Chapter 1
INTRODUCTION

1.1: ORIGIN OF THE REPORT
Being a BBA student of this university, we are all required to prepare a term paper for every course in each semester. For this course, our course instructor, Lecturer Ummya Salma had asked us to submit a term paper as per our will. After thoroughly analyzing all the topics, I have chosen the “Gainsharing Approaches” as my topic.

1.2: OBJECTIVE OF THE STUDY
Gainsharing approaches are important elements of the incentive plan. The main objectives for this study include the following: 1. To analyze the impact of various gainsharing approaches 2. To explore the different types of gainsharing approaches 3. To explore the recommendations that can make the gainsharing approaches programs more effective

1.3: SCOPE OF THE STUDY
The scope of the report outlines the various objectives of the report. The scope of this report is to understand how comprehensive gainsharing approaches have become and to understand the massive impact it has on employee performance.
1.4: METHODOLODY
I have gathered the information from various sources. The major sources of information include the book on Human Resource Management by Keith Davis and William B.Werther also Human Resource Management by Gary Dessler. For further elaboration and clarification, I also took help for various websites.
I have mainly used secondary sources of data which was collected through various books and websites.
1.5: LIMITATIONS OF THE STUDY
Research works are meant to face limitations. While completing this term paper I too had to face a lot of limitations in gathering information. My limitations included:

* Time constraint * Lack of pertinent information

Chapter 2
GAINSHARING APPROACHES

Gainsharing programs actively encourage employees and employers to work together to solve the problems of cost, quality, and production efficiency. Where there is an improvement in one of these areas-based on a comparison with predetermined performance measures-employees share in any resulting financial gains.

Gainsharing is related to profit sharing in that both plans are designed to relate employee compensation to the performance of the organization and to engender employee commitment. However, gainsharing is fundamentally different from profit sharing because gainsharing rewards are related to departmental and/or organizational performance rather than profit. Therefore, in some circumstances gain sharing plans provide employees additional rewards when the company is experiencing productivity and performance improvements but not making a profit.

To be effective, gainsharing programs must have the full support of employees at all levels of the organization: executives, managers, supervisors, union representatives, and line employees. The three main components of effective gainsharing plans include: * A management philosophy emphasizing employee participation, potential, and ingenuity; * A structured involvement system for gathering and implementing employee suggestions toward performance improvements; and * A formula to share benefits of performance-generated savings between workers and their employers. Overall, gainsharing programs are designed to encourage employees and management to work together in order to maintain or increase productivity and performance throughout the organization.
There are a number of different types of gainsharing plans, but the "traditional" plans are the Scanlon, Rucker, and Improshare plans. Most new gainsharing plans borrow elements from one or more of the traditional gainsharing plans, but are customized to meet the specific needs of the organization.

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.

