The ABC's of Gainsharing:Lessons from the Scanlon Plan Paul W. Davis
President
Scanlon Leadership Network This article appeared in the Winter 1997 Issue of and is also published as a chapter in and as a chapter inIt explains the various issues that must be considered when developing a Gainsharing Plan.
Why Gainsharing? Today there is increased interest in gainsharing, a management concept that has endured for over half a century. Gainsharing is a guiding management philosophy of at least five of the "100 Best Companies to Work for in America." Herman Miller, Donnelly, Beth Israel Hospital, Motorola, and Dana all credit at least part of their world class performance to their gainsharing systems. A comprehensive study conducted by the American Compensation Association beginning in 1991 and published in 1994 found companies averaged over $2410 per employee per year in productivity and quality improvements after installing gainsharing. After deducting program expenses, and after paying bonuses on average of $867 per employee per year, gainsharing provided a 134% return. The financial results are impressive, yet they are only one of the many benefits of gainsharing. Study after study has found that gainsharing also improve employee involvement, communication, teamwork, labor relations, and quality. The renewed interest in such an old concept can be attributed to pressures that organizations are now facing. As they down-size, they seek ways to motivate the remaining employees. As they become flatter, the old methods of compensation (number of direct reports, etc.) are no longer effective. As competitive pressures increase, they seek ways to increase productivity and quality. After adopting Total Quality Management (TQM) practices, they seek ways to reward and coordinate teams. Unable to afford the high cost of adversarial relationships and ever increasing base wages, union and management leaders look to gainsharing as a way to encourage cooperation within collective bargaining. The Crow and the Cormorant Revisited, or "What is Gainsharing?" The Japanese have a fable about a crow and a cormorant. In this ancient tale a crow admires the cormorant: a black water bird that can swim in order to catch fish. The crow reasons that because he is a black bird like the cormorant, he too should be able to swim, so he dives into the water only to drown. The fable's lesson is that things that appear to be the same may not be due to subtle unapparent differences. Those interested in gainsharing should remember the crow's experience, because gainsharing systems that at first appear to be identical, reveal fundamental differences upon closer scrutiny. Gainsharing is a generic term with widely different definitions. For many, gainsharing is simply a group bonus calculation. For others, gainsharing describes a very sophisticated organizational development strategy. For the purpose of this article, gainsharing will describe any organizational process designed to increase productivity, quality and financial performance by sharing "rewards" with groups of employees. Furthermore, in this article gainsharing will refer to practices that include 1) the establishment of specific goals, targets or baselines, 2) the communication to a group of employees of these goals, targets or baselines, and 3) the sharing of rewards when the goals, targets or baselines are exceeded. This operational definition of gainsharing will not include discretionary management "bonus" practices such as an annual Christmas bonus because they are not tied to the specific performance of the company. In addition, it will not include individual piece work systems since they reward individuals and not groups. However, profit sharing will be considered a form of "gainsharing." The ABC's of Gainsharing Most of what is written about gainsharing concerns the mechanics of bonus formulas because various gainsharing systems are typically classified by how the bonus formula is constructed. In these articles Scanlon Plans, Multi cost Scanlon Plans, Rucker Plans�, Improshare�, Profit Sharing, etc. are reduced to a paragraph that only an accountant could love. important for gainsharing success it is only one factor among many that differentiate the various Recent research indicates bonus formulas may not be the most important factors in gainsharing success. Furthermore, almost all articles written about the Scanlon Plan's bonus calculation since the 1960's are misleading in documenting Scanlon evolution. They have not kept up with current Scanlon theory or application. While they are valuable as history, they provide little insight for those interested in the current state of the art in gainsharing. The final reason why the formula approach to describing gainsharing is no longer effective is because it describes fewer and fewer gainsharing applications. Historically, gainsharing plans were a one-size-fits-all, developed by consultants who trademarked their approaches. Improshare� and Rucker� are two of the most well known. While Improshare� Plans are still being installed, the Rucker� Plan did not survive long after the death of its creator. Today, there are still consultants trying to trademark their approaches but most gainsharing systems are customized to the unique needs of each organization. A new method of classifying the various gainsharing approaches is needed if the reader truly wants to understand the critical differences and make an informed choice. This article will attempt to help the reader understand the ABC's of gainsharing. This simple device where A= Assumptions, B=Business Literacy, and C=Commitment will help readers understand which gainsharing approach is right for them. If the ABC's can be mastered, the rest of gainsharing (including designing the bonus formula) will be easier. Because there are only two classic approaches that have survived the test of time, Scanlon and Improshare�,they will be used to highlight differences in philosophy and application. A=Assumptions All gainsharing systems are developed for some desired end. Typically the motivation may be to produce greater profits, to produce higher quality, or to encourage labor-management cooperation. At the heart of every gainsharing system are assumptions about human motivation and behavior at work. lead, design, and operate them. These assumptions define the program to a much greater extent than does the method of bonus calculation. B=Business Literacy All gainsharing systems claim to increase productivity, profits, or performance. Some are based on the idea that the only thing needed to generate these improvements is more financial motivation, while others stress the importance of teaching employees about the business so that they will know what