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Productivity gainsharing - C. Bernolak - Employment Sector

Chapter 1

The Gains of Productivity Improvement

1.1. Introduction: Defining productivity


Enterprise and Management development working paper


Productivity gainsharing

by C. Bernolak

The purpose of this study is to explain what productivity is, what the gains are from productivity improvement, why it is in the interest of each worker, manager and other stakeholders to improve productivity, and how the gains of productivity improvement can be shared equitably through gainsharing.

Productivity improvement is ultimately about progress. Creating more goods with less resources, superior quality goods of equal or superior with less resources should ultimately result in productivity improvement. Simply stated, "productivity" is the relationship between the products or services produced and the resources used in their production. Expressed in technical terms, productivity is output per input (see Figure 1).

As explained in more details later, productivity is often expressed in respect of specific inputs, e.g. productivity of labour, of capital, of materials, of energy or a combination of various elements.

Therefore, productivity is a "real" concept, it is a volume relationship between physical output and physical input. If more products or services (outputs) of equal or superior quality are produced from the same resources (inputs), productivity has increased. If the same quantity and quality of products or services has been produced from less resources, it also means that productivity has increased. Accordingly, if more products or services of equal or superior quality are produced from less resources, it is an even greater increase in productivity. If the quality of the products or services produced from the same volume of resources has been improved, again it is a productivity improvement because a better product or service is clearly a real improvement, it is "more" of a product or service.

Productivity is an evaluation of the entire production and distribution process, as well as of the quality of the products and services produced, per person or other resources used. It does not mean that everyone involved in the process works "harder" but rather that they must work "smarter" so as to achieve a better utilization of all other resources.

1.2 Productivity versus Production

Productivity is often confused with "production" which refers to the amount of a product or service produced. "Productivity", on the other hand, refers to the

Productivity gainsharing - C. Bernolak - Employment Sector

amount produced per person or per other resources used.

1.3 Productivity versus Profitability


Productivity is not the same as profitability although the former is usually one of the main determinants of the latter. It is clear that if we can produce more and/or better goods from the same amount of resources, and profitability should also be increased (all other factors remaining equal). In the long run, it is almost always the case.

In the short run, however, profits are also influenced by many other factors. For example, entrepreneur "A" may be able to buy buildings, machines or other assets at fire-sale prices or borrow money at a better rate than competitors. As a result of A's lower costs, A can sell his/her products cheaper and make a better profit than his/her competitors even if A's productivity is no better than his/her competitors. It is possible that a company increase its profits by raising prices e.g. in a monopoly situation - without increasing productivity Therefore, even though profits are largely determined by productivity, they are also influenced by the entrepreneur's situation, current market conditions, tastes and other factors.

1.4 Productivity Trends

Productivity is a relative concept. It does not mean much to say that productivity is high or low, unless a comparison is made against some benchmark. For instance, present productivity could be compared to the past, showing that productivity has increased or decreased by a certain percentage. This comparison of change over time is called a productivity "trend", and is usually shown in index form. The base year is taken as 100 (per cent) and the increases are indicated in per cent age terms. For example, a 5% increase in productivity will bring the index up from the (past) base of 100 to 105 in the current period.

Say that a company's labour productivity was actually 2,500 chairs produced per employee in the base year, then this is represented by the index of 100. If the current year output increased by 10% while the employee input remained the same as in the base year, then productivity increased by 10% and the index would be 110, which means 2,750 chairs were produced per employee (that is 2,750 x 100 /2,500 = 110).

Equally, if output remained the same as in the base year but labour input decreased to about 90.91% (that is .9091) of the base year, then productivity increased by 10% and the current productivity index would be 110 (see Figure 2):

Capital productivity change or total-factor productivity change can be calculated similarly, provided all data are available.

1.5 Productivity Comparisons

Productivity may also be compared at a specific point in time, in comparison with a competitor, an industry average or standard. This is called an analysis of productivity levels or comparative analysis, and the variations are usually also expressed in percentage terms. For example, comparing in figure 3 the productivity of Company A to Company B, Company B's productivity level is considered the base and equal to index 100.

If a company produces a variety of products, e.g. chairs and tables, the output can be added up if they are "weighted", that is multiplied by their respective unit values or their respective unit labour requirements (ULR). The ULR is the amount of labour time needed to produce a chair and the amount of labour

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time needed to produce a table, respectively. If the number of chairs is "weighted", that is multiplied by a chair's ULR, and the number of tables is weighted by a table's ULR, then the output of chairs and the output of tables can be added up to yield an overall total output in terms of ULRs (for example, expressed in minutes or hours).

1.6 Productivity and Monetary Values

Productivity can be measured using monetary values. If monetary values of different outputs or inputs are compared over a time period, then the impact of inflation must be eliminated from the relevant prices and costs. This adjustment to eliminate the impact of inflation is called "deflation", and the monetary values which exclude the effect of inflation are called "deflated" or "constant" values (such as "constant dollars").