Chapter 3

TYPES OF GAINSHARING APPROACHES

3.1: Employee Ownership

Employee ownership means a significant and meaningful stake in a business for all its employees. If this is achieved then a business has employee ownership and so it has employee owners. What is meaningful is not confined to financial participation. Irrespective of any financial participation, employees must have access to organizational structures that ensure employee engagement. Where financial participation takes place there is no set rule on what percentage of issued share capital is a significant and meaningful stake.
Employee ownership can take one of three forms: * Direct employee ownership – using one or more tax advantaged share plans, employees become registered individual shareholders of a majority of the shares in their company * Indirect employee ownership – shares are held collectively on behalf of employees, normally through an employee trust * Combined direct and indirect ownership – a combination of individual and collective share ownership
Employee ownership typically happens in one of the following scenarios: * Business succession or ownership succession- private owners, such as an entrepreneur or family business, decide to sell to their workforce. The most typical route into employee ownership. * Growth and Expansion- Partners, owners, or managers might decide to broaden ownership to cover most or all employees, reflecting the need to attract, retain and motivate talented people. * Public Service Spin-Outs- Sometimes called mutuals, these newly created businesses including social enterprises and community interest companies delivering public services may choose an employee led or owned solution as part of their structure. * Insolvency or closure threat - employee buy–outs can prove an effective route to recovery for businesses that might otherwise fail.
3.1.1: Employee Ownership Benefits * The employee owned business tends to be more successful, competitive, profitable and sustainable. * Employee owned businesses tend to be more entrepreneurial and committed to the company and its success. * They have high employment standards, involve staff and give everyone a stake. Employee owned businesses are better at recruiting and retaining talented, committed staff. * These type businesses tend to have a strong commitment to corporate social responsibility and involvement with the communities they operate in. * Employee owned companies are more innovative because managers go out of their way to consult, share information about the company, and give staff responsibility.
3.1.2: Employee Stock Ownership Plan (ESOP)
Employee ownership can be accomplished in a variety of ways. Employees can buy stock directly, be given it as a bonus, can receive stock options, or obtain stock through a profit sharing plan. Some employees become owners through worker cooperatives where everyone has an equal vote. But by far the most common form of employee ownership in the U.S. is the ESOP, or employee stock ownership plan. Almost unknown until 1974, by 2014 7,000 companies had ESOPs covering 13.5 million employees.
An employee stock ownership plan (ESOP) is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company. Under these plans, the employer gives certain stocks of the company to the employee for negligible or less costs, until the options vests and the employee exercises them or the employee leaves/retires from the company or institution.

These plans are aimed at improving the performance of the company and increasing the value of the shares by involving stock holders, who are also the employees, in the working of the company. The ESOPs help in minimizing problems related to incentives.

How ESOP works

In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits.

Shares in the trust are allocated to individual employee accounts. Although there are some exceptions, generally all full-time employees over 21 participate in the plan. Allocations are made either on the basis of relative pay or some more equal formula. As employees accumulate seniority with the company, they acquire an increasing right to the shares in their account, a process known as vesting. When employees leave the company, they receive their stock, which the company must buy back from them at its fair market value (unless there is a public market for the shares). Private companies must have an annual outside valuation to determine the price of their shares. In private companies, employees must be able to vote their allocated shares on major issues, such as closing or relocating, but the company can choose whether to pass through voting rights (such as for the board of directors) on other issues. In public companies, employees must be able to vote all issues.

3.2: Production-Sharing Plans

In this strategy, a standard of output is set before the manufacturing period on the basis of production goals. If this predetermined level of output is reached by the employees, they are qualified for the incentive. Basically production sharing plan is a short time tool. It’s best practiced with specific production target in a given period of time. When the target is set, employees try harder to reach it at any cost. Since fulfilling the target ensures incentive for them. The incentive can be cash or non-cash both type.

3.3: Profit Sharing

Profit sharing is an incentive plan which awards employees with a certain percentage of company’s profits. Under this variable pay plan, the management of the company sets out a percentage of yearly profits as a pool for sharing with employees. The amount to be distributed is decided on the basis of a formula which is devised for profit distribution. Often, profit sharing results in more money shared with employees with higher salary and lesser amount to the employees whose compensation is lower. Profit sharing works best in organizations which have relatively stable earnings, or if the earnings are gradually increasing.
3.3.1: Characteristics:
The following are the characteristics of profit sharing scheme: 1. Workers are provided a part of profits exceeding a certain limit. 2. The profits are paid to labor/ employees in addition to their normal wages. 3. The payment is made from net profits. This means that it is not a part cost of production or a charge against profit and loss account. 4. The payment is based on seniority for wages calculations of the workers.