to improve and how to participate in improving it. C=Commitment Gainsharing is a way to change the commitment level of people at work. All gainsharing systems attempt to shift commitment from the individual to a group or organization. The various approaches differ in the size of the group and the level of commitment they attempt to create. Assumptions About Human Motivation Throughout human history, we have sought to harness and control human motivation. We have used a wide range of "motivators" to get people to do what we want. We have used punishment from slavery to starvation and we have used rewards from concubines to precious metals. As society became more civilized, we developed money as the universal form of exchange. With industrialization, we developed a wage system where people work for money that they can then use to purchase desired goods and services. Despite thousands of years of experimentation, there is still great disagreement about what does and does not motivate. Since motivation is the primary reason organizations install gainsharing, the debate is not academic. Research has produced results which at times seem to contradict what most of us assume is common sense. For example, we have learned through research that money may not be as powerful a motivator as non-monetary rewards. Psychologists have attempted to unwrap the mystery of human motivation, yet there are still wide differences of opinion on: 1) Whether one human being can motivate another: is motivation intrinsic or extrinsic? 2) What motivates people at work? 3) What is the best way for managers to motivate workers? 4) Is money the universal motivator? Can One Human Being Motivate Another? All gainsharing systems use some form of incentive or financial reward. So, like the crow, we might assume that all gainsharing philosophies believe deeply in the power of extrinsic motivation. They do not. Scanlon Plans place more of an emphasis on the intrinsic motivation created by participation and education rather than on the extrinsic motivation created by money. Improshare� Plans place more of an emphasis on extrinsic motivation. Alfie Kohn, author of Rewards: The , argues that the only thing accomplished when we try to motivate others is to destroy the intrinsic motivation in each of us. He quotes one of the foremost management scholars and researchers on human motivation, Frederick Herzberg, who said: Herzberg said this about the typical manager's common sense approach to motivation: What Motivates People at Work? Researchers and management scholars believe that we each have different needs and, therefore, different motivators. Abraham Maslow predicted that human beings fulfill their needs in a certain order. First, they have a need to eat, sleep, and breath. He called these physiological needs. When these needs are met, he predicted people would seek to have their security and safety needs met. Maslow believed physiological, security, and safety are lower order needs. When these needs are met, people seek to have their social or affiliation needs met. Next they strive to have their esteem or ego needs met. When all the other needs are met, people seek self-actualization or self-fulfillment. Maslow believed social needs, esteem needs, and self-actualization needs were higher order needs. Lower order needs have more to do with our bodies; higher order needs are related more to our minds. Frederick Herzberg's work on motivation found that what motivates people is different from what turns them off. He found that working conditions, salary, benefits, status, and security were not motivators. He called them "hygiene factors," and realized they were similar to Maslow's lower order needs. While they have the capacity to turn people off, they have little capacity to turn people on. Hygiene factors are a base from which the higher order needs can be addressed. The "motivators" he discovered were responsibility, achievement, recognition, and satisfaction in the work itself. These he realized were related to Maslow's higher order needs. Herzberg's research indicates that if we want to motivate workers, we must first make sure that we have a base to work from. We must create security by driving out fear, providing insurance, etc. We must provide adequate salary so the need for food and shelter can be met. Once this base is in place, we can help to provide "motivators" by creating organizations that allow the higher order needs for affiliation, esteem, responsibility, recognition, and self fulfillment to be met. Managers who accept Herzberg's research would create as part of any gainsharing approach opportunities for employees to have their social needs met (perhaps by having them work in teams). They would design their gainsharing system to encourage responsibility and recognition. They would make sure that everyone has a chance for meaningful achievement at work. They would be careful not to use gainsharing to create greater insecurity (by putting pay at risk). They would not view money as a motivator. What Can Managers Do to Motivate? As researchers have explored human motivation at work, they have also studied and written about the nature of management, trying to discover what a manager should or should not do to increase the motivation of the workforce. Managers' assumptions about the nature of people at work have tremendous impact on how they attempt to motivate others. For example, one organization that was exploring gainsharing decided not to pursue the idea further when the President of the organization said, "I do not believe in gainsharing. I grew up in the depression. Having a job is the only gain anyone needs." He assumed his workforce shared his views. He believed that their need for security would produce motivation. He clung to his assumptions, even though most of his workforce was younger and had never experienced the depression. He clung to his assumptions even though they are not supported by Herzberg's research. Managers' assumptions are also influenced by the predominant management gurus of their time. As this article is being written, management thought is dominated by the work of W. Edwards Deming, Tom Peters, and Stephen Covey. These writers stress the importance of employee involvement and participatory management. However, many of today's practicing managers were influenced by other writers and other philosophies that do not place a value on employee involvement and participation. Their philosophies are in conflict with current management thought. Frequently they rely on punishment and rewards as the primary motivators at work. There are those who still follow the theories of Frederick Taylor, one of the earliest and most influential writers about the role of