line of sight in terms ofwhat employees do and

how they are compensated.

FundingGains and resulting payouts are self-funded based onsavings generated by improved performance.

Payment targetPayouts are made only when performance hasimproved over a historical standard or target.

Employeeeligibility

Typically all employees at a site are eligible for planpayments.

Payout frequency

Payout is often monthly or quarterly. Many plans have

a year-end reserve fund to account for deficit periods.

Form of Payment

Payment is cash rather than deferred compensation.

Many organizations pay via separate check to increase

visibility.

Method of

distribution

Typically all employees receive the same % payout or

cents per hour bonus.


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Plan development

Employees often are involved with the design and

implementation process.

Communication

A supporting employee involvement and

communication system is an integral element of

Gainsharing and helps drive improvement initiatives

There are three major types of gainsharing:

Scanlon plan:This program dates back to the 1930s and relies on committees to

create cost-sharing ideas. Designed to lower labor costs withoutlowering the level of a firm's activity. The incentives are derived as

a function of the ratio between labor costs and sales value ofproduction (SVOP).

Rucker plan:This plan also uses committees, but although the committee

structure is simpler the cost-saving calculations are more complex.

A ratio is calculated that expresses the value of production requiredfor each dollar of total wage bill.

Improshare:Improshare stands for "Improved productivity through sharing" and

is a more recent plan. With this plan, a standard is developed that

identifies the expected number of hours to produce something, and


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any savings between this standard and actual production are sharedbetween the company and the workers.

[3]

Features of each gainsharing plan include:

Strategic objectives-

Most successful gainsharing programs utilize clearly

communicated objectives. Common objectives include: improving

safety, reducing operating costs, enhancing productivity and

quality, and reducing materials and/or energy usage.

Employee involvement-

Involving employees should be an important consideration

in gainsharing plans. The Scanlon and Rucker plans utilize a

multitiered employee-involvement program that consists of a

suggestion system and one or more committees to identify and

solve operational problems. Although Improshare doesn't requirean involvement program, plans having an involvement vehicle tendto be more successful than those that do not.

Employees covered by gainsharing plans-

There is wide variability in the employee groups covered by

gainsharing plans. Some organizations have established plans that

cover all employees, while other plans have focused on production

and indirect labor. One of the most difficult decisions to make isdesignating which employee groups should be included in

gainsharing. In the decision process, organizations must consider

the tradeoffs between including those groups of employees who

can impact the measurement formula the most, and including all

employees to develop esprit de corps.

Typical elements of a Gainsharing plan include the following:
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Gains and resulting payouts are self-funded. The plan commonly applies to a single plant, site, or stand-alone

organization. However, some organizations have levels of sharing

across multiple locations or corporation-wide. Performance is typically measured across

departments/units/functions. Measures are commonly narrower and controllable by employees

rather than being an organization-wide measure of profits.

However, some organizations have measures as broad as profits. Payout is often monthly or quarterly. Many plans have a year-end reserve fund to account for deficit

periods.

Employees are involved with the design process. All employees are eligible for plan payments. The bonus is often paid as an equal percentage of compensation or

equal cents per hour worked, rather than paid on the basis of

individual performance.

A supporting employee involvement system is part of the plan inorder to drive improvement initiatives.

How does Gainsharing work? The typical Gainsharing organizationmeasures performance and through a pre-determined formula shares thesavings with all employees. The organization's actual performance is

compared to baseline performance (often a historical standard) to

determine the amount of the gain. Employees have an opportunity to earn

a Gainsharing bonus (if there is a gain) generally on a monthly or

quarterly basis. Gainsharing measures are typically based on operational

measures (productivity, spending, quality, customer service) which are

more controllable by employees rather than organization-wide profits.

Gainsharing applies to all types of business that require employeecollaboration and is found in manufacturing, health care, distribution, and

service, as well as the public sector and non-profit organizations. Typicalelements of a Gainsharing plan include the following:

When does Gainsharing work best?Works best when company performance levels can be easily quantified

and in a work environment that is based on openness and trust. A

supporting system of employee involvement will significantly enhance


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the long term effectiveness of the plan. Requires managementcommitment, training and frequent and ongoing communications.