3.3.2: Objectives:
The following are the objectives of this scheme: 1. To recognize the right of workers for sharing the prosperity to the organization. 2. To help maintain cordial relations between employees and employers. 3. To make workers feel as members of the organization rather than only employers. 4. To supplement income of workers.
3.3.3: Advantages of Profit-Sharing:
This scheme is good both for employers and employees. The employees try to contribute their maximum so that profits go up. Management gets willing co-operation of employees for all its progressive schemes.
The advantages of this scheme are as follows:
1. Increase in productivity:
The workers will try to improve their efficiency so that costs are kept under check and profits go up. They will realize that low productivity will mean less profits and their share will also go down. The workers will take keen interest in raising output of the organization between Employees and Management.
2. Cordial relation:
There will be cordial relations between management and employees. Industrial atmosphere is generally disturbed by strike and lockout. A strike leads to low production and less profits. Workers will try to avoid every type of conflict so that work does not suffer. Management on the other hand, will not have any excuse to declare lock-out etc. Both the parties stand to gain by virtue of industrial peace.

3. Reduction in labor turnover:
Under profit-sharing scheme, workers are paid according the length of service, etc. Those who have stayed for long stand to be benefited more. Employees will try to stay in a concern for longer periods so that they get more as their share between the year do not become eligible under this scheme. This will prompt workers to complete at least a year so that they get share in profits.
4. Additional income for workers:
The payment of profits is additional benefit. It results in additional earnings to the workers. They are allowed to raise their standard of living with the additional income.
5. Less supervision:
The workers are motivated to work more and do not require much supervision. They will keep on working without caring whether there is anyone to supervise them or not. Their interest lies in raising output. Self-discipline inculcated by workers reduces the need for supervision.
6. Team spirit among workers:
Profitability is the result of team work. Single person’s performance cannot increase profitability of the enterprise. All the workers will try to improve their performance. They will co-operate with each other for raising the profitability of the unit.
7. Social justice:
The profits will be shared by both employees and employers. Instead of leaving all profits for investors, the employees will also be able to increase their earnings by having a share in them. This will bring equal distribution of income and social justice.

3.3.4: Limitations of Profit Sharing:
Following are the limitations of profit sharing scheme:
1. No distinction between efficient and inefficient:
The profits are shared in a specific ratio by all the workers without regard to their contribution. There is no distinction between efficient and inefficient workers. It kills the initiative of efficient persons. Rather, in efficient persons feel more satisfied because they also get the same amount of profits as received by efficient workers.
2. Uncertainty of profits:
The profits are always uncertain. A number of factors, besides workers are responsible for the profits of a concern. The demand and supply economic factors, government policies, etc. may influence profits. There may be low profits in spite of best efforts by the workers.
The workers will never be sure of the amounts of profits available to them. They will not be able to make their plans in the absence of definite amounts of profits. They may feel discouraged if there are losses due to reasons beyond their control.
3. Manipulation of accounts by management:
Management may indulge in manipulation of accounts. Profits may not be accurately shown by under-valuing of closing stocks or by inflating expenses. This often leads to disputes among workers and management. Workers generally, suspect that management do not show real profits to avoid payments to workers.
4. Opposition by trade unions:
Profit sharing schemes are not generally supported by trade unions. Management try to keep workers away from unions. This is not acceptable to unions and they oppose the adoption of profit sharing plans.
5. Inadequate incentive:
Profit sharing plan does not create interest in hard work continuously because profits given only once in a year. On the other hand, if workers are paid incentive amount regularly then they will continuously feel attracted towards their work. In case management decides to credit share of profit to workers provident fund then it will cease to offer an incentive for hard work.
3.3.5: Basic Principles for the Success of a Profit-sharing Plan:
These are as follows:
1. In order to enhance the team spirit of the organization, the management is always interested in installing the profit sharing plan.
2. This system provides sufficient incentive to the workers and remove the feeling among them that major share of their contribution by way of extra effort will go to the management.
3. The workers feel that the incentive they are getting is the fair share of the profits they have helped in generation. This generates faith among the employees in the working of the incentive plan.
4. An atmosphere of understanding among the employees and management should be created so that both of them consider themselves partners in the welfare of the organization so that whenever company goes in loss, the loyalty and interest of employees is not lost.
5. Employees should be well represented in the administration of the plan.
6. Management should have the abilities to manage.
7. Profit sharing plan should not be adopted as an alternative for paying less than the prevailing wages.
8. The working of profit sharing system should be simple and easy to understand for workers.
9. The plan should be dynamic both in technical details and method of administration of the plan.
10. Management should not consider profit sharing as an answer to all troubles. It must improve industrial relations by providing dignity and welfare of employees.