For example, if prices rose by 5% from last year (say, the base year) then one must divide the current year prices by 1.05 to deflate them to base year prices. On the other hand, one could multiply (weight) the number of units produced in the current year by their respective base year values or prices. Either method renders measures in constant values that are comparable from the current period to the base period.

1.7 Productivity in Service Industries

The same approaches can be used to measure outputs in the service industries as in the goods-producing industries. For example, the number of loan applications approved, haircuts provided, air plane tickets issued, paychecks printed or persons inoculated are all output volume measures in service industries. Again, as in the goods-producing industries, different services (outputs) can be summed up by using ULR weights or deflated (constant) unit values.

1.8 Value Added

Sometimes the output of productivity measures are expressed in terms of "value added" (VA).

Value added equals net sales plus or minus inventory changes minus outside purchased materials and services. Therefore, value added is the "value" added by labour and capital of the company to materials and services bought from outside the company. If the value added per input of a company increases, then productivity of the company has increased.

For example, in a restaurant, all sales would add up to gross output but if the cost of raw materials, ready-made sauces, beer, wines or juices, electric light and power, etc which are all bought from outside the restaurant, are deducted from the gross output, it is called value added. The VA then is the value "added" by the restaurant (through its labour and capital) to all materials and services bought from outside the restaurant.

1.9 Family of Productivity Measures

As mentioned earlier, productivity is expressed in the form of a relationship, a ratio of the "outputs" (products produced or services provided), divided by the "inputs" (the resources used). Due to the various possible combinations of outputs and inputs, there is a variety of productivity definitions and measures which throw light on different aspects of productivity. There is no "right" or "best" productivity measure. Instead, a set or "family" of many productivity

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measures are needed to reflect the various factors and influences on productivity (1) . Figure 4 provides an example of a family of productivity measures, consisting of important and widely used productivity measures. (These measures will be explained further in the section below entitled "Partial, Multifactor, and Total Factor Productivity".)

Therefore, an organization with a comprehensive productivity improvement effort would probably track a number of the productivity measures from Figure 4 or create and track its own family of productivity measures that highlight areas of interest to the organization. Accordingly, the organization's incentive system could also make use of a number of the productivity measures listed above and base bonus payments on measures such as some of the partial and multifactor productivity measures.

The various inputs can be added up by using, say, ULR or unit value weights.

C. Total factor productivity relates output to the weighted total of all inputs.

1.9.1 Partial Productivity

When productivity is expressed as output per one type of input, such as output per labour, the measure is referred to as a "partial productivity" measure. The most important input is labour, because everything is made for and by people. It is not surprising that the most discussed partial productivity measure is "labour productivity", that is output per labour. Labour is typically expressed in person-hours or person-days or person-years. Recall Figure 2 which uses a partial productivity measure, specifically labour productivity, in the example calculated. One may notice that "2,500 chairs per employee" is used, however from the text it is clear that the time frame of the example is one year. Therefore, to be precise, the example is actually 2,500 chairs per employee-year, meaning 2,500 chairs were produced per employee during the year.

Even though "labour productivity" is defined as output per labour input, it does not measure the specific contribution of labour alone, but expresses the joint effect of a number of influences on the utilization of labour in the production or distribution process. Such influences include changes in technology, substitution of one factor of production for another (e.g. capital for labour), utilization of physical capital and lay out, as well as the efforts of the labour force including managers. In other words, "labour productivity" shows how much workers produce per hour with all the resources available.

Another partial productivity measure is output per capital input. After labour, the second most important input is capital, that is buildings, machines, furniture, and equipment, because workers need shelter, proper surroundings, tools, machines and equipment in order to produce goods and services. Capital input or the capital "used up" in a period to produce output is referred to as "capital flow". Capital input (capital flow) is usually measured in (deflated) currency values. It equals this year's true economic depreciation, rather than the total book value of the capital asset (which is called capital "stock"). Capital flow is not calculated according to the tax accounting laws, but simply as follows: If a machine really lasts for 20 years, only one-twentieth of the constant value of its original book cost is the capital flow or input for this year. If a piece of equipment lasts 10 years, its capital flow or "input" for the current year is one-tenth of the constant value of its original capital stock (original book cost).

More examples of "partial" productivity measures include output per material input, output per energy input, and so on. Inputs such as raw materials, energy, light, water, legal, accounting and protective services bought from others outside the establishment are called "intermediate" inputs. Raw materials can be measured in units of weight, such as pounds or kilogramme of raw material consumed, energy can be measured in BTUs or kilowatt hours, or they (as other

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intermediate inputs) can be measured using deflated currency values.

1.9.2 Multifactor Productivity


More recently, particularly in the past decade or so, it has been realized that productivity improvement is not brought about by labour alone but also by changes in the other inputs of factors of production and in particular, by utilizing more or new capital to increase the capability of labour.

This is why measures of multifactor productivity have been conceived in addition to partