re-invigorating the scheme and re-energizing individual contribution.
Communication is also very important, especially when the scheme is producing the
desired results and the employer, but, more importantly, the employees are benefitting
from it. Not only when introducing the new scheme in order to explain its mechanism,
but also when results have been achieved and individuals receive the expected benefit,
communicating results is hence paramount.
As it usually occurs with every type of scheme, plan and programme, gain-sharing is
very likely to have both supporters and opponents. Research (Ross et al, 1992) shows
that the reasons for individuals supporting the introduction and execution of gain-sharing
schemes can be grouped into three main categories:
Involvement opportunity: in that the scheme can be considered as an employee
voice tool. Individuals can make suggestions on the way their work is carried out,
which also represents a way to recognize the value of their skills and competency;
Positive organizational climate: individuals will communicate and genuinely
cooperate. This will in turn contribute: effectiveness to their work, better working
conditions and enhanced productivity, ultimately positively impacting the
organizational climate;
Personal benefits: under this scheme individuals develop the feeling that they are
important for the business, are treated fairly and receive adequate recognition.
All of that contributes in turn to let individuals develop a more robust sense of job
security and sense of belonging.
By contrast, the reasons why some individuals oppose gain-sharing schemes can be
categorized into four groups:
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Lack of trust in management: the majority of opponents to the scheme usually
consider it as a useful means for the organization and its management, but not
for employees.
Lack of trust in the scheme: it is not supposed to cause the payment of any
significant bonus for individuals, if any. Additionally, many individuals do not trust
the way the bonus is calculated.
General lack of interest for a bonus system: in that considered as a meteor
destined to fade any time soon.
The negative impact over base pay: amongst the opponents of gain-sharing many
consider it detrimental to the effect of a possible base pay increase. As long as a
gain-sharing plan is in place, according to these, it is very unlikely that the
organization could grant employees a base pay increase (Ross et al, 1992).
The likely restraining forces to gain-sharing implementation could be largely averted by
means of a clear and open two-way communication process.
There are practically little chances that all of the employees might genuinely welcome
the new plan, opponents will always be there and usually, albeit these may be a tiny
minority, tend to amplify the negative consequences of the plan implementation.
Employers desiring to sensibly increase chances that the new scheme would be accepted
by staff need to convince as many employees as they can, preferably involving – where
any – informal leaders, that the scheme is genuinely effective and that the benefits
associated with this will be achieved by employers and employees as well according to
the win-win tenet underpinning its design and development.
To this extent, the full support of the company management is of paramount importance.
Whether managers would be able to explain and let individuals perceive the real benefits
gain-sharing can bring to them as individuals and as a group in terms of involvement,
participation, productivity, organizational climate and ultimately financial reward,
chances that the scheme is accepted will dramatically increase.
Gain-sharing plans can also be used in combination with other variable pay
arrangements. Bonuses are paid to staff only whether an increased level of performance
or a real cost reduction is achieved, so that the payment of the bonus has not to be
intended as an entitlement. Gain-sharing can be introduced in every moment; however,
the use of the scheme can reveal to be particularly effective when the business is
confronted with a particular strong goods or service demand. In such cases it can both
help employees to virtually instantly realize the benefits of the scheme and the employer
to more likely being able to successfully face the exceptional circumstances (Gainsharing
Inc., 2012).
Notwithstanding, in recent times this approach has not caught the interests of the vast
majority of employers. Putting aside the circumstance that gain-sharing is a fairly
demanding scheme, the lack of interest towards this approach could be explained by the
exogenous factor and more in particular by the economic landscape in which business
are competing since several years. Albeit Gainsharing Inc. (2012) maintains that this
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scheme could effectively be operated also when the demand is stable or even declining,
in that concerns could put in such circumstances emphasis on costs reduction rather
than on performance enhancement, in practice employers might find it difficult to grant
extra pay to staff in such situations.
According to the business needs and the circumstances, gain-sharing definitely
represents an additional and valuable approach to reward management employers can
have recourse to, in isolation or in combination with other incentives arrangements.
