Scanlon and other Gain sharing plans

Few would argue with the fact that the most powerful way of ensuring employee commitment is to synchronize the organization’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 workers pursues the employer’s goals as well. Experts have proposed many techniques for attaining this idyllic state, but few are used as widely or successfully as the Scanlon plan, and incentive plan developed in 1937 by Joseph Scanlon, a United Steel Workers Union official.

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

A second feature of the plan 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 operated in terms of customers, prices, and costs. Competence is a third basic feature. The program today, say three experts, explicitly recognizes that a Scanlon plan demands a high level of competence from employees at all levels.

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 decide 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 and payroll costs should have been $275,000 (50% of sales). The savings attributable to these suggestions is $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 months in which labor costs exceed the standard.

Gain sharing Plans: The Scanlon plan is one early 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 a company’s productivity objectives, with any resulting cost-savings gains shared among employees and the company. In addition to the Scanlon plan, other types of gain sharing plans include the Rucker and Improshare plans.

Te basic difference among these plans is the formula used to determines employee bonuses. For example, the Scanlon formula divided payroll expenses by total sales. The Rucker formula uses sales value minus materials and supplies, all divided into payroll expenses. Most firms use custom designed versions of these plans.

Implementing a Gain sharing Plan: In general there are eight basic steps in implementing plan:

(i) Establish general plan objectives. These might include boosting productivity or lowering costs.
(ii) Choose specific performance measures. For example, use productivity measures such as labor hours per unit produced, or financial measures like return on net assets to measure employee performance.
(iii) Decide on a funding formula. What portion of gains will employees receive? In one study, employees received, by formula, an average of 46.7% of incremental gains; the remainder stayed wit the company.
(iv) Decide on a method for dividing and distributing the employees’ share of the gains. Standard methods include equal percentage of pay or equal shares; however, some plans also modify awards based on individual performance.
(v) Choose the form of payment. This is usually cash, but occasionally is common stock.
(vi) Decide how often to pay bonuses. Firms tend to compute financial performance measures for this purpose annually, and labor productivity measures quarterly or monthly.
(vii) Develop the involvement system. The most commonly used systems include steering committees, update meetings, suggestion systems, coordinators, problem-solving teams, department committees, training programs, newsletters, inside auditors, and outside auditors.
(viii) Implement the plan.

As an example, assume a supplier wants to boost quality. Doing so would translate into fewer customer returns, less scrap and rework, and therefore higher profits. Historically, $1 million in output results in $200,000 (2%) scrap, returns and rework. The company tells its employees that if next month’s production results in only 1% scrap, returns and rework, the 1% saved would be a gain to be split 50/50 with the workforce, less a small amount for reserve for months in which scrap exceeds 2%. The firm posts awards monthly but allocates them quarterly.