Employee Involvement Through Gainsharing Leads to Cost Savings

Chief Financial Officers often identify opportunities for cost savings  that may not be carried through to implementation for various reasons. For example, perhaps the CFO wants to reduce maintenance expenses, but there is resistance from the line supervisor ordering the factory consumables. So how do you overcome knee-jerk reactions and resistance from internal stakeholders? Motivating and inspiring employees through financial incentives — gainsharing — may be the answer.

What is gainsharing?

Gainsharing is a team-based approach that compensates employees based on improvements in a company's productivity. An employer agrees to share profits with employees based upon employees’ contributions to cost savings.

The process includes two key components. The first component is a financial measurement and feedback system to monitor company performance, and distribute gains in the form of bonuses to employees when goals are achieved. The second part of gainsharing includes a focused involvement system to eliminate barriers to improved company performance. Gainsharing programs seek to improve employee-management relations while reducing organizational costs or increasing production.

For most gainsharing plans, gains and resulting payouts are self-funded based on savings generated by improved performance. Many plans will have a year-end reserve fund to account for deficit periods.

Successful gainsharing relies on employee involvement

In the development of an organization’s gainsharing plan, employees participate in the initial design process. A robust employee involvement system is an integral part of the plan to drive improvement initiatives.

The concept is to build cooperation and communications between departments instead of building silos, and this is accomplished by creating cost-reduction teams across all levels in the organization. Employee teams are formed to achieve specified company goals, with bonuses tied directly to team performance. These bonuses are awarded in addition to an existing merit-based employee compensation system.

Teams are comprised of supervisors and their subordinates, charged with finding ways to improve cost savings in their areas of work responsibility. They are usually given limited spending authority to approve and implement recommendations. Suggestions approved by a team, but beyond the group’s spending authority, are advanced to a higher level in the organization, a screening committee made up of managers, higher-level executives and skilled workers. This group is responsible for final approval of cost-savings ideas. The outcomes of implemented recommendations are tracked, and the participating teams generally benefit from bonuses averaging around 45 to 60 percent of the documented savings.
               
The benefits of gainsharing

Gainsharing motivates employees in an emotionally compelling, positive way by tying their cost-savings efforts to a positive outcome for the organization. These efforts support a true pay-for-performance culture. By working together and sharing in gains together, employee teams can help businesses achieve sustained improvement in key performance measures. When employees develop more of a sense of ownership for their work and the organization, the results are overwhelmingly positive. Gainsharing can foster a culture of change leading to improved overall labor-management relations and increased employee satisfaction.

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