Pay for Organizational or Unit Performance

1. Pay for Organizational or Unit Performance Why Organizational- or Unit-based Pay? • Overarching Rewards to Link Interdependent Teams to a Common Fate • Share Money saved (labor savings) or Cash Produced (profits) with employees due to their efforts. Promotes Cohesion/Cooperation between various groups - Ex: labor/management. • Share risks of success (upside and downside) with employees to give firm “shock absorber” when business experiences a decline in profits/revenues. MGMT 4030 - Managing Employee Reward Systems

2. Gainsharing Definition of Gainsharing • Basis of Pay is a subunit of a firm such as abusiness unit, division or department. • Employee Involvement is an essential feature of gainsharing. • Gainsharing represents a substantial organizational intervention and change in culture. MGMT 4030 - Managing Employee Reward Systems

3. Gainsharing Definition of Gainsharing (continued) • Basis of employee involvement is the implementation of continuous employee suggestions - employees form suggestion teams • “Work smarter, not harder” • Gains from the improved work methods are shared with the employees. • Example: Scanlon Plan (most popular plan) MGMT 4030 - Managing Employee Reward Systems

4. Gainsharing Operational features of Gainsharing • Production Committee - involves front line employees who develop suggestions • Screening Committee - overarching committee that evaluates production committee suggestions. • Bonus - Monthly check for cash given to employees based on beating historical cost formula • Bank - A portion of the bonus is banked for times when no bonus is declared. • Union involvement in design of gainsharing - critical for successful implementation of plan. MGMT 4030 - Managing Employee Reward Systems

5. Gainsharing Formulas Scanlon Formula Payroll, Materials and Payroll CostsOverhead Costs by Product Net Sales Net Sales or or Production Value Production Value Single Ratio Multicost Ratio MGMT 4030 - Managing Employee Reward Systems

6. Gainsharing Drawbacks to Gainsharing • Weak Line of Sight (true of all organization or business unit pay plans) • Rigid Bonus Formulas - employees resist change of bonus formulas • Excluded workers - managers? Temps? Part-time? • Efficient Units Penalized - Inefficient units start from a lower base of improvement • Union Resistance - May not trust Management’s intentions and view gainsharing as a “speed-up” or excuse to layoff workers. MGMT 4030 - Managing Employee Reward Systems

7. Most Favorable Conditions for Gainsharing • Smaller Units (less than 500 employees) • New plants or inefficient ones that are at low point on learning curve. • Management committed to employee involvement. • Corporate cultures that value employee participation and cooperative labor relations • Fairly stable product market • Significant potential for meaningful rewards MGMT 4030 - Managing Employee Reward Systems