Profit-sharing
Profit-sharing schemes represent a form of variable pay according to which a portion of
the profits made by the organization will be distributed amongst employees, either in
cash or shares, regardless of the level of performance attained by the business and of
employee contribution. In the past, profit-sharing programmes were mostly intended
and implemented as deferred compensation schemes; payments were thus made directly
to pension funds in order to increase employees’ contribution to their individual plan or
scheme (Masternak and Associates, 2013). Nevertheless, this practice has progressively
faded away insofar as nowadays payments are nearly exclusively made in cash or share
options.
Findings of a CIPD investigation (2011) revealed that only 13.7 per cent of respondents
have recourse to this type of plans. In any case, a rate fairly superior to that emerged
from the same investigation as regards the use of gain-sharing programmes (3.6 per
cent). The study also showed that this approach is literally deserted by public, voluntary
and not-for-profit organizations employers and that, even though it is applied at all the
staff ranks, it is mostly used at senior management level.
The objective of this type of arrangements is clearly that of sharing with employees the
financial success of the business and favour individual identification with the organization
fortune and eventually misfortune. This approach can be considered as appropriate and
suitable for an organization whether this is mostly aiming at increasing profit. Directly
linking cash payments to profit making can effectively help employers to clearly let
employees understand that the main business aim is in fact that of generating profit
(Watson, in Robertson, 2007).
Habitually, the plan is extended to all of the employees irrespective of the circumstance
that these may work in different locations, factories or branches, whereas the only factor
considered by employers to determine individuals eligibility to profit-sharing payment is
represented by a minimum period of service, usually identified with one year. Employers,
as it actually rather frequently happens, may decide to introduce separate arrangements
for high fliers and senior managers.
Factors that need to be assess when designing the plan
When developing and designing a profit-sharing plan reward professionals have to
identify, consider and address some important and fundamental elements.
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Payment frequency
The first decision which needs to be made concerns the frequency of payouts. Since the
plan is associated with the year-end profit actually made by the concern, the most
suitable approach to payouts frequency is that to refer to the financial year. Indeed,
profit-sharing sums are at a very large extent paid annually.
Calculation methodology
Before deciding “how” to share, it is clearly important determining “what” to share. To
this extent, employers may decide to determine first of all a threshold in order to identify
and set the minimum level of profit they consider necessary to be made by the business
for a portion of this being shared with staff. In this case a part of the overall profit will be
distributed amongst individuals if and only if the profit made by the firm will exceed the
pre-identified threshold.
Alternatively, employers could decide to determine the portion to be shared amongst
staff as a percentage of the total profit made by the firm. This method, however, entails
that a quota of the profit will be distributed also in those circumstances in which the
profit made by the business is low. The risk associated with this method is that, in the
outlined situation, the amount of the addition paid by the employer to individuals may
reveal to be particularly small and give raise to employee disappointment and discontent.
In contrast with these methods, organizations could decide not to use any pre-set
formula and leave to the exclusive judgement and discretion of the board the decision of
the profit quota to be distributed amongst staff. This approach, however, is likely to be
perceived by staff as sorely dubious and suspicious. As such, this method is very likely to
also be perceived by individuals in open contrast with the objective of fostering
employee involvement and favour individual identification with the business success
(Armstrong, 2010).
Irrespective of the calculation methodology identified, careful consideration needs to be
paid to the significance and value of the final sum practically paid to individuals. As just
mentioned, the payment of a small sum of money could at best result as pointless and at
worst produce counterproductive results. Habitually, employers use to distribute a sum
from 2 to 5 per cent of base pay. However, the payment of a sum lower than 5 per cent
salary is hardly recognized to be productive of any positive effect over individual
commitment and motivation (Armstrong, 2010). Tulk (in Robertson, 2007) avers that a
significant impact of profit-sharing payments over employee motivation can be attained
by employers only whether payments represent between 7 and 12 per cent of individual
pay.