What is the best way to implement Gainsharing?Executives and managers must be educated in order to develop a clear

understanding of the Gainsharing philosophy and the management style

required for success. If an organization moves forward with a plan, it is

best to form a team of employees to work on various elements of the

project. The team is involved in preparing many of the rules of the planand final approval for the plan details from top management. The team is

then responsible for presenting and communicating the plan details.

Supervisors and managers are trained in the relationship of their role

toward the plan. Teams are formed and trained in order to work on

performance enhancement initiatives. It's best to have an expert on

Gainsharing to guide and facilitate the process in order to work throughthe pitfalls and to avoid payout out of false gains.

Advantages

Helps companies achieve sustained improvement in keyperformance measures

Rewards only performance improvement Payouts are self-funded from savings generated by the plan Aligns employees to organization goals Fosters a culture of continuous improvement Enhances employee focus and awareness Increases the feeling of ownership and accountability Enhances the level of involvement, teamwork and cooperation Supports other performance improvement efforts and helps

promote positive change Promotes morale, pride, and more positive attitudes toward the

organization

Disadvantages

Measures are narrower than organization-wide profit and thereforegains may be paid even though profits may be down.

Requires a participative management style


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Requires that management openly shares information related toperformance measures

Employees may question or challenge management decisions thatmay adversely impact a gain.

Increases the level of organizational stress since everyone has moreof a financial stake in the organization's success

Applies best to and a work environment that requires teamworkand collaboration rather that individual entrepreneurship

Paid on the basis of group performance rather than individual merit

Our experience in designing and studying many gainsharing plans

suggest six factors must be addressed in creating an effective

gainsharing program.

Utilization of an easy-to-understand:- Formula that tracks those

variables which directly affect an organization's strategic performance.

Employees must have an impact on formula's elements.Regular program evaluation (at least annually) :- This can include

developing metrics to assess program performance, creating procedures

for revising the bonus formula and using a process for communicating theprogram's changes.

Employee involvement during design, implementation and periodic

evaluation:- Organizations that solicit employee input regarding program

design tend to have programs that outperform systems designed without

such contributions.

A base reward system that pays at the current market level:-

Gainsharing is not a substitute for paying salaries below the market level.

It is designed for and works best when augmenting a base salary system

that reflects market conditions.A subject-matter expert to guide the design process:-Gainsharingsystems are not do-it-yourself programs. Success requires an expert who

has successfully designed these types of reward systems. Organizations

that think the process is as simple as reading a book usually encounter

significant problems.Stable product/service lines:- Organizations that have relatively stable

product/service lines or an ability to develop a stable formula tend to havethe highest success rate. Rapidly changing product/service lines and

unstable baselines will result in wide payout variations, which tends to


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undermine employee confidence in the program.

Types of measurement formulas

There are two distinct types of gainsharing measurement formulas:physical and financial.

Physical formulas :- reward employees for improving the relationship

between physical units of output and input (e.g., Improshare). This type

of formula affords many advantages because it's based on easily

understood variables within the employee's direct control. The downside

of using this type of formula is that it can pay bonuses during periods of

shrinking or nonexistent profit.

Financial formulas :-are based on an organization's overallprofitability. Employees become eligible to receive a bonus only when

the organization makes a profit. The Rucker and Scanlon plans use thistype of formula. Since financial formulas are affected by factors beyond

an employee's direct control (e.g., inflation, government regulations,

taxation, pricing decisions), they are distorted by the relationship between

effort and reward. This can have a deleterious effect on employees'

motivation (see figures 2 and 3).

In some organizations, the three textbook formulas don't track and rewardthe variables required for competitive advantage. In these instances, it

may be appropriate to develop a customized formula that meets an

organization's special needs. When developing a formula, you should

consider the following guidelines:Create a formula that can be administered easily.

Develop a formula that adapts to changing environmental conditions.

Before installing a formula, do simulations or modeling to identify how

the bonus is affected by changes in volume, selling price, market share,

etc.

The baseline:-Baselines are used as a starting point for calculating improvements.

Organizations use either permanent, dynamic, rolling or targetedbaselines. Permanent baselines remain constant during the plan's lifetime.

This provides employees with an added advantage because their bonuses

reflect improvements made during previous periods. Dynamic baselines


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are revised on an intermittent basis (usually early) according to theperformance level achieved in the previous measurement period. Plans

that utilize dynamic baselines have problems maintaining bonus levels

because employees must generate new improvements constantly.

