Scanlon and other Gain sharing Plans

Scanlon plan

An incentive plan developed in 1937 by Joseph Scanlon and designed to encourage cooperation involvement and sharing of benefits.

Few would argue with the fact that the most powerful way of ensuring employee commitment is to synchronize the company’s goals with those of its employees – to ensure that the two sets of goals overlap and that by pursuing his or her goals, the worker pursues the employer’s goals as well. Experts have proposed many techniques for attaining this idyllic state. However few are used as widely or successful as the Scanlon plan, an incentive plan developed in 1937 by Joseph Scanlon a United Steel Workers union official. It is still popular today.

The Scanlon plan is remarkably progressive considering that it is now about 70 years old. Scanlon plans have five basic features. The first is Scanlon’s philosophy of cooperation. This philosophy assumes that managers and workers must rid themselves and their attitudes that normally inhibit employees from developing a sense of ownership in the company.

A second feature is what its practitioners call identity. This means that to focus employee involvement the company must clearly articulate its mission or purpose and employees must understand how the business operates in terms of customers prices and costs. Competence is a third basic feature. The program says three experts explicitly recognize that a Scanlon plan demands a high level of competence from employees at all levels. This suggests careful selection and training.

The fourth feature of the plan is the involvement system. Employees present improvement suggestions to the appropriate departmental level committees, which transmit the valuable ones to the executive level committee. The latter then decides whether to implement the suggestion.

The fifth element of the plan is the sharing of benefits formula. If a suggestion is implemented and successful, all employees usually share in 75% of the savings. For example, assume that the normal monthly ratio of payroll costs to sales is 50%. (Thus if sales are $600,000 payroll costs should be $300,000). Assume the firm implements suggestions that result in payroll costs of $250,000 in a month when sales were $550,000 ad payroll costs should have been $275,000 (50% of sales) The savings attributable to these suggestions id $25,000 ($275,000 minus $250,000) Workers would typically share in 75% of this ($18,750) while $6,250 would go to the firm. In practice the firm sets aside a portion usually one quarter of the $18,750 for the month in which payroll costs exceed the standard.

Gain sharing plan

An incentive plan that engages employees in a common effort to achieve productivity objectives and share the gains

The Scanlon plan is one party version of what we call today a gain sharing plan. Gain sharing is an incentive plan that engages many or all employees in a common effort to achieve a company’s productivity objectives with any resulting cost savings gains shared among employees and the company. In addition to the Scanlon plan, popular gains sharing plans include the Rucker and Impro share plans.

The basic difference among these plans is the formula employers use to determine employee bonuses. The Scanlon formula divides payroll expenses by total sales (or, sometimes, by total sales plus increases in inventory ). The Rucker plan uses a value added formula. Here the employer divides the value added for the period (basically net sales minus the cost of materials supplies and services such as utilities) by total payroll expenses. With the Impro share plan, the bonus basically depends on the different between how many labor hours the company should have used for the period, compared with low many it actually used. Most firms use custom designed versions of these plans.