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A gainsharing plan is an enhanced system of performance-related pay. In a typical performance-based pay incentive the employees are expected to achieve a particular goal and then, rewarded based on that particular criteria. But in the case of the gainsharing plan, the process requires more than the accomplishment of tasks but it also enables the workers to join in the creation of the said scheme. Companies that successfully adopted gainsharing plans were shown to have bee more effective and efficient. One of the high-performing companies that benefited from this management strategy is Xerox. Although a gainsharing plan was proven to be an effective strategy, corporate leaders must be careful in applying this particular strategy before studying all the factors involved.
A gainsharing plan occurs when workers are offered incentives in order to save on costs (Armstrong, 2002). At the same time, a gainsharing plan is characterized by the willingness of corporate leaders to promote cooperation and solidarity by demonstrating to their employees that the company values their opinions and ideas (Wright, 2004).
The advantage of a gainsharing plan can be seen in the promotion of teamwork and cooperation because leaders communicate goals while at the same time workers have substantial access to performance information (Wright, 2004). Furthermore, employees are able to identify and deal with the obstacles that impeded excellent performance. In other words, productivity issues can be discussed and taken up as a team.
It has to be pointed out that in a gainsharing plan every worker is involved in the process of problem-solving and the reduction of cost. In other words, every worker is part of a team (Boyett & Boyett, 2004). Since the leader of the team is either a manager or supervisor, the workers are assured that they always receive instructions from management.
Gainsharing Plan at Xerox
In the case of Xerox, the gainsharing plan resulted in the implementation of employee participation and work redesign effort (Ichniowski, Levine, Olson & Strauss, 2000). It began as a narrow quality circle program but it evolved into different changes that resulted in the creation of self-managing work teams as well as special problem-solving task forces (Ichniowski, Levine, Olson & Strauss, 2000). The company reported that the workers, supervisors and managers experienced greater flexibility, decentralized decision-making, reduction in status differences among workers and more importantly, it introduced a mechanism for resolving grievances in an informal manner (Ichniowski, Levine, Olson & Strauss, 2000).
At Xerox, the gainsharing plan “was based on workers meeting quality, cost, scheduling, safety and attendance goals” (Nealon, 1994, p.140). These are measurable goals and the workers are aware that they can control the outcome of the said variables. For example, the workers can see if they reached a particular quality standard. They can also see if they were able to meet production deadlines. They can also see if the attendance of the members of the team is consistent and that the group does not suffer from chronic absenteeism. In one study the performance of three Xerox plants was compared with others that retained conventional management practices. It was discovered that the three plants exhibited higher productivity and lower costs.
In the case of Xerox, the quarterly plant performance was measured against a predetermined standard based on the concept of added value (Wright, 2004). The added value was computed using the value of total output less total material costs and controllable overheads (Wright, 2004). Payments to the employees were made when a certain level of productivity improvement was made evident and exceeded what the firm has set (Wright, 2004). In order to maintain quality, product quality targets were set annually and failure to achieve these targets resulted in the reduction of gain share payments (Wright, 2004). Productivity improvements in each of the first three years of the scheme generated a positive gain share pool split wherein 50% was given to the employees and 50% was retained by the firm (Wright, 2004). In the fiscal year 1995, Xerox was able to experience a delivered a cash payment that averaged around 2% of employee’s salary (Wright, 2004).
Benefits and Drawbacks
The major advantage of a gainsharing plan is the way it motivates employees to work harder and to be mindful of waste and the unnecessary cost incurred during the manufacturing process. In the case of Xerox, the workers are aware that their actions directly affected the quality of the product that comes out of the manufacturing facility. They can see that their work ethic directly affects the cost-efficiency of the manufacturing process.
The employees are not only motivated because they receive performance-related pay but also because their opinions and ideas were heard and incorporated into the gainsharing plan. Their inputs were highly valued particularly when it comes to the usage and quality of materials (Wright, 2004). The workers are also motivated because of the financial rewards linked to the achievement of goals, “payments were generated when a certain level of productivity was exceeded by the team” (Wright, 2004, p. 139). The workers and the company share the positive gains and as a result, the profit-sharing scheme enabled workers and managers to share a common purpose.
The positive outcome of a gainsharing plan is well documented but there are also drawbacks. One of the possible drawbacks is the failure of management to implement the strategy correctly. For example, part of the gainsharing scheme is to solicit ideas and opinions from workers. Thus, the workers are excited to voice out what they believe is a way to improve the system. Management, therefore, makes the commitment that when the gainsharing plan will be implemented the ideas that were given by the workers will be incorporated into the new scheme. But there are unforeseen challenges and problems that may prevent the company from implementing the said changes.
Another possible drawback is job security. At first glance, it seems that a cost-efficient operation is desirable for workers and management. The promise of a financial reward in the event of cost-reduction could motivate the workers to find ways of eliminating waste. But from another point of view, a well-managed company may result in the reduction of the workforce. If the company has reached a level of efficiency there is a tendency for management to reduce the number of workers. This is one of the fears of the workers and this must be addressed before the company can expect increased participation from the workers.
There must be active participation by management. The corporate leaders of the company must initiate a gainsharing plan if they are not committed to going through the process of communication, consultation and collaboration with the workers. The management team must carefully study the requirements of the gainsharing plan. In other words, management support is a critical key to success.
The CEO must rally the troops towards a common goal. The CEO must talk about the importance of the gainsharing plan. The CEO must clearly elaborate on why the company will benefit from the said scheme. The CEO must demonstrate his belief in the gainsharing plan. When the workers, managers and supervisors can see the commitment and enthusiasm from top leaders it is easier for them to participate in the transformation of the manufacturing process, specifically the creation of teams that can focus on specific areas of the job requirements.
The active participation of corporate leaders fosters open communication and at the same time could help build bridges and establish relationships. It is important to build relationships because there is a need to deal with the fears and insecurities of some workers with regards to the implications of the new strategy. As mentioned earlier it is possible that workers fear the impact of a cost-efficient system. They can interpret it as a threat to job security because management may decide to reduce the workforce. Thus, the management team must not only focus on short-term goals. The top leaders of the company must clearly communicate the long-term goals of the company. They have to assure the workers that they will expand the operation. They must explain to the workers that the production of high-quality products does not only guarantee higher revenue but repeat orders.
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The gainsharing plan was seen to be an effective motivator to increase the commitment and work efficiency of employees. The benefits of a gainsharing plan are rooted in the financial rewards promised by the scheme as well as the opportunity it provides for workers to voice out their opinion on how to improve the business process. The implementation of a gainsharing plan enables the workers to see the direct correlation of their performance to the company’s productivity and efficiency levels. At the same time, the workers feel that the company values them. But there are also possible drawbacks specifically when it comes to unmet expectations and concerns about job security. Therefore, it is important that management must actively support the implementation of the said gainsharing plan. At the same time corporate leaders, particularly the CEO must clearly communicate the importance of the gainsharing plan. The CEO must assure the workers that increased productivity will not lead to the reduction of the workforce but on the contrary, there will be expanded as increased revenue will also generate repeat orders.
Armstrong, M. (2002). Employee reward. UK: CIPD Publishing.
Boyett J.,& Boyett, J. (2004). The gainsharing manual. NE: iUniverse, Inc.
Ichniowski, C., Levine, D., Olson, C., & Strauss, G. (2000). The American workplace: skills, pay, and employment involvement. UK: Cambridge University Press.
Nealon, T. (1994). Double reading: postmodernism after deconstruction. New York: Cornell University Pres.
Wright, A. (2004). Reward management. UK: Chartered Institute of Personnel Development.