3.4: Cost-Reduction Plans
Cost reduction plans are effective principles or methods for increasing operations efficiency. Cost reduction strategies can reduce operations costs while increasing productivity, allowing for strategic reallocation of resources. These cost reduction strategies provide additional benefits that ripple throughout the business by eliminating waste, accelerating processes, and utilizing resources effectively.
With reduced cost in production, the organization can refocus budgeted resources on expanding operations or new market expansion. This supports the strategic alignment of goals as well as innovation and increasing market share.
Conditions to be considered for the plant-wide incentives plan:-
1. Technology
2. Size of the firm
3. Corporate culture
4. Historical performance
5. Stability of the product market

Three major types of Cost-Reduction Plans-
1. Scanlon Plan- This type of plan rewards labor savings, most appropriate for the organization that has high labor content.
2. Rucker Plan- This plan is useful for the companies that want to improve other elements such as energy consumption or scrap reduction in addition to labor.
3. Improshare- This plan is the easiest of the profit sharing plans to install and understand.

Advantages-
1. Increase in the level of cooperation.
2. Improved quality.
3. Decrease in the measurement difficulties.
4. Eliciting active employee input.

Disadvantages-
1. Results in the protection of low performers.
2. Management-labor conflict.

3.4.1: Scanlon Plan
Joseph Scanlon designed this plan in the early years of the Great Depression to save enterprises threatened by the economic collapse. Scanlon believed that if the workmen are allowed to contribute to an organization’s decision-making process, the goals of the workmen and the employer would be common and both would work in co-ordination to achieve such goals. Such plans were instrumental in ensuring stability in the labor-management relations in a highly volatile era.
Scanlon Plan is cost-saving, gain-sharing, productivity-incentive plan in which any saving (agreed upon standard labor cost per unit of output subtracted from actual labor cost per unit of output) is shared equally between the workers and the organization. This plan requires formal employee participation along with frequent performance reviews and employee reporting.

This type of a gain-sharing program seeks to involve employees more directly in an organization’s decision-making process. Since the employees and the employers are set to benefit from the plan, both should acknowledge the importance of each other’s suggestions and contributions. For such plans to work, the relations between employers and employees need to be relatively stable and the employees should feel a sense of belonging to the organization.

Procedure 1. Employees provide suggestions to the department level committee 2. The suggestions seek to identify ways to improve productivity 3. The department level committees then transfer the suggestions to a screening committee 4. The screening committee includes members of the workforce and the management 5. The screening committee reviews the suggestions and designs measures to improve performance 6. The screening committee periodically reviews performance and computes the amount of bonus to be paid to workmen as their share of performance improvements.

3.4.2: 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 value of production, whereas the Rucker formula introduces a third variable: the 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 objective of the Rucker Plan is to increase value added. When there is an increase in value added, a fixed percentage of that increase is paid out as a bonus.

Concept of Value Added
Value added is commonly used in measures of an organization’s productivity. It represents the wealth created through its production process or provision of services. Wealth is generated by the combined efforts of those who work in the organization (Employee) and those who provide capital (Employers and Investors). It must therefore be distributed among them.

To set standards for a Rucker Plan, an employer must examine accounting figures over a long period of time to find a stable ratio between labor costs and value added. For each accounting period, the following figures should be examined: * Sales value of finished goods; * Costs of raw materials, supplies, and services; and * Payroll, including wages and fringe benefits for direct and indirect employees.

The key element in a Rucker Plan is the productivity standard. Specifically, if productivity is too low, payments will not provide sufficient worker incentive; if it is too high too much will be paid in bonuses.

