Pay For Team Performance?

Gainsharing

Organizations that want employees to focus on efficiency may adopt a gainsharing program, which measures increases in productivity and effectiveness and distributes a portion of each gain to employees. For example, if a factory enjoys a productivity gain worth $30,000, half the gain might be the company's share. The other $15,000 would be distributed among the employees in the factory. Knowing that they can enjoy a financial benefit from helping the company be more productive, employees supposedly will look for ways to work more efficiently and improve the way the factory operates.

Gainsharing addresses the challenge of identifying appropriate performance measures for complex jobs. Even for simpler jobs, setting acceptable standards and measuring performance can be complicated. Gainsharing frees employees to determine how to improve their own and their group's performance. It also broadens employees1 focus beyond their individual interests. But in contrast to profit sharing, discussed later, it keeps the performance measures within a range of activity that most employees believe they can influence. Organizations can enhance the likelihood of a gain by providing a means for employees to share knowledge and make suggestions, as we will discuss later in this chapter.

Gainsharing is most likely to succeed when organizations provide the right conditions. Among the conditions identified, the following are among the most common:

• Management commitment
• Need for change or strong commitment to continuous improvement 
• Management acceptance and encouragement of employee input 
• High levels of cooperation and interaction 
• Employment security
• Information sharing on productivity and costs 
• Goal setting

HOW GAINSHARING MOTIVATES EMPLOYEES

Many firms have had a difficult time developing compensation systems that were simultaneously motivational and cost-effective. Managers have reported that gainsharing motivated employees in their organization in several ways. First, financial rewards, applied in the proper setting and in the proper way, can be a powerful motivator. In addition, gainsharing provides:

• Financial participation, which is a powerful tool for increasing employee commitment and loyalty—the same psychological processes that operate for senior and middle managers are applicable to other employees;
• The ability to see the outcomes of work in monetary terms;
• Rewards that are directly tied to work behavior;
• Group rewards that lead to group cohesion and peer pressure to perform;
• An expanded role for employees in an organization that fulfills higher level psychological needs by encouraging employees to take more responsibility, utilize more talents on the job, and become a genuine partner in the operation of the business;
• An opportunity for expanded communication leading to greater trust in the organization—the calculation of the monthly bonus formula permits employees to understand fundamental business problems;
• An opportunity to unify the organization as many gainsharing plans include all employees (hourly, salaried, clerical, and so on) as participants; and
• An equitable distribution of the gains from productivity improvement.

Gainsharing Plans

Improshare

Improshare, which stands for Improved Productivity through Sharing. Improshare was created by Mitchell Fein, an industrial engineer.

The Improshare plan is a form of gainsharing that focuses on sharing physical productivity gains with employees. Standard hours are calculated for the production of each unit, and Improshare pays a bonus when the time needed in the production process is reduced. Gains realized by working either faster or more efficiently are then split between the employer and employees, and the employee portion is shared among all workers. Improshare does not require any form of employee participation, although participation is compatible with the process.

Improshare bonuses are based on the overall productivity of the work team. Improshare output is measured by the number of finished products that a work team produces in a given period. Both production (direct) employees and nonproduction (indirect) employees are included in the determination of the bonus.' Since a cooperative environment benefits all, Improshare promotes increased interaction and support between employees and management.

The bonus is based not on dollar savings, as in the Scanlon and Rucker Plans, but on productivity gains that result from reducing the time it takes to produce a finished product. Bonuses are determined monthly by calculating the difference between standard hours (Improshare hours) and actual hours, and dividing the result by actual hours. The employees and the company each receive payment for 50 percent of the improvement. Companies such as Hinderliter Energy Equipment Corporation pay the bonus as a separate check to emphasize that it is extra income.


Scanlon plan
"Cost saving productivity-incentive plan"
Joseph Scanlon was a union organiser in a steel works, who put a proposal to the owners aimed at saving the jobs of his union members. The steelworkers agreed to work in a more efficient way in return for an equal share of the savings that this generated.

Since its development in 1927, the Scanlon plan has been implemented in many organizations, especially in smaller unionized industrial firms. The basic concept underlying the Scanlon plan is that efficiency depends on teamwork and plant-wide cooperation.

