Gainsharing

Tying Pay to Performance
by Dr. Woodruff Imberman
Imberman and Deforest, Inc.

Two low-tech Illinois companies—one a job shop coater in Chicago and the other a galvanizer headquartered in Joliet—have established a track record proving low-tech is live and well in Illinois.

The first is Orion Industries, Ltd., a job shop coater (Teflon, primarily) which has managed to boost sales by 40 percent while reducing employment by 50 percent. The Joliet galvanizer is AAA Industries, Inc., whose productivity boost has averaged over 20 percent in just two years. Both have done it through tying their employees pay to their performance through gainsharing plans.

Just What Precisely Is Gainsharing?

Gainsharing is a group pay-for-performance plan for improving employee performance—better productivity (i.e., higher throughput, less down-time on prep ovens and galvanizing kettles), higher quality ( i.e., proper coating thickness and lower scrap and waste) and better safety (fewer accidents)—over a pre-set threshold. The workers’ performance improvement is quantified and given a dollar value. This gain (hence the name) is then split between the company and its employees. So, for every dollar paid in workers’ bonuses, the company saves a like amount through higher productivity (lower per-unit labor costs), better quality (less spoilage and lower customer returns) and improved safety (lower worker’s comp premiums).

Gainsharing has proved very effective in the plating and coating industries for motivating blue- and white-collar workers to improve their performance. In a 1983 report, Congress’ General Accounting Office investigated programs for improving employee productivity and quality. Its report cited gainsharing programs as “the wave of the future” because they unite even a diverse workforce in the goal of boosting their company’s operational performance.

Actual Results: Two Companies, Two Successes

Here are two examples of companies in the low-tech coating and galvanizing industries whose gainsharing plans have had long-lasting, positive results. In each case, the base or threshold employee performance (productivity, quality and safety) workers had to beat to earn a bonus was 100% of their performance in the months before their gainsharing plans start. Subsequent performance figures reflect only good product (scrap and rework has been penalized and deducted). The performance base in each company was boosted annually to allow for the effects of capital investment and the need for continuous improvement.

Both companies have used their employees’ better performance to cut costs boost margins, and expand their customer bases. The table above shows 57 months’ results at Orion Industries, Ltd., the leading Chicago job shop coater.

Why did Orion Industries and AAA Galvanizing have such long records of gainsharing success? Simple, they used their plans to motivate their employees.

How To Motivate Workers

Employee motivation techniques can be roughly divided into categories—non-economic and economic. Behavioral scientists and personnel specialists have battled over which is more important—often without bothering to ask the workers themselves. As a result, most executives now hedge their bets and try both categories of employee motivators.

Non Economic Motivators

Non-economic techniques for motivating workers include practices like service award lunches, recognition symbols (t-shirts, hats with company logos), preferred parking places, good attendance awards, catalog gift items for workers achieving milestones and even special invitations to dinner with the company president.
While these non-economic methods do build team spirit and provide workers with a sense that management cares, the survey indicated most managers felt these efforts were of questionable effectiveness. There were two reasons why.

First, in our permissive society, such tokens of recognition are now considered entitlements. Workers expect them as their due and resent their absence. As such, these entitlements provide little positive motivation. Because worker expectations, once started, last forever, these entitlements endure with a longevity matched only by government subsidies.

Second, since entitlements are expected, employees now expect extra rewards for any “extra” efforts they exert for extra productivity. And usually, they want something “extra” in their wallets. Again, how to provide the economic extra, without it becoming an entitlement?

Economic Motivators

High Level

Most executives expect rewards for their performance in the form of year-end bonuses for better profitability, higher earnings per share, inflated stock prices, etc. Their pay-offs come in a mind-boggling variety of forms—stock options and private jets in public companies, phantom stock and company cars in private, family-owned ones, with golden handshakes and parachutes all around.

Low Level

Many of these executives have decided that what is good for the goose is good for the gander, and have extended simpler programs downwards. Like themselves, they realize their employees want to earn a buck, and will respond if given the chance.

Profit sharing plans are common. So are merit raise programs and discretionary year-end bonuses. Unfortunately, the raises and bonuses are often based on ill-defined or illusionary criteria, and sometimes apparently according to the phase of the moon. Are they effective? Perhaps a majority of managers, a minority of first-line supervisors (up from the ranks with no training), and only a handful of blue-collar workers have horizons long enough to equate what they do today with a year-end bonus, to say nothing of a 401(k) paid out 20 years from now on retirement.

