Gain-sharing – How important are internal stakeholder reward systems to your cost-savings plans?
By Cassia Cruz posted on April 8, 2013Written by Will Singer CFO’s often identify cost savings that are not realised through to the implementation phase? Perhaps the CFO wants to reduce maintenance expenses but there is resistance from the line supervisor ordering the factory consumables. So how do you overcome knee-jerk and push back from internal stakeholders? The answer may lay with motivating and inspiring the team through stakeholder-based rewards overlaid across the existing merit-based compensation system. This motivates teamwork and collaboration, rewards employee initiative and performance excellence. It can be driven by either identifiable cost savings or actual profit sharing. Gain-sharing schemes aim to improve stakeholder/management relations while reducing costs (inputs) or increasing production (outputs). These schemes are so named because the gains associated with cost savings are shared between the owners of the company and its workforce. Work groups that succeed in reducing costs (or increasing outputs) receive bonuses that reflect a substantial portion of the cost savings. Here is a simplified example of a gain-sharing plan: Historically, costs at a property trust company has been 50 per cent of output value. Last month, the value of total output was $2m and costs were $900 000 or 10 per cent below the 50 per cent base rate. The company has earmarked the $100,000 savings for the ‘incentive fund’, 30 per cent of which is retained as a reserve to cover costs during performance periods when costs exceed the 50 per cent historical average. Twenty-five per cent of the total is set aside for company profit, and the remaining 45 per cent ($45 000) is distributed to team members as a bonus. Gain-sharing initiatives can be powerful motivators if they strengthen stake-holder and management problem solving. This is accomplished by using interlocking cost reduction committees across all levels in the chain of command, usually comprised of supervisors and their subordinates, who are charged with finding ways to improve cost savings in their areas of work responsibility. The cost reduction suggestions made by the committee are then reviewed by managers, higher-level executives and skilled labourers. They approve cost-savings suggestions and work the teams down the line to implement them. The outcomes of the suggestions are tracked and all groups covered by the scheme benefit from bonuses that average about 45–60 per cent of the documented savings. Gain-sharing is an extremely powerful tool for lowering costs and building ‘bottom-up’ innovation into the company. Firms that have successfully implemented gain-sharing plans report a number of benefits. Many of them find improvements in organisational communications, especially between labour and management and between different interdependent functional units. Since gain-sharing supports a true pay-for-performance culture and improved line of sight, employees link their economic security to the success of the firm. This raises their organisational commitment as well as their satisfaction with their remuneration. Many gain-sharing plans create an esprit de corps between interdependent work groups as well as between workforce and CFO which usually reduces conflict, improves cooperation between related work units and strengthens overall labour–management relations. These benefits to quality of work life reduce staff absenteeism, turnover and tardiness. These distinguishable reductions in staff costs actually motivate employees to look for ways to further reduce input costs.