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April 29,
2002 Issue
Raise the Bar in Organizational
Success - Link Gainshare Plans to Strategic Performance
Assessment
A previous issue of
Astronology explored increasing employee
accountability for performance by improving the
organization's communication of strategic objectives. The
use of a simplified two-page performance assessment outline,
focusing primarily on "Balanced Scorecard" strategic
objectives and each employee's contribution to the
organization through his / her essential functions, also was
explored. This process requires organizational commitment to
extensive education and communication.
Now we take this approach to the next level. Strategically
aligned performance assessment processes have given rise to
increased creativity in reward programs. The most popular of
these creative programs is gainsharing. While gainsharing
has existed for many years, most equate it with profit
sharing or a way to legitimize previously scheduled bonus
payments. However, when designed properly, gainsharing
focuses the behaviors of individual employees and employee
teams, thereby enhancing the organization's ability to
succeed.
Organizations should keep the following in mind when
considering any form of gainsharing:
- Widespread today are efforts to transform
organizational culture to one with highly committed and
involved employees. These efforts are critical to future
organizational success and survival.
- An organization cannot expect its employees to
continuously improve organization performance when
- their jobs limit their latitude and ability to
change work processes, and
- when they are given little information about the
business and management systems' focus on control.
- Gainsharing primary goal is to support a philosophy
of participative management. When commitment to change
is lacking, the involvement process will be ineffective.
Gainsharing will then fall short of expectations.
There are six basic components of and processes to build a
successful gainshare program.
- Define the group to be included. Many organizations
attempt to make these programs all-inclusive. However,
one must address the "line of sight" issue.
All-inclusive programs sometimes lose their
effectiveness since employees may not understand how
they personally impact results.
- Define the formula for measuring success and funding
the share. This is where the balanced strategic
scorecard comes into play. Most organizations focus only
on the financial aspects of the scorecard. While this
ensures the funds for rewards will be available, this
jeopardizes the other scorecard components. On the other
hand, having four or five objectives can complicate the
formula to the point that all are confused and have
little trust in the outcomes.
- Set the baselines and targets. The baseline for
measurement should focus on historic information from
the past fiscal year or quarter. Three levels of targets
work best for all types of reward and recognition
programs: threshold, target, and optimum. However, most
gainshare programs focus on one specific level at which
the actual share begins.
- Determine the share between the organization and the
employee. While organization culture often defines this,
the most common ratio is 25% to employees and 75% to the
organization. Some organizations first determine what
percentage they want to reserve as retained earnings and
then calculate the share. This ensures the ability to
invest in future organizational improvements and, in
public companies, to provide for stockholder equity.
- Determine payout frequency. Many manufacturing
organizations focus on an annual gainshare payout. There
is an increasing trend towards quarterly shares to
quickly reinforce the behaviors exhibited by employees.
There may be financial reporting barriers that prevent
this from happening. Those on a quarterly program commit
to a payout within thirty days of the end of the
quarter.
- Develop the method to distribute shares to
employees. Many advocate an equal share to all involved
so as to reinforce the team aspect of the program. Some
creative methods include distributing equal shares based
on the total hours actually worked during the
measurement period. Another determines the share based
on the pay grade in which the job is classified. Care
must be taken when distributing funds to non-exempt
employees. Overtime payment is required on gainshare
distributions.
The following tips are essential for developing a
strategically aligned gainshare program linked to a balanced
scorecard performance document.
- The program should be organization-wide in terms of
funding and accomplishing key balanced scorecard
objectives. The funding can be an increase in net
income, or a decrease in operating expenses or some
other quantifiable savings. A single organization-wide
objective focusing on a quality, customer, or growth
objective should be set as a circuit breaker. Failure to
meet these objectives would result in total forfeiture
of any monies gained.
- The program should be an annual one based on the
realities of today's complex financial reporting systems
and the need for employees to work towards objectives
over a realistic period of time. While this may add some
pressure in terms of FLSA calculations, this approach
tends to be more successful in allowing employees time
to correct early failures.
- Place no less than a 25% share of the gain in the
employee pool. Less than 25% sends a message that the
employees' efforts were not considered valuable by
organization management.
- Have a direct linkage to the two-page performance
process. Since this process focuses primarily on
contributions to strategic objectives and essential
functions, base payout shares on this contribution. At
the end of the gainshare calculation cycle, managers
recommend to senior management three levels of share:
- a full share for high contributors,
- a three-quarter share for contributors, and
- a quarter share for those in need of
improvement.
Senior management then makes the final assessment for
reward distribution.
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Copyright 2007, Astron Solutions, LLC
ISSN Number 1549-0467
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