management. Some even credit Taylor with coining the term "gainsharing." His book, written in the early 1900's, influenced a generation of managers and launched industrial engineering as a profession. The book explains how to use the principles of scientific management to motivate a steelworker to work harder by offering him more money for loading pig iron. He illustrates with an actual quote from a conversation he had with the steelworker. Scientific management assumes that some people in an organization are better at thinking while others should simply do what they are told (without talking back). Money and punishment are seen as the most powerful motivators. Workers are viewed as lazy and unwilling to do their best without management intervention. It is assumed that the average worker does not seek more responsibility and in fact will avoid responsibility. Douglas McGregor, the great scholar of organizations many years later, would call these assumptions "Theory X." Management assumptions are critical to gainsharing success. Assumptions are like lenses in a pair of glasses. They will distort, focus, and alter everything a manager sees. A small Michigan manufacturing company was purchased by a group of investors who had experience with the Scanlon gainsharing system. The investors specialize in turnaround situations. The investors' assumptions about management were not "Theory X." The gainsharing approach they selected was highly participatory and involved the union and the employees in solving company problems. Within three years the company was highly profitable, having carved out a niche by competing head-to-head with the much larger 3M Corporation. The company became so successful that the investors decided to sell, receiving ten times a return on their investment. The Theory X purchasers did not believe in the value of participatory management. Their assumptions distorted their view of the gainsharing system. They saw the bonuses as giving away some of their profits. They saw the frequent meetings required for participation as a waste of time and as a loss of their management power. Within two years, the gainsharing system was in ruins, employee morale was at an all time low, and the new owners were debating moving the plant south to avoid their union. Today "Taylorism" has fallen out of favor, but its basic assumptions continue to drive many management actions. Theory X managers usually do not support gainsharing if there is an employee involvement component, yet they may embrace gainsharing as a compensation approach. They tend to support gainsharing systems where pay is at risk. In these systems employees are not paid a market wage, but are able to reach market rates or above with the addition of a gainsharing bonus. These assumptions are the same assumptions that drove the Taylor's piece work systems in the early 1900's. The assumptions driving these systems are that money is the primary motivator and employees will not work hard unless their pay check is at risk. They assume people do not want to work. They believe management must intervene by designing a more effective carrot if workers are to be motivated to work. While McGregor studied managers with Theory X assumptions, he also studied managers with quite the opposite assumptions about people. McGregor called these assumptions "Theory Y." These managers assume that workers want to accept more responsibility, actually enjoys work, want to set their own goals, have great ambition, and can be trusted. Today, most modern management practices such as TQM, Teams, Employee Involvement, etc. are based on Theory Y assumptions. Few managers realize that McGregor developed Theory Y by studying a variety of organizations with Scanlon gainsharing systems. McGregor endorsed Scanlon by saying, "I need only mention the Scanlon (gainsharing) Plan as the outstanding embodiment of these ideas in practice." Herman Miller, a Michigan office furniture manufacturer, has had a Scanlon gainsharing system since the 1950's. Consistently ranked as one of America's most admired corporations, the company has been a leader in Theory Y management practices. Former CEO Hugh De Pree describes the essence of Theory Y management by saying. Is Money the Universal Motivator? The assumptions behind the Scanlon gainsharing system are congruent with the work of McGregor, Maslow, and Herzberg. Scanlon Systems are based on the assumption that people want to participate and accept responsibility. Other gainsharing systems were developed based on different assumptions about human motivation. Mitchell Fein the creator of the Improshare� gainsharing wrote: Fein assumes that money is the primary motivator. While Improshare� encourages employee involvement, it is not viewed as the critical component that it is in Scanlon gainsharing systems. Fein cites his own studies which indicate the Improshare� system motivates and creates greater productivity without the need for employee involvement. The debate has taken on renewed vigor as a result of the work of the late W. Edwards Deming. Deming, the great quality expert, had very strong feelings about motivation and the role of money as a motivator. He believed in the power of intrinsic motivation. He believed that individual merit pay systems, rewards, punishment, and most of the other motivators used in business were dysfunctional. He believed in Theory Y management. Deming summed up over fifty years of organizational study by saying, "Pay is not a motivator." If pay is not a motivator, why then is it so common? Voltaire said, "When it is a question of money, everybody is of the same religion." Leavitt writes: Jerry McAdams in takes a pragmatic approach that seeks the middle ground. He does not take the extreme position of Deming or Kohn that all motivation is intrinsic, nor does he endorse the assumptions of Leavitt and Fein that extrinsic monetary rewards are sufficient motivators alone. He believes that a properly designed reward system will avoid the problems of both extremes. McAdams' credibility is enhanced by the fact that he was head researcher in several large-scale studies of alternative reward systems for the American Compensation Association. Because money is universal, quick and easy it often becomes the only focus of many gainsharing systems. Gainsharing as compensation or a "bonus" is easier to design, communicate, and administer than is a more comprehensive method such as Scanlon. Scanlon practitioners have found the real value of financial rewards isn't the money they provide per se, but the way the money helps to focus employees and management on business issues. Scanlon practitioners no longer view Scanlon as simple gainsharing, as a plan, or as a program. They consider Scanlon