Does everyone need incentives to do good work? No, but they certainly don’t hurt. Stock options, healthcare, quarterly bonuses—all of these are ways companies incentivize employees into staying focused and giving 100 percent on the job.
Incentive plans work. No, bonuses and pizza parties aren’t always a long-term solution for motivating employees, but they play a role in keeping work standards high. Performance-based incentives (like bonuses and extra PTO) get results because employees’ compensation is tied directly to their work contributions. However, there can be unintended consequences.
For example, a company that rewards sales volume could end up with customer complaints if salespeople decide to lie to close more deals. Design teams that get output bonuses might produce lower-quality work to finish more projects. Employee incentives that reward quantity alone typically result in boosts to quantity alone, leaving managers with a challenging task: How do you incentivize performance and the improvement of performance?
The answer is gainsharing.
Gainsharing rewards employees for boosting output and quality. It’s a little complicated, but understanding it can help your teams get excited about continual improvement.
In this blog, we’ll discuss gainsharing, how it works, and how using it can help your organization achieve results.
What is the meaning of gainshare?
Gainsharing is an incentive system that rewards employees when they improve company performance. Bonuses go to employees who meet or exceed specific performance targets, such as those related to:
Productivity
Cost reduction
Quality improvement
The main goal of gainsharing is to align employee interests with the company’s interests. Ideally, workers will see a direct link between their efforts and paychecks, motivating them to work harder and smarter.
What is a gainsharing example?
Gainsharing isn’t an output bonus. Output metrics are easy to measure, but quality metrics are not.
Gainsharing programs depend on quantity and quality in order to analyze and score employee work and reward helpful contributions.
For example, suppose a healthcare provider plans a gainsharing program to improve patient satisfaction and reduce costs. They might set the following targets:
Increase patient satisfaction scores by 10%
Reduce average length of stay by one day
Decrease medication errors by 25%
If teams meet these targets, they receive a bonus payout based on the improvement. This could be a percentage of cost savings or a flat rate based on how patient satisfaction scores improve.
Note that the goal is to take care of less patients. The priority is to treat each patient with better care and then find ways to do that more efficiently. Quality comes before quantity, but both matter.
What is the main difference between gainsharing and profit sharing?
Gainsharing obviously sounds a lot like profit sharing, but there are some big differences between the two. Profit sharing distributes a portion of the organization’s success to employees, usually at year’s end. On the other hand, gainsharing rewards employees who meet specific performance targets, whether or not those targets make the company more profitable overall.
For example, let’s say a team in a manufacturing plant finds a way to reduce waste that saves the company money on costs. In a gainsharing system, that team would receive a bonus based on those savings, even if the company as a whole wasn’t profitable that year.
What are the benefits of gainsharing?
Getting a gainsharing program up and running is hard work, but there’s no denying the benefits of creating a near-perpetual motion machine to make your company more efficient.
Some advantages of gainsharing can include:
Employee motivation: Workers who see a direct link between their efforts and their pay are more motivated to perform well.
Better teamwork: If your gainsharing program rewards team or department performance, you can encourage better collaboration.
Reduced costs: Gainsharing is most concerned with lowering labor costs and improving a company’s bottom line.
Aligned interests: Sharing performance data with employees can lead to a better understanding and buy-in of company goals and challenges.
Continuous improvement: Focusing on meeting performance targets creates a culture that values ongoing improvement and innovation.
Are there drawbacks to gainsharing?
Like any workplace miracle, gainsharing has downsides. Learning where to focus your efforts mostly takes trial and error. You probably won’t get it exactly right the first time, so plan to revise often.
Other challenges that come with gainsharing include:
Focus on short-term gains: The biggest problem with performance incentives is that some employees will prioritize short-term gains over long-term company health, undermining the whole program.
Potential for gaming the system: If not well-designed, employees—even honest ones—may look for ways to meet targets without actually improving performance.
Entitlement mentality: Goals should be challenging so that employees don’t take bonuses for granted, rather than seeing them as a reward for exceptional performance.
Difficulty in measuring individual merit: It’s unavoidable that some who work less will be rewarded the same as those who do more.
Knowing these challenges is critical to designing an effective gainsharing initiative.
How does a gainshare bonus work?
The point of a gainshare bonus is to reward employees based on how well the company’s operations improve. Start by identifying or creating the critical performance indicators (KPIs) you want to improve, then create a baseline to measure performance improvement. Here’s an example:
Start with a baseline: Let’s say a company’s current productivity rate is 100 units per hour.
Set a target: The company wants 110 units per hour.
Measure performance: By the end of a given period, the company achieves 115 units per hour.
Calculate the gain: The improvement is 15 units per hour over the baseline.
Determine the bonus: The company shares 50% of the resulting cost savings with the teams involved.
How much do you decide to share, and who are the questions you’ll have to answer on your own? Consider consulting outside help, as some gainsharing plans rely on complex formulas to consider multiple KPIs.
Implementing a gainshare program at your company
Giving out bonuses for money you wouldn’t have saved otherwise costs nothing. This may be why gainsharing initiatives have increased over the past few years.
The industries where gainshare programs are most common are:
Manufacturing
Health care
Retail
Logistics
Call centers
Gainsharing can also be adapted to work in other organizations, such as the federal government and service industries.
The real question is: will gainsharing work as well for your company as it does for others? The only way to find out is to start planning a program.
Assess your company’s readiness
Gainsharing works best in organizations with a culture of openness and trust. Workers need to know that their teams will work alongside them and that their employer will keep their promises once the work is done.
Side note: only ever promise a bonus after following through. There’s no faster way to lose the trust and optimism of your teams than to dangle cash like a carrot in front of them only to shift goalposts once they near completion. People don’t like it.
Pick KPIs to target
The crux of gainsharing is getting teams on board to improve company performance. But what exactly should you improve? How can you verify whether or not something actually improves? How do you see progress, both in output and in competency?
KPIs are how theories become reality. By designing meaningful and measurable metrics, you can use software to track how your processes improve. One great tool for measuring KPIs is Superset, a free, open-source data visualization program to help you learn about points you want to improve.
Superset and other data visualizers have a learning curve, but their community pages offer helpful resources for beginners.
Once you have KPIs ready, set realistic targets your teams can achieve.
Design the bonus structure
How will teams be rewarded for their work? Will they receive a percentage of cost savings? A flat rate for meeting a target? A combination of both?
Employees need to know (in writing) what they will earn by going above and beyond. They deserve a cut if they put in the extra work to save their employer money.
Communicate clearly
Don’t ghost your employees. Keep them posted on how the program is going and how they are progressing. Superset (the program mentioned above) gives employees access to real-time progress visualizations, letting them motivate without lifting a finger.
Once they hit their targets, cut those checks.
Challenges to gainsharing programs
The hardest part of implementing a functional gainsharing program is setting effective KPI targets. They need to be achievable while still motivating people to stretch their abilities. You also need to be able to measure them, which takes some vigilance.
New programs also face resistance to change. Some employees and managers will be skeptical about new things, and the only way to assuage their fears is to prove how incentives lead to improvement and better employee engagement.
In conclusion
When implemented correctly, gainsharing is a powerful incentive for employees to seek ways to improve the company. It encourages imagination and employee involvement and helps create a workplace culture where values are shared, and goals are a team effort.
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