Rolling baselines calculate the average performance for a specific numberof periods. The length of time typically varies from four to six weeks. For

example, if a company utilizes a four-week rolling average as it begins

the first week of month two, the first week of month one is dropped.

Targeted baselines are used when no appropriate baselines are available.

This can occur when a new product or technology is introduced or when

work processes are significantly changed, making the existing baseline

invalid.

The employee bonusThe percentage of savings shared with employees varies depending on the

gainsharing plan utilized. Generally, plants that only measure labor

productivity share the greatest percentage of savings with employees.

Traditionally, the Scanlon plan (labor-only formula) returns 75 percent ofthe gain to employees. Improshare usually returns 50 percent of the gain

to employees, while the Rucker Plan varies greatly.

When determining the bonus share, management should consider the

capital intensity of the business, frequency of baseline changes and

expected motivational impact. Capital-intensive industries usually pay outsmaller shares to employees. Plans that frequently change the baseline

require larger productivity improvements for employees to receive a

bonus. Typically, these types of plans provide employees with a larger

share.

In most plans, organizations pay out bonuses either weekly, monthly,

quarterly or annually. Most organizations reward employees monthly.When deciding on payout frequency, consider the availability of data,

motivational intent desired, administrative costs and environmental

uncertainty (uncertainty in the environment can cause considerable

payout variations).

Organizations can divide employees' share of gains as follows:

Percent of income-


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The bonus pool translates into a percentage of salaries, with eachemployee receiving an equal percentage of compensation. This method is

used in about 75 percent of the plans.

Equal shares-

Every employee receives the same dollar amount.

Hours worked-

The bonus is paid in terms of dollars per hour worked and applied

to employees accordingly.

Advantages of productivity gainsharingOrganizations that have successfully implemented productivity-

gainsharing plans report a number of benefits. Many of theseorganizations believe it has significantly improved organizationalcommunications, especially between labor and management, and between

different interdependent functional units. Since gainsharing supports a

true pay-for-performance culture, employees tend to see their prosperity

linked directly to the organizations. This tends to increase their

commitment to the organization.

Since gainsharing plans measure changes in critical relationships between

inputs and outputs, employees must understand the variables-that theycan control-which affect organizational performance. Many gainsharing

plans create an esprit de corps between interdependent work groups, and

between labor and management, which usually reduces conflict, improves

cooperation between related work units and benefits labor-management

relations.

It's not uncommon for these quality-of-worklife benefits to have a

positive effect on absenteeism, turnover and tardiness. Also, most

companies report considerable reductions in their cost drivers (e.g., laborcosts, product/service quality, purchased goods or services). Lastly,

gainsharing plans motivate employees to improve the performance of key

success factors within an organization.

Is gainsharing right for you?Listed below are seven variables that should be considered when

assessing the feasibility of gainsharing.

Fit with strategy and ongoing operational initiatives-


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An organization's strategy is the vehicle of change. Gainsharing isviable only when it supports the business strategy and is integrated with

ongoing operational initiatives.

Alignment with existing culture-

Gainsharing is not an overlay. It must be consistent with the

organization's existing beliefs and values.

Commonality with the prevalent leadership style of management

Gainsharing requires a participatory leadership style. Supervisors

and managers must not be threatened by increased employee

empowerment. Management must be receptive to suggestions for

improvement and be willing to act on those suggestions.

Capabilities of the information-reporting system-

Gainsharing plans can tax an organization's information system.

Successful plans require accurate, timely and appropriate information tocalculate the bonus and track the plan's performance.

Type of product/service mix-

Plan complexity increases exponentially as the product/service mix

becomes greater. It is, therefore, more difficult to implement gainsharing

principles in an organization with a wide range of product/service lines.

Interdependence of the work force-

Gainsharing works best in organizations that have highly

interdependent processes.

Potential to absorb additional output-

The basic premise behind gainsharing is to improve the ratio of

inputs to outputs. Typically, organizations focus on increasing outputs. If

your organization competes in a market that cannot utilize additionaloutput of products/services, productivity gains can become personnel

displacements.

Implementation issuesSince no two organizations are alike, there is no map that can be used to

design and implement gainsharing in all environments. Listed below are

several broad steps that should be considered when designing and

implementing a gainsharing program.Conduct a readiness assessment-


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A readiness assessment answers two important questions: Isgainsharing a fit within my organization, and what are the requirements

for a successful transition to gainsharing?