to be a for organizational and individual development. Each part of the process is important for success. They believe most gainsharing systems have fatal flaws built into them. Typical gainsharing approaches that consider money to be the only motivator can only motivate when there are bonuses to be paid. They do not provide motivation during tough times, when a company can't pay bonuses, but needs motivated employees the most. Many operate much like a lottery. Employees enjoy the opportunity to earn extra money but they believe the bonus is subject to chance. They do not believe they can influence the results. The focus on gainsharing as a program or a plan, instead of a , prevents them for adapting and changing which creates built in obsolescence. There appears to be a basic paradox among gainsharing practitioners. Gainsharing is viewed as a solution for motivating workers by managers with totally opposite assumptions about what motivates workers. Each camp has its own management theorists to justify its and other assumptions. Each is able to cite objective studies to validate its position. Gainsharing systems are not created equal. Those exploring gainsharing must first determine their own basic assumptions about human motivation and then design a gainsharing process based on those assumptions. If they work with an existing gainsharing process or gainsharing consultant, they must question whether or not the process and the consultant share the same assumptions. When management assumptions and gainsharing systems match, there is power, synergy and integrity. Gainsharing becomes a way for the manager to manage. When management assumptions and gainsharing don't match, gainsharing is not effective. Gainsharing sends a strong message to the organization about what behaviors are important. Employees are quick to find inconsistencies between what the managers say and what gainsharing rewards. While this is not to say that consistency per se makes gainsharing successful, inconsistencies will soon undermine even the best gainsharing process. The following questions and/or suggestions are designed to help you explore your assumptions and determine what gainsharing approach is congruent with your assumptions. Since Scanlon and Improshare� are the only classic approaches still being installed, they are highlighted. If the reader is evaluating another approach or designing a generic gainsharing process, use the questions to help clarify your thinking. A=Assumptions 1) Do you believe workers are motivated more by extrinsic rewards or intrinsic rewards? If extrinsic, design a gainsharing process that focuses on money as a motivator. Consider Improshare�. If intrinsic, maybe you should not even consider gainsharing. If you do, consider a process that takes into consideration intrinsic motivators like participation. Consider Scanlon. 2) Do you agree with Herzberg that the human motivators are responsibility, achievement, recognition, and satisfaction with the work itself? If yes, build your plan to include these motivators. Consider Scanlon. If no, what do you believe are the needs of your workforce? If you believe money is a universal need, design a process with a large bonus component. Consider Improshare�. 3) Do you believe in Theory X or Theory Y management? If X, consider scientific management. Consider designing a piece work system instead of gainsharing. Consider automation or contracting out as a way to increase productivity and quality. Consider putting a large part of your employees' wages at risk. Consider a merit system instead of a gainsharing system. If Y, involve your employees in designing the process. Do not use money as the only source of motivation. Use gainsharing to build participation and commitment. Include all employees in the gainsharing pool. Consider Scanlon. B=Business Literacy One of the hottest management ideas of the late 1990's is the idea of Business Literacy or "open book management." Authors such as John Case, Jack Stack, and John Schuster have done a wonderful job of documenting the effects literacy training has had on a wide variety of organizations. Stack's own organization, Springfield Remanufacturing Corporation, has become one of the most sought after places for a benchmark visit because of its amazing turnaround story. What these open book managers and/or authors have discovered is the power generated when employees know their business, are provided meaningful information on the performance of their business, are able to influence decisions to improve their business, and are included in the rewards of capitalism. Open book practitioners seek to create companies where every employee is a business person. Despite the hype, these ideas are not new. Many were developed over half a century ago by Joe Scanlon, the father of gainsharing, and are incorporated in every Scanlon gainsharing process. Joe was an eclectic man. During his lifetime he was a steelworker, union leader, cost accountant, prizefighter, researcher, and lecturer at the Massachusetts Institute of Technology (MIT.) His name has become synonymous with gainsharing. During the depression Joe learned the value of cooperation by helping unemployed steelworkers find land and seed for gardens. After the depression, he found himself on the union bargaining committee in negotiations with his employer, Empire Sheet and Tube. Barely profitable, Empire was not able to increase wages and was in danger of going under. In desperation, Joe sought advice from the International Brotherhood of Steelworkers. He was told to return to Empire to see if there was any way the workers could improve the company in hope of making it more profitable. The workers had many ideas for improving the company, and Empire was saved. News of Joe's work spread and soon he was helping other workers and their companies cooperate to survive. The initial Scanlon Plans had no "gainsharing" bonus formula. They focused on Business Literacy and employee involvement. As companies became stronger and survival was no longer the issue, the idea of sharing gains was born. The initial gainsharing formulas were designed to share improvements in labor productivity. As workers were able to reduce the cost of labor, these savings were split with 25% of the savings going to the company and 75% going to the workers. The plans were very successful. Joe was asked to join the Steelworkers Research Department. With the outbreak of WW II, Joe became involved in creating joint Union and Management Councils to help with the war effort. After the war, labor and management were no longer interested in cooperation. Joe was asked by Douglas McGregor to join the faculty of MIT, where he was involved in establishing gainsharing systems until