Sure, few employees at any level refuse a year-end bonus—it’s like finding free money. But when asked, few workers can tell you why they received the amount they did, nor can they answer what specifically they had done to earn it.

Effective Motivators

Effective economic motivators are transparent, easy to understand, and short-term—they match the horizons of the workers whose behavior they are designed to affect. Today, astute executives say pay-for-performance programs with short-term reward horizons, like gainsharing, are the most effective ones. Today’s gainsharing plans reward group effort and cooperation with management to achieve company goals of higher performance (i.e., more tons of customer product galvanized per shift in AAA’s galvanizing plants, smoother and more even coatings in Orion’s Teflon spray booths) and better safety in all locations.

Some managers think workers will respond like rabbits in a lettuce factory in their effort to earn a gainshare bonus. Since the literature on gainsharing is widespread, many of these do-it-yourselfers try designing a plan themselves. Although there is also widespread literature on brain surgery, few try that on themselves, book in one hand and scalpel in the other.

A well-designed gainsharing plan will produce improvements in productivity and costs of quality of 17 to 22 percent annually (Both AAA and Orion beat those averages!). Good plans incorporate a combination of non-economic and economic motivational tools. Employees respond to gainsharing’s economic motivation—the opportunity to earn extra earnings.

Equally as important: they also respond positively to communications—when they realize they are being listened to, when their ideas are co-opted, and when they are told how their ideas are making an important contribution to their employer.

Today, many newspapers bemoan the loss of Midwestern manufacturing jobs. Some commentators claim it is impossible for them to compete with foreign imports. Orion and AAA have both proved that is not true.
“Our sales are now 40 percent higher than before the gainsharing started, with a workforce 50 percent smaller than it was before the plan started,” said Orion Vice President of Operations George Osterhout. “That’s what gainsharing has done for our productivity! It has become our company’s key driver for motivation and compensation.” In an industry known for having to battle sharp-penciled purchasing agents, Orion has been able to cut its prices repeatedly, beating competition, gaining new customers and boosting its profit levels.

“Gainsharing enabled us to boost productivity by over 20 percent in each of our four gainsharing plants, while reducing zinc usage significantly,” said Kevin Irving, AAA’s vice president and general manager. “Since labor and zinc are our two biggest costs, these improvements have helped us underprice competitors, speed the all-important turn-around time of customer product, and gain new customers at the expense of competitors.”

Managers in both companies learned to look beyond their “hard” operating statistics and gave adequate weight to the “soft” aspects of their plan, i.e., the critical communications system needed for the improved results.

Gainsharing is designed to motivate employees to “work smarter, rather than harder,” by eliminating waste—wasted time and effort caused by slack and poor productivity, and wasted materials due to internal defects and customer returns. Working smarter can only be accomplished by tapping into the wealth of employee thinking by developing and using a program of two-way communications. This means communicating downwards by managers, telling employees at least on a weekly basis how they are performing under their gainsharing plan, and then upwards by listening: managers must work hard to seek employee ideas and input on ways to eliminate the problems that cause the poor quality and productivity.

It is no secret that many giant corporations tie managerial compensation to company performance in order to motivate executives and managers to boost profitability. It is also no secret that these same giants have implemented similar programs for lower-level employees, for the same reason: better performance.

A growing number of smaller job shops in the plating, finishing and coatings industries, like Orion and AAA, have realized that what is good for the goose is good for the gander. They, too, are tying pay to performance and instilling a pay-for-performance mentality for employees at all levels within their organizations, in their efforts to motivate them to meet and beat the competition, both domestic and foreign.

Why Bother?

Competition will stiffen in coming years as the global economy develops. Competitors are no longer next door, but in Eastern Europe or the Pacific Rim countries, as customers search worldwide for low-cost suppliers.
To survive and prosper in this hyper-competitive environment, galvanizers like AAA Industries and job shop coaters like Orion have learned to motivate employees at all levels to deal successfully with growing pressures to control costs, improve productivity and quality, and satisfy customers. Isn’t it about time your company did so too? IBI

Dr. Woodruff Imberman is president of Imberman and Deforest, Inc., a nationwide consulting firm that specializes in designing workforce incentive plans.

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