The philosophy behind the Scanlon Plan is that employees should offer ideas and suggestions to improve productivity and, in turn, be rewarded for their constructive efforts. The plan requires good management, leadership, trust and respect between employees and managers, and a workforce dedicated to responsible decision making. When correctly implemented, the Scanlon Plan can result in improved efficiency and profitability for the organization and steady employment and high compensation for employees.

A Scanlon plan can help reduce a firm’s labor costs without corresponding decreases in productivity levels. According to Scanlon's proponents, effective employee participation, which includes the use of committees on which employees are represented, is the most significant feature of the Scanlon Plan. Under a Scanlon plan, employees make suggestions for how to improve a firm’s productivity and offer those suggestions to a review committee for its consideration for implementation. If the review committee accepts the plan and its implementation results in increased efficiency, the gains of that efficiency are shared with employees.

Incentive rewards are paid to employees on the basis of improvements in preestablished ratios. Ratios of labor costs to total sales value or total production or total hours to total production are the most commonly used. Savings due to differences between actual and expected ratios are placed in a bonus fund. A predetermined percentage of this fund is then split between employees and the organization.

How Scanlon plan is implemented

It starts with the top-level managers, they sit together and discuss about the formulation and implementation of Scanlon plan. After thorough discussions they come up with Scanlon plan Roadmap as to how to put the plan into the practice. Before putting the plan into practice, the roadmap is communicated to all the employees irrespective of positions in the organisation for their acceptance. If the roadmap is not accepted by the majority of people in the organisation, it will be stopped. If it is accepted by the majority, a separate team is created to formulate a written plan as to how to put the Scanlon plan in to practice in the organization. Finally, written plan of Scanlon plan should be approved by all in the organisation so as to finally put it into practice. For the purpose of monitoring implementation of the written plan of Scanlon plan, subcommittees are formulated.

The Scanlon plan is not a true profit-sharing plan, because employees receive incentive compensation for reducing labor costs, regardless of whether the organization ultimately makes a profit. Organizations that have implemented the Scanlon plan have experienced an increase in productivity and a decrease in labor costs. Also, employee attitudes have become more favorable, and cooperation between management and workers has increased.

Illustration: A firm might have a target ratio of 1. In this case, if the company expected to do $100,000 in sales, it would attempt to keep its labor costs to $10,000. If employees are able to hit the same sales value of production with a ratio that’s lower than 1, the gains of that efficiency are shared with firm and employees.  For example, if the firm's workforce were able to realize $100,000 in sales value of production with only $9,000 in labor costs, the $1,000 in savings would be split among the employees and their firm.

Rucker plan
The Rucker plan, almost as old as the Scanlon plan, was developed in the 1930s by the economist Allan W. Rucker. The Scanlon formula measures performance against a standard of labor costs in relation to the dollar value of production, whereas the Rucker formula introduces a third variable: the dollar value of all materials, supplies, and services that the organization uses.
The Rucker formula is calculated as follows:

$ Value of Labor Costs

$ Value of Production - $ Value of Materials, Supplies, Services

The result is what economists call the “value added” to a product by the organization. The use of value added rather than the dollar value of production builds in an incentive to save on other inputs.

Team Bonuses and Awards

In contrast to gainsharing plans, which typically reward the performance of all employees at a facility, bonuses for team performance tend to be for smaller work groups. These bonuses reward the members of a group for attaining a specific goal, usually measured in terms of physical output. Team awards are similar to team bonuses, but they are more likely to use a broad range of performance measures, such as cost savings, successful completion of a project, or even meeting deadlines.

Both types of incentives have the advantage that they encourage group or team members to cooperate so that they can achieve their goal. However, depending on the reward system, competition among individuals may be replaced by competition among teams. Competition may be healthy in some situations, as when teams try to outdo one another in satisfying customers. On the downside, competition may also prevent necessary cooperation among teams. To avoid this, the organization should carefully set the performance goals for these incentives so that concern for costs or sales does not obscure other objectives, such as quality, customer service, and ethical behaviour.