3.4.3: Improshare plan

Improshare is “Improved Productivity through Sharing” and was coined by Mitchell Fien. Improshare is a type of group bonus that is gained depending on the productivity of the team. Productivity is measured through amount of output produced in a given time period. The bonus amount depends on both employees who contribute directly and indirectly to the output.

The bonus is calculated by finding the difference between standard working hours and actual hours to produce the required output and divided by the actual hours. The employers and the employees share 50-50% of the bonus. The employees 50% is split between all the members in the team that contributed towards productivity improvement.

An advantage of this method of bonus is that it promotes team work and collaboration, resulting in positive group dynamics as well as increased productivity for the organization. Furthermore the employees are aware that they will receive the bonus if they finished their work quicker, hence improving efficiency as well as reducing the cost of production.

However the drawback is that it only focuses on the reduction of cost of production and does not consider reduction in other types of cost. Hence those employees involved in other cost savings will not be benefited by the Improshare system.

Unlike some other plans, Improshare programs are not influenced by outside factors beyond an employee's control, such as sales value or market conditions. Product changes do not upset the plan because labor hours per product are being measured and productivity bonuses are not affected by sales volume.

3.5: Incentive Matrix Summary

This is more like a tool that helps to analyze different types of incentives and gainsharing approaches that are been practiced in any organization. Some programs may generate cash for employee, where some may provide other benefits. Redesigned job can be one sort of award too. However, fractional ownership of the organization can be offered to the employee for his/her performance at one point.
Incentive matrix helps to differentiate if the approach is generating cash or non cash incentive for the employee. It shows another important distinction which is between individual and group incentive. When cooperation is expected, works must be assigned in groups. However, when cooperation is comparatively less important, individual incentives are better choice. But individual incentive might work against teamwork since it puts employees into competition with each other. So depending on the need of affiliation in work, incentive program has to be designed with the help of incentive matrix.

Chapter 4
FINDINGS AND RECOMMENDATIONS

4.1: Findings

Gainsharing plans measure changes in critical relationships between inputs and outputs, employees must understand the variables-that they can control-which affect organizational performance. Many gainsharing plans create an esprit de corps between interdependent work groups, and between labor and management, which usually reduces conflict, improves cooperation between related work units and benefits labor-management relations.

It's not uncommon for these quality-of-worklife benefits to have a positive effect on absenteeism, turnover and tardiness. Also, companies may report considerable reductions in their cost drivers (e.g., labor costs, product/service quality, purchased goods or services). Lastly, gainsharing plans motivate employees to improve the performance of key success factors within an organization.

4.2: Recommendations

* Realizing the employee need is important so that the incentive program can be designed accordingly. * Proper gainsharing approach should be chosen based on the organization structure and condition. * Transparency in the incentive programs is unavoidable matter of concern * Must be consistent with the organization's existing beliefs and values

Conclusion
Gainsharing is a structured program to increase productivity and decrease costs. A gainsharing program is setup so employees who reduce cost or increase profits, receive regular cash bonuses. Gainsharing differs from profit sharing in that employees know exactly the goals they have to achieve in order to receive the bonuses, more feedback is needed and payouts are more frequent.

References: * Beck, D. (1992). Implementing a gainsharing plan: What companies need to know. Compensation & Benefits Review, 24(1), 21-33 * Bullock, R. J. & Lawler, E. E. (1984). Gainsharing: A few questions and fewer answers. Human Resource Management, 23 (1), 23-40 * Gowen, C. R., 111. (1990). Gainsharing programs: An overview of history and research. Journal of Organizational Behavior Management, 11, 77-99 * Masternak, R. L. (1992). Gainsharing boosts quality and productivity at a B. F. Goodrich plant. National Productivity Review, 1202, 225-238 * Schodlatz, W. C. (1955). The Rucker share of productivity plan. Management Record, 17, 239-240