The circumstance that the “what” an organization will pay is firmly associated with the
level of profit made by the business, clearly accounts for this form of payment being
variable from year to year. When eventually identifying the threshold triggering the
payment, employers should avert fixing it at a too high or at a too low level. Too a high
threshold level, considerably reducing chances that employees will receive any sum of
money, is likely to produce suspicion and disinterest towards the plan; too a low
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threshold limit may account for the payment to be perceived as an entitlement, never
mind fairly straightforward to attain.
Employers should pay due care to the circumstance that albeit the payment of profit-
sharing is associated with an organization ability to make profits, the fact individual
performance is not directly taken into consideration for the cash calculation might
account for this form of reward being considered by individuals as an entitlement to a
benefit (Masternak and Associates, 2013).
Distribution methodology
Determined which part of the total profit have to be distributed amongst staff, employers
should subsequently decide how to share the identified amount of money.
As mentioned earlier, these can decide to pay individuals:
-
An amount of money determined as a percentage of base pay, without
considering any additional variable, as for instance, individual length of service,
grade, contribution, skills, etc.;
-
A sum of money calculated as a percentage of base pay or a fixed amount equal
for all of the employees, to which a variable addition is added based on individual
contribution or other variables;
-
A fixed amount of money equal for all the employees regardless of any variable.
General rules
As suggested by Robertson (2007), in order to prevent spelling disaster when
implementing the plan, employers should be careful when deciding about the right
moment to introduce it. Strictly speaking, it should clearly be avoided introducing the
scheme when some events very likely to negatively impact its implementation are known
to occur. For instance, during periods of planned strong investments that will clearly
negatively impact the business profits.
Since according to the mechanism of a profit-sharing scheme employees will receive a
money addition only whether the business will make a profit, the scheme may reveal to
be very effective to help organizations fostering team-working. Consequently, as
suggested by Watson (Robertson, 2007), the scheme can also help employees to foster
an organizational culture encouraging mutual cooperation and assistance or to put it in
the Watson’s words: “a culture where it’s good to help.”
Some commentators suggest that gain-sharing programmes are more likely to succeed
into smaller to medium organizations with no more than 500 employees, in that, in such
circumstances individuals can better identify with the business and better associate their
contribution with organizational success. However, some cases such as that of the John
Lewis Partnership, which will be discussed later, show that this is not necessarily
invariably the case.
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Variable reward schemes
The plan is also considered to usually produce positive results within businesses where
there is not a wide variety of roles, such as in manufacturing and, more in general, in
those organizations in which a production line is in place and individuals broadly equally
contribute to the final output (Robertson, 2007).
In order to profit-sharing plans being successful, it is crucially important to determine
and to correctly identify what the most important objectives for the business and for the
success of the plan are. This requires the organization senior managers working together
and deeply investigating the business processes and mechanisms (Robertson, 2007).
The John Lewis case
One of the most successful cases, arguably the most successful case, of profit-sharing
implementation is represented by the John Lewis Partnership.
Inasmuch as for the successful introduction of a profit-sharing plan profit has to be
considered by the employer crucially important, Profit is considered one of the three
founding pillars underpinning the John Lewis Partnership’s (ILP) strategy, together with
Partners and Customers.
More specifically, as regards the profit element the JLP’s strategy states: “The
Partnership should make sufficient profit to sustain our commercial vitality and
distinctive character, allow continued development and distribute a share of profits each
year consistent with Partners' reasonable expectations.”
Indeed, so successful has revealed to be this three-leg strategy, that the JLP’s 84,500
members are now used to see their “reasonable expectations” being regularly exceeded.
In 2013, for instance, JLP members (represented by both John Lewis and sister company
Waitrose staff) have seen their profit-sharing addition rising from 14 per cent to 17 per
cent of their salary (Felsted, 2013). JL Partners are actually used to this type of
performances; at year-end 2007, for example, they received a remarkable 20 per cent
gain-sharing payout.
John Lewis, and hence department stores in general, represent a very good example of
how profit-sharing schemes could reveal to be successful, in that, sales staff can by
means of this plan better understand how their activity impacts on the organization
performance (Charman, in Robertson, 2007).
