The following article appears in the journal JOM, 47 (7) (1995), p. 57. JOM is a publication of The Minerals, Metals & Materials Society

Improving Plant Performance Through Gainsharing

Gainsharing offers industry the opportunity to improve plant performance and boost productivity while reducing costs attributed to poor quality (e.g., waste, spoilage, rejects, and customer returns). Today, there are approximately 2,500 companies are using gainsharing, according to a study done by the American Management Association. Among the companies using the plan in their plant operations are such firms as Dresser Rand, Consolidated Diesel, Carter-Day, Dover Rotary Lift, Gradall Company, Ingersoll-Rand, Mixer Systems, Proen Products, Rexnord, Webster Electric, Cincinnati Milacron, and a host of smaller companies.

Gainsharing is not an individual, piecework system. It is a group incentive, pay-for-performance wage system—a group bonus in which the entire factory workforce shares as a result of improving productivity above a certain level and decreasing rejects and rework. Moreover, while productivity gain is the object, the output must be a good product; rejects and customer returns are deducted from the output totals. Over a five-year period, the productivity gains should be close to 100 percent and the costs of rejects and rework greatly reduced.

A successful gainsharing program relies on two factors—formula and training. A sound formula based on a careful examination of the company's past performance is the level from which gain is measured and payout is made. There is no one-size-fits-all gainsharing plan; each program is custom made to fit an individual company's needs. Not only are productivity and quality factored into the formula, but other costs such as the cost of worker's compensation or the reduction in order-to-shipment lead times can also be added. And in order for the program to work, all levels of the workforce must be educated about their respective roles in gainsharing through proper training methods.

As an example of how gainsharing works, consider a company producing rigid and steering differential axles for tractors. From its records, the company determined that every $1,000,000 of good product output required 10,000 worker hours. Under gainsharing, the next $1,000,000 of axle output and shipment was produced with only 9,000 hours. If the average wage rate is $10 an hour, the 1,000 hours saved are worth $10,000. That is a gain to be shared equally between the workforce and company.

Or consider a company that manufactures heat exchangers for off-road construction equipment. An analysis found that the value added by manufacturing was about 40 percent. That is, for every $1,000,000 of shipments, $400,000 represented value added by manufacturing. The remainder was materials cost. A gainsharing program was set up to enable the workforce to work more efficiently, inspect heavy-bolted and soldered radiators carefully, reduce setup times, watch temperature controls, and speed up crating and shipping time. The workforce produced the next $1,000,000 of output with only $350,000 in value added by manufacturing—a savings of $50,000 to be divided equally between the workforce and the company.

In addition to helping reduce manufacturing costs, gainsharing can also enable a company to cut costs due to poor quality. For example, a company producing rolling bearings with solid lubricant cages had small labor costs (about 10 percent), but high poor-quality costs. An analysis of the company's records revealed that for every $1,000,000 in shipments, $200,000 was directly traceable to the cost of spoilage, rejects, and customer returns. By establishing a gainsharing program, the workforce was able to provide proper thermal hardening of the antifriction compound and provide equipment maintenance more promptly. The cost of poor quality was cut to $150,000 in the next $1,000,000 of shipments and the gain of $50,000 was shared between the workforce and the company.

In a study reported by Chicago Business in April 1994, 110 plant managers in Michigan, Ohio, Indiana, Illinois, Wisconsin, and Minnesota were questioned about their gainsharing programs. Forty managers reported productivity gains of 18-25 percent annually; 11 reported gains of less than ten percent; 17 reported poor results and discontinued the plan.

In 1991, a study by the U.S. General Accounting Office of 76 companies found that with gainsharing, the average company improved productivity by 17 percent in the first year. Some examples of successful gainsharing programs are

• The Super Sack Manufacturing Corporation in Fannin County, Texas, which has improved productivity by 88.5 percent over five years, according to manufacturing vice president David Kellenberger.

• General Tire's 1,950-employee plant in Mount Vernon, Illinois, where the plan has generated $30 million in savings over a five-year period—$20 million of which was paid out to workers in the form of bonuses, while the company profited by $10 million, said Floyd Brookman, coordinator of the program.

• Timken's Faircrest Steel Plant, where gainsharing targeted plantwide improvements and replaced old incentive systems that paid only for individual piece-work operations, said Tim Chapin, senior human resources executive.

Despite the success of gainsharing, some firms are still hesitant to adopt the program. One of the factors causing this is described by Peter Drucker in Managing for the Future. He says, "Inertia has undermined more companies than incompetence, poor executives, or failure to manage finances well."

For more information contact W. Imberman, Imberman and DeForest, 1790 Ridge Avenue, Evanston, Illinois, 60201; (708) 733-0071; fax (708) 733-0073.