In most instances, the readiness assessment should start with a review of

your operations.

This can include an analysis of the current physical layout and process

flows, existing productivity measures, historical information on resources

used, key cost drivers, input/output variables that measure productivity,

capital investment plans and assessment of the degree employees can

impact profitability.

It is not advisable to install gainshar-ing in an environment where large

capital investments are planned, which can affect the capital-labor ratio

and makes the baseline unreliable.

In addition to the operations review, you should conduct an assessmentthat identifies how a gainsharing program will affect your organization's

architecture. We believe architecture is composed of three elements:

technology (i.e., the equipment, data and applications used); organization

(i.e., administrative control systems, structure, human resource systems,

culture and employee competencies); and process (i.e., work processes

and physical layout).

Design gainsharing program-

Typically, this begins with the formation of a design team. Ourexperience suggests a cross-functional design team-represented by human

resources, training, finance, operations and the union, if applicable-with

significant employee representation a must for success.

Unless the design team has considerable gainsharing experience, werecommend you conduct education on gainsharing principles, including:

the history of gainsharing; successful case studies/plant visits;

benefits/risks; features of each gainsharing plan; and a blueprint for

design/implementation.

After completing the training, the design team should get down to thenuts and bolts, and develop the objectives of the gainsharing program,

identify which groups will be covered by the plan and design the plan's

key features (e.g., employee-involvement vehicles, productivity baseline,


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bonus formula, bonus payout). Before selecting which plan to implement,we recommend highly that the design team simulate the Scanlon, Rucker

and Improshare plan formulas based on historical data while using a

variety of input/output measures.

One of the most critical components that organizations frequently ignoreis the evaluation strategy of the gainsharing plan. This should include

metrics to measure the plan's effectiveness, timetables for ongoing

measurement and the establishment of a committee or team that has the

authority to review and modify the plan.

After the plan has been designed fully, decide the scope of initial

introduction. Specifically, will the plan be introduced on a pilot basis, orwill full implementation take place? The optimal time to implement

gainsharing is when demand for the organization's products or services

exceeds current production levels. Avoid new product introductions or

implementing technology with long learning curves. Also, avoid

introduction during peak times or labor negotiations.Maintenance-

Gainsharing plans must be flexible enough to respond to changingmarket conditions. The last key task that the design team should tackle is

clarifying maintenance roles and responsibilities.

This is a ticklish issue. For a plan to succeed, employees must understand

and have confidence in the plan. Whenever a plan is modified, employees

tend to be skeptical. They assume that management has a hidden agenda.Plan modifications usually occur because of changes in the

product/service mix or capital investments (i.e., new technologies).

One way to mitigate the perception of tampering is to include a section in

the gainsharing policy on plan evaluation and modification. The policyshould describe who will review the plan, circumstances under which the

plan can be modified and a process for modifying the plan.

Always include employees in the review process. The utilization of a

gainsharing policy should reduce employee mistrust. And some

organizations document how and why decisions to modify the plan weremade, what assumptions were made and what conditions existed that

necessitated the change, reporting the results to em-ployees.


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The following summarizes many of the elements of a Gainsharing

plan which have been discussed.

Gains and resulting payouts are self-funded based on savingsgenerated by improved performance.

The plan commonly applies to a single plant, site, or stand-aloneorganization. However, some organizations have levels of sharing

across multiple locations or corporation-wide.

Performance is typically measured across departments, units, orfunctions.

Measures are typically based on operational measures(productivity, quality, spending, customer service) and are more

controllable by employees rather than an organization-widemeasure of profits.

Payouts are often monthly or quarterly. Many plans often have a year-end reserve fund to account for

deficit periods. Employees often are involved with the design process. All employees are eligible for plan payments. The bonus is often paid as an equal percentage of compensation or

equal cents per hour worked, rather than paid on the basis of

individual performance. A supporting employee involvement system is part of the plan in

order to drive improvement initiatives. Plans are often reviewed at least annually and adjustments may be

made that make sense for both the company and employees.

The keys to successful implementation are simplicity and employeeinvolvement

Simplicity - Employee understanding is necessary for them to bemotivated by it.

Involvement - The more employees are involved in a plan's design,the more ownership they will take in it.

mir process

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