his death in 1956. Russell Davenport reported on the philosophy, methods and potential of Scanlon's ideas in "The Greatest Opportunity on Earth" and "Enterprise for Everyman," two Magazine articles in 1949 and 1950. & Joe's work was continued by Dr. Carl Frost and Mr. Fred Lesieur. Dr. Frost contributed to Scanlon theory and practice by creating the Frost/Scanlon Principles. Mr. Lesieur worked with MIT, and specialized in installing Scanlon Plans in companies with unions. The Scanlon has survived for over half a century, and many of America's "best" organizations use Scanlon. Motorola, Herman Miller, Dana, Donnelly, Sears, Magna Copper, Beth Israel Hospital, and Whirlpool are just a few of the organizations that were influenced by Joe's ideas. Joe never trademarked his process nor copyrighted his ideas, believing they should be made freely available. Today many generic plans (and some trademarked plans) are really Scanlon Plans. Scanlon Plans are a combination of philosophy (Theory Y), principles, and common sense practices. Reflecting his basic belief in Business Literacy and Employee Involvement Joe wrote: The primary Scanlon Principle is called Identity. The Principle of Identity incorporates what writers are today calling Business Literacy. Through a of education all employees are taught about their company, their competitors, and the need to change. Each Scanlon company develops its own to insure Identity. Visits by customers, information on competitors, and training on how to read financial reports all ways that Scanlon companies create Identity. Beth Israel Hospital implements Identity by sharing hospital information with its employees in three languages (French, Spanish, English). Sears creates Identity by having employees complete "learning maps," customized colorful interactive visuals which teach employees "What Day it is On Retail Street," "The Voices of Our Customers," and "The Sears Money Flow." Each company designs an Identity that fits its industry and size. Questions About Business Literacy Do you believe Business Literacy among all employees in your company/organization is important? If yes, consider developing a gainsharing that stresses the importance of Business Literacy. This can be done through training, but also through systems that encourage Business Literacy, i.e., screening committees, Great Game of Business� financial reporting systems, etc. Include developing Business Literacy as part of the installation strategy of your . Consider Scanlon. If no, focus your system on the financial reward potential of gainsharing. Consider Improshare� Are you willing to share financial and operational data with your employees? If yes, read the open book management literature for ideas on how to do this. Consider Scanlon. If no, Business Literacy is not for you! Scanlon is not for you. C=Commitment Organizations are changing their commitments to customers, investors and employees. The quality movement has helped world class organizations increase their commitment to customers. Investors led by the large institutions have demanded and received increased commitment to their needs. Paradoxically, during these times of increased commitment to customers and investors, organizations are decreasing their commitment to employees. Many employees work part time, their organizations unable or unwilling to commit to full time employment. Full time employees are told it is impossible for their organizations to commit to lifetime employment. Organizations that have become flatter and leaner cannot even commit to regular advancement for good performers. While employees are told to expect less organizational commitment, they are asked to commit to new forms of work. They are asked to commit to longer hours and more responsibility. They are expected to commit to being flexible. They are told to commit to lifetime learning to master ever more complex and changing jobs. Albert Camus said, "Commitment is the soul of work." Johann Goethe said, "Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness, concerning all acts of initiative (and creation). There is one elementary truth the ignorance of which kills countless ideas and splendid plans: That the moment one definitely commits oneself, then providence moves too." The various gainsharing approaches differ in the commitment they make and the commitment they seek. Those that are implemented as a compensation strategy commit to pay a bonus when certain performance targets are met. This in and of itself is a major commitment, just like a commitment to meet payroll, to fund benefits, etc. Once an organization commits to gainsharing, it must follow through with the commitment. A bonus can not be promised and then withdrawn later. Most gainsharing systems are self-funding, paying for their administration and the bonuses out of gains or savings, yet even these systems demand organizational commitment. For example, Lincoln Electric had to borrow money to meet bonus commitments. Their system paid a bonus based on productivity gains. Employees improved productivity, yet the company was not profitable. This doesn't happen often, but if it does illustrate the point that a commitment to a bonus is a commitment that must be honored in good times and bad. Gainsharing systems such as Scanlon that are fundamentally organizational and individual development systems demand great commitment from employees and their organizations. They demand personal and organizational commitment to participation, to equity, and to increased competency. Commitment to Participation Every gainsharing system seeks to alter the commitment of individuals. As a result of gainsharing, individuals are assumed to participate in some way to making the group or organization better. The various approaches differ on how widely to encourage participation and on who is included in the gainsharing group. Some focus only on the production people in an organization and do not include administrative people or managers. Some focus on teams, with each team operating its own bonus system. Some focus on multiple plants or sites. Gainsharing writers call this the "line of site" issue. People want to be able to influence the results of a bonus. The more people that are involved, the more difficult this becomes. The less a bonus measure is influenced by participation, the harder it is to explain and to enlist support. For example, employees in a manufacturing operation might feel that they can participate in reducing scrap, yet they may feel they have no control over profits (even though the two measures are related). The question of who to include in the gainsharing group becomes a question of philosophy and pragmatism. The Scanlon philosophy is to include as many as