Profit Sharing vs Gain sharing
Incentive pay – Gain Sharing and Profit Sharing
Chapter 4 describes various types of incentive pay.
One type of incentive plan is gainsharing. Another type of incentive plan is profit sharing.
For many years traditional pay plans considered compensation as a fixed cost. This meant that the only ways to reduce “labor costs” were the drastic measures of cutting wages or reducing the size of the workforce.
Incentive pay ties employee compensation to the success of the business. This type of compensation plan permits organizations to ensure that company successes (or lack thereof) can be reflected in employee compensation without using the more drastic actions of layoffs or pay cuts.
Successful gain sharing plans require that employees and management exhibit a high level of mutual trust, as well as excellent communication about the business and the business results.
The text emphasizes that gain sharing plans focus on employee suggestions and group involvement in improving productivity and efficiencies in the organization.
This is accurate.
However, gain sharing plans also typically involve financial formulas and calculations that are intended to measure the organization’s quantitative financial gains.
An example would be an organization that improves production output over the prior year while maintaining the same production costs.
In this case a portion of the actual dollar “gain” would be “shared” between eligible employees.
This is an example of a “self-funding” gainsharing plan.
The financial (and self-funding) aspects of a gainsharing plan also permits an organization that achieves the improvement goals created by the employees, yet finishes the year with a financial loss, to provide no incentive payout.
This could mean that even though the process improvements suggested by the employees were achieved, sales levels were less than forecast and the organization lost money for the year.
The assignment –
Define (in your own words) and explain the terms gain sharing and profit sharing.
In your definition/explanation include (and define in your own words) the terms “self-funded,” and “line of sight.” Explain why these two terms are very important in any discussion of incentive compensation.
Explain the key differences between these two types of incentive compensation plans (gain sharing and profit sharing) and describe where (in what type of an organization) each type of incentive compensation plan might be effective and non-effective. Explain why.
Explain why trust between management and employees is critical in a gain sharing plan.
Finally, use your research to find –
- A large organization that effectively employs a gain sharing plan – explain why the plan works for this organization
- A large organization that effectively employs a profit sharing plan – explain why the plan works for this organization
Research and list at least three outside sources.
Your submission should be between 300 and 400 words. This is a discussion type question. Does not need to be in written paper format just APA style.
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