In the JLP case, team spirit and employee identification with the firm are supported by
the Partnership’s strategy fostering the tenets of co-ownership and appetite for
continuous improvement and innovation. By means of the three-leg model underpinning
the JLP strategy the firm unrelentingly continues to show its “ability to compete against
and outperform conventional companies” which, as outlined by the JLP strategy itself,
represents the most compelling evidence of the effectiveness of the Partnership
approach to business.
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Variable reward schemes
Profit-sharing v gain-sharing
Aside from the circumstance that under both a profit-sharing and a gain-sharing scheme
employees can receive an additional sum of money and that payments are subject to the
business performing well, the two types of plan are indeed fairly different.
Purpose and meaningfulness
The first noticeable difference between the two plans concerns their ability to actually
and effectively motivate individuals. In general and excluding the certainly existing
exceptions, gain-sharing is most direct and clear about what individuals have to do in
order to achieve their objectives. Indeed, not only employees know what to do, but,
under these schemes, these become also well-aware that what they do can actually help
the business to achieve the pre-identified target; which represents in turn the
prerequisite for the supplement to be paid.
Profit-sharing plans are weaker in this sense. Individuals, particularly in concerns with
complex structures and where a wide variety of jobs and roles exist, are less likely to
properly connect their actions and duties with profit making. Never mind, can these
plans help individuals establish a direct and clear line of sight between their action and
the final overall result.
According to Gainsharing Inc. (2012), profit-sharing programmes are likely to reveal
more effective when applied to higher ranks of staff, those who have a more
comprehensive and deeper vision and knowledge of the business and are therefore able
“to connect the dots.” Gain-sharing plans, establishing a clearer and direct link between
individuals’ activity and additions payment, can more easily and immediately be
understood and, as such, are more likely to produce positive effects also at the shop
floor level.
Albeit both types of schemes can actually favour team spirit and focus on the business,
gain-sharing is potentially more powerful in this sense. People cooperate together and
the result of this cooperation can potentially produce immediate effects, visible in the
employees monthly pay slip. The same objective can be attained also by means of profit-
sharing programmes, but this requires individuals being more focused on the overall
organizational process and wider picture, which is less obvious and immediate and as
such less likely to be understood by employees.
Masternak (2013) considers therefore gain-sharing programmes mainly aimed at driving
business performance, whereas profit-sharing plans more intended to foster employee
participation and identification with the business fortune and eventually misfortune.
Payments frequency
The different frequency of the payments characterizing the two types of plan actually
contributes to reinforce the motivating effect induced by gain-sharing programmes and
to further blur the cause-effect linkage existing between individual actions and the
attainment of the final objective.
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The circumstance that under a gain-sharing programme payments are usually made on a
monthly basis, or at worst on a quarterly basis, clearly helps establishing and
consolidating the relationship between individual actions and the significance of their
activity for the attainment of the final aim and thus the payment of the cash addition. In
contrast, the fact that profit-sharing payments occur, albeit for obvious reasons,
annually does not actually help individuals to establish such a solid link.
Feedback frequency
Directly associated with the frequency of payment is the aspect of the frequency of
feedback. Also in this case, gain-sharing programmes, by means of the frequent
feedback typical of the scheme, can reveal to be more effective to motivate staff than
profit-sharing plans are.
Indeed, finance functions within organizations are used to periodically devise reports
about the organizational performance, but these reports are typically issued on a
quarterly basis. Under a profit-sharing scheme thus it is unlikely that reliable feedbacks
could be provided by mangers to employees at a higher frequency.
Gain-sharing programmes, by contrast, can enable managers to more regularly provide
staff with valuable insight about the current level of performance, giving them the
possibility to timely readdress the navigation route, whether required.
Entitlement to payments
A considerable difference between the two approaches also exists as for the variables
used to determine whether the eligible employees have gained the entitlement to the
addition payment or otherwise.
Gain-sharing programmes formulae are based on a limited number of variables
represented by the most important costs essentially associated with the production
process, its quality and the productivity level attained also by means of costs reduction.