possible. Thus all levels and jobs are usually identified as participants. This creates "we are all in it together thinking." It makes it easier for departments and teams to work together since they share the same Scanlon bonus. It allows white and blue collar workers to find common ground. In large organizations such as Sears (with over 300,000 employees), the group has been defined as a specific store or store support service unit. This fits Sears' organizational structure and allows for a manageable size. In smaller organizations, the group may be defined as the entire organization. Sometimes even part-time employees and key vendors are included in the . Commitment to participation can be built into gainsharing or it can be left to chance. For example, historically the Scanlon approach encourages participation through a suggestion system and committee structure. Employees submit suggestions to a production committee made up of coworkers and managers who decide whether or not to implement the suggestions. Production committees are workgroup or department based. Production committees send representatives to a Screening committee made up of top management and union leaders. The Screening Committee reviews suggestions that were rejected and those suggestions that involve multiple departments or large expenditures of money to implement. This system exists in many organizations as well as some newer forms of participation such as work teams and Kaizan teams. Employees in Scanlon companies are expected to participate by "influencing decisions in their areas of competence." The commitment to participation is evident in the way the Scanlon is implemented. Scanlon is not purchased off-the-self from consultants or third parties. They are not implemented unless there is evidence of virtually universal organizational commitment at all levels. The begins with discussions at the top level of the organization. Every top leader after learning about the Scanlon is asked to make a personal and professional commitment of support. Only when the top level team is personally and professionally committed is the introduced to the other levels of the organization. If there is a union, the union leadership is introduced to the idea. Eventually all the levels of management, including the front line supervisors, are introduced to the concepts of Scanlon and asked to make a personal and professional commitment of support. When the managers representing the organization, their departments, and their professions have committed and the union leadership has committed, the is explained to the rank and file employees. They too are asked to commit to creating a different way of working through the Scanlon . They vote to participate by electing a committee to design the Scanlon system. After it is designed the committee presents their work to all of the employees and a vote to try Scanlon for a trial period is taken. Acceptance levels of 80-90% are usually required for the to be implemented. Finally, after the trial period, the Scanlon is evaluated one more time and a vote is taken to continue Scanlon indefinitely as a way or working together. This is time consuming. It takes on average 35 weeks from initial exploration until Scanlon is approved for the trial period. The is not designed for speed, it is designed for building commitment and participation. The creates the following: - Commitment: People "own" the , even giving it a unique name like UNITE, PRIDE, REACH, I.C.E., etc.
- The does not belong to one department like Human Resources.
- The prevents Scanlon from becoming another "flavor of the month" approach.
- The requires an organization to spend time up front explaining gainsharing rather than risking people will understand later once it is in place.
- Every company is unique, the prevents one-size-fits-all mistakes.
- The builds internal competence. A company does not become dependent on consultants or others to maintain or improve the system. Employees grow as human beings as they learn new skills.
- The creates the links and support needed for implementation as well as design.
- The creates a model that can be used when it needs to be renewed.
- Success: A study done at the University of Wisconsin found that participation, voting, and plan understanding were highly correlated with gainsharing success.
The idea of employee voting is intimidating to some, especially with an 80-90% approval rate recommended. However, the vote rarely fails. More typically, as the unfolds issues will surface that may require a delay or change in the . For example, one company decided not to pursue Scanlon because they were involved in ISO certification and the top managers did not feel they could handle both initiatives at the same time. Once ISO was completed, the company began the Scanlon . Others may decide not to continue because the union will not support gainsharing or the top management team cannot accept Theory Y management practices. The commitment level the generates is illustrated by what happened in a recent SEARS installation. A long term employee became sick and was taken to the hospital on the day the vote was to be taken. She called from her hospital bed because she wanted the vote to be unanimous. Other gainsharing approaches require little commitment to participate from employees. They are designed by internal or external consultants and then simply communicated to employees. They can be installed quickly. There is no vote. They can be changed quickly and easily. They do not create commitment. The issues surrounding participation and gainsharing are similar to the issues surrounding participation and employee stock ownership. Participation is not required for gainsharing nor is it required for ownership. Participation is linked to the strategy or reason for adopting gainsharing as it is linked to the reasons for adopting ESOP's. Some gainsharing systems are viewed as a compensation strategy, and participation is not required. Some ESOPs are viewed as a tax saving strategy and participation is not required. Research on both gainsharing and employee stock ownership have found that effectiveness is increased when combined with participation. Questions to Consider - Do wish to commit to Participation? If yes, consider designing participation into the system from the beginning by having employees create the system. Make sure top leadership is committed to making gainsharing a success. Consider Scanlon. If no, Improshare� may still require more participation than you feel comfortable with. Do consider Scanlon.
- Do you have time for Participation? If yes, consider a like Scanlon. If no, wait until you have time. You simply cannot have meaningful participation if you don't take the time.
