As components of variable pay: Gain sharing v/s profit sharing

Both gain sharing and profit sharing are parts of variable pay, but then they do differ in a lot of aspects and do concur on a lot of aspects. Both gain sharing and profit sharing happens when the organization performs much better than expected, but then how is better performance translated into a compensation for an employee. Here the basic difference comes in what parameter is used to define performance and this eventually drives the whole plethora of differences between the concepts of gain sharing and profit sharing.

Gain sharing

Suppose you are a shop floor employee and your daily target is to make 10 items during the work time of 8 hours. So effectively the estimated time per component is 0.8 hours. Now you work in an efficient manner and you are able to make the 10 components in 7.3 hours. In this case, you have saved around 0.7 hours while doing your work and thereby 0.7 hours for your company. This is a gain from the company’s point of view. So under the concept of gain sharing, using a predetermined formula, this gain will be translated into a compensation benefit. Now there can be various questions which arise once you have read the above concept.

* Doesn’t the above gain of time, accounted in my performance and thereby in my annual appraisal?
* How will the compensation be calculated?
* Won’t I compromise on the quality of the product which I make, if I know that I will get more pay, if I finish in lesser period of time?

The gain of time can be one of the parameters of the appraisal, but not the only parameter of the appraisal. The appraisal might consist of a multitude of parameters, and the gain of time might not be objectively counted in for the appraisal. Most of the companies have vaguely defined appraisal parameters. Even though each role might have some certain set of parameters which drive the whole appraisal process and outcome, there can be a lot of subjectivity involved in the appraisal. So in such a case gain of time factor, will act as a good driver for determining the VP under the gain sharing plan. But it is to be noted that, the gain of time is just one example of a gain sharing plan. There can be other factors used to measure productivity which will be used to determine the pay under the gain sharing plan.

The compensation under this plan will be calculated using a pre determined formula which the organization decides. The gain sharing might or might not be based on an individual productivity improvement. In many cases, the productivity can be measured on an organization wide or department wide basis.

The quality problem can be addressed on what parameter you decide the gain sharing portion of the compensation. Some companies use, the no. of scrap rates to determine productivity.

So the key aspect to be noted here is that, how is productivity defined with respect to gain sharing plan. An example of a definition of productivity is: Productivity = Labor cost / Sales value of production.
It can be noted that, the definition varies with the industry which we are considering.

For more information on the various types of gain sharing plans see http://www.qualitydigest.com/jul/gainshre.html

Profit sharing

In this the company distributes a part of it pre tax profit amongst its employees. The amount received by each employee generally depends on the base salary each employee has. Generally, this plan does not apply to every employee. This applies to certain pay grades. This acts as a morale booster for the employees.

Now the first difference between a profit sharing plan and a gain sharing plan is that, a profit sharing plan is executed only annually and a gain sharing happens monthly. Profit sharing can also happen quarterly. This depends on the company policy. In most companies, it is done on an yearly basis.

The major factor which differentiates the two plans is that, in a gain sharing plan, an employee knows exactly what to do, to incur a gain in a factor. Like, if a gain factor for productivity is considered to be a scrap rate, then the employee exactly knows, that he has to reduce the scrap rate to increase gain for a company. But in a profit sharing plan, employee is unaware of what actions of his will exactly translate into a profit, and how much of efforts can lead to a certain amount of profit. So gain sharing plan helps an employee plan his work more efficiently by giving more information, whereas a profit sharing plan gives the employee no such specific information.