Commitment to Equity Websters defines equity as "the quality of being fair or impartial." Scanlon gainsharing systems incorporate this idea of fairness by defining equity as a genuine commitment to accounting for the needs of all constituents including customers, investors and employees. The concept is graphically depicted as an equilateral triangle. The pursuit of equity is the way the Scanlon gainsharing system holds everyone accountable to the stakeholders. Scanlon is the only gainsharing that defines these multiple accountabilities yet the idea is probably as old as time itself. Confucius was reported to have said, "The proper man understands equity, the small man profits." Equity is important because a focus on only one or two of the stakeholders will ultimately destroy an organization. For example, the auto industry in the US historically has been a good place to work with high pay and good benefits. It has also been a good place to invest, yet consumers began switching in mass to Japanese automobiles in the 1970's because they were not happy with the quality and service of US companies. We were close to losing the industry until the auto companies and their employees made the gut wrenching changes needed to compete. There are companies whose profitability is unacceptably low or nonexistent, yet employees demand higher and higher wages eventually forcing the company to go out of business. Today, there are companies that lay off their employees even though they are highly profitable with record sales. The companies are liquidating their human assets and setting in motion their own demise. Dr. Carl Frost in describing the Scanlon Equity said: Scanlon companies operationalize the equity concept by creating appropriate reliable databases of customer satisfaction, financial performance, and human resources. There are regular, public occasions where the data are shared and discrepancies between what is and what needs to be are explored. Sometimes, positive discrepancies are noted and sometimes negative discrepancies are found. Frequently, bonus formulas are constructed that take into account the needs of all stakeholders. SEARS has developed a "Total Performance Index" as a component of corporate transformation. The vision is to make SEARS a compelling place to shop, to work, and to invest. Customer, employee, and investor measures are tracked. Spring Engineering and Manufacturing Company even named their Scanlon system the I.C.E. Plan for Investor, Customer, and Employees to emphasize equity. The Scanlon Equity Principle includes many concepts business writers are now calling a "balanced scorecard." Bonus formulas that take into account the needs of all stakeholders are better than those that emphasize only one. The Lincoln Electric bonus, mentioned earlier, might satisfy employees but may not meet the needs of investors. One company paid a bonus to employees for improvement in quality, yet the firm's customers said the company's quality standards were too low. The company found itself rewarding employees for performance that its customers would not accept. These examples illustrate the difficulty in creating equity. It is much easier to simply create a bonus. However, an equity system is superior to a bonus system alone because equity provides the greatest long term organizational security. Scanlon gainsharing experience has found that the primary reason employees are interested in developing a Scanlon is to provide long term employment security and not to provide short term bonuses. Companies that stress a bonus, create employees who are dissatisfied when the bonus cannot be paid. These employees are conditioned to expect a bonus. They are not literate to the fact that their investors may be losing money, or that their customers have gone somewhere else. In companies committed to equity, employees know the needs of the other stakeholders and are willing to make sacrifices when necessary. Organizations operationalize the principle of Equity in many ways. Traditionally, they decide what to measure and then construct an historical baseline that represents the current level of the measure(s). When the measure(s) is exceeded, the gain is split between the company and the employees. Operational measures such as labor productivity, scrap, safety, or quality measures are typical. Financial measures such as profit, ROI, EVA are also used. American Compensation Association survey results indicate that organizations report greater success with measures that take into account both operational and financial measures. The employees' portion of the gain is placed in a bonus pool and is distributed either on a percentage basis of salary or "hours worked." (The Fair Labor Standards Act regulates how nonexempt employee bonuses are computed and should be consulted before designing a bonus formula.) Almost always the bonus is paid monthly or quarterly. Often a portion of the employees' share is put in a reserve account and used to cover any future deficits. At the end of the year, any remaining reserves are then returned to the employees. The most typical way the bonus is paid is a separate check. These methods have withstood the test of time because they are considered fair and reasonable and are usually not difficult to design and compute. Increasingly some organizations take a quite different approach. They look and ask the question, "What performance is needed to achieve our objectives in the upcoming period?" They believe what was adequate in the past may no longer be adequate for the future. They do not wish to reward for improvements if the results still do not meet the continuous improvement goals they have committed to. This system is called goal sharing and it is the approach favored by Sears and Spring Engineering. Both organizations participatively set the goals with their employees so that the employees know the goals are achievable and realistic. Both the gainsharing and goalsharing approaches can be used by not-for-profit organizations, although unfortunately there are few examples. One of the most well known is Beth Israel Hospital-Boston that has had a successful Scanlon system called PREPARE 21 since 1989. Beth Israel has credited its Scanlon with helping to save hundreds of thousands of dollars in cost, while improving quality and patient care. One of the highlights of Beth Israel's year is the PREPARE 21 Recognition program. During this time, employees and teams are recognized for their contribution to PREPARE 21 and to Beth Israel. It is usually standing room only, as the busy staff of this major teaching hospital comes together to honor their own. Recipients not only receive the accolades of their peers, but they have their names added permanently to a special kiosk near the hospital's cafeteria. Other organizations feel that the only true measure of performance is profit and so they develop profit sharing plans. Purists would argue that profit sharing is a concept foreign to a discussion of gainsharing, but philosophically the ideas are similar. Profit sharing can be considered a financial measure bonus system. Profits above a base number are split with employees. Joe Scanlon studied profit sharing in the 1940's and concluded: The analysis of these plans indicates that a sense of participation and partnership is the importance. Douglas Kruse found that profit sharing adoption results in productivity gains of 3.5 to 5 percent. Douglas Kruse, ( Kalamazoo: W.E. Upjohn Institute for Employment Research, 1993) There are two common challenges associated with profit sharing. The first is a literacy issue. Most employees simply don't understand profit and must be educated to understand what it is. The Second issue is "line of sight." Profit is influenced by many factors beyond the control of the typical employee. These challenges are not impossible and there are many successful profit-sharing programs. Wescast Industries, a Canadian company, that produces most of the engine manifolds in North America, combines a once a year profit sharing bonus with a quarterly operational measure bonus system. This system helps to focus employees on the profitability of the corporation, and at the same time the need for quality, safety, and productivity. Equity as ownership can also be combined with gainsharing, goalsharing, and profitsharing. Herman Miller has had a Scanlon Process since 1950. They also provide stock to every employee with over one year of service. Max DePree former C.E.O. of Herman Miller said, Max DePree (New York: Doubleday, 1989) p.85. Finally it is not necessary and maybe even counterproductive to give money as the gain. Once a bonus check is cashed and the money spent, it is often difficult for employees to know where the money went. Cerdec Corporation/Drakenfeld Products provides its employees with "mall dollars" that they can spend at local businesses. Employees can purchase goods and services from vacations to cars. A new VCR may have more "trophy value" than does the equivalent in money. Employees remember what items they received in mall dollars. Enterprising organizations could even use the mall dollar concept to negotiate favorable exchanges and discounts from merchants. Most merchants would gladly offer a discount for a captive customer. An additional benefit of the concept is that money remains in the local economy. Another creative approach is taken by Weyburn-Bartel Incorporated which pays its bonus in meat. Employees sign up for various cuts of beef or seafood that is delivered by refrigerated truck. The system prevents the value of their bonus from being eroded by sales taxes. While this approach is not for everyone, it does show that there are many creative ways to create an equity system. Questions to Consider - Do you wish to create a bonus system or an equity system? If bonus, consider Improshare�. If equity, consider Scanlon. Create a balanced scorecard measuring system. Make sure the bonus formula takes into account the real needs of the stakeholders. Think creatively.
- Do you wish to do gainsharing, goalsharing, or profit sharing? If gainsharing, you will need good historical data from which to create a baseline. Select a baseline period that takes into account your business cycle and typical performance. If goalsharing, you will need to participatively develop goals with employees if you want them to be realistic and accepted. If profit sharing, you will need to determine what measure of profit you will use. You will have to determine what level of profit will result in sharing.
Commitment to Competency Business Literacy, Participation, and Theory Y management require increased employee competency. Employees must learn to do more than what is expected in traditional firms. Motorola's Scanlon philosophy has led them to invest over 50 million dollars per year (1990) in employee training and development. SEARS has created SEARS University. Gainsharing as a compensation strategy does not identify this type of commitment to increased competency. Participatory gainsharing requires changes in both managers and employees. Managers must learn how to lead, to listen, and to coach. Employees must learn how to work in teams, control quality, and reduce costs. Both employees and organizations must commit to major investments in time, energy and money to be successful. Scanlon organizations believe the investment is worth the cost. They believe employees are an asset to be developed and not a cost to be reduced. In three separate audits, Motorola calculated a $30 return for every dollar invested in training and development. At the very least, every gainsharing system must help employees to become competent in understanding the basis of the gainsharing formula that is used. If employees don't understand the calculation, they will not know why they are or are not receiving the bonus. They will view the bonus as some form of lottery in which they hope to win, but in which they have little influence of the outcomes. Questions to consider: - Do you believe employees are an asset to be developed or a cost to be reduced? If an asset to be developed, recognize your strategy is for the long term. Consider a Scanlon . If a cost to be reduced, do not consider gainsharing. Consider reengineering, automation, contracting out or another approach as a strategy.
Mechanics of Gainsharing Once an organization is clear on the ABC's of gainsharing, the mechanics of gainsharing become more straight forward. Every gainsharing system should address the following mechanics before it is implemented. Design of Gainsharing What is our reason for considering a gainsharing system, i.e., what do we seek to accomplish? Do we have top management and organization commitment and support? Is this the right time?
A. Do we have enough time to design the system?
B. Are there other issues we need to address first? 1. Management competency
2. Union Relations
3. Compensation system Who will create the system?
A. Do we work with a consultant?
B. Do we design it ourselves?
How do we select the design committee(s) and what are their roles? How do we involve the organization/union? What are we trying to improve?
How do we measure it?
Do we have all stakeholders identified?
Improvement over what?
Gainsharing
How will we construct the base period?
What is the protection for the company?
a. Split
b. Reserve
c. Caps
Goalsharing
How much money can we spend?
What are the goals we must accomplish?
How will we pay out? Profit-sharing
What measure of profitability will we use?
How will we protect the company?
Minimum profitability before sharing
Split
Reserves
Caps Who will be covered by gainsharing?
Will we include everybody?
How do we take into consideration line-of-site?
How will we communicate gainsharing to our employees? Who will maintain the system?
Do we need a gainsharing coordinator position?
How do we keep it from becoming another HR Department program? How will we know if gainsharing is successful? How will we change the system? Conclusion Gainsharing is a proven, powerful tool to manage an organization if there is an understanding of the basic ABC's of gainsharing. Mistakes are made by those that do not take the time to understand the differences between the various approaches that are available. Before beginning a gainsharing program, carefully evaluate your Assumptions about motivation. Consider the impact of Business Literacy. Finally consider the level of Commitment your organization will expect and is willing to provide. Once the basic ABC's are mastered, the right gainsharing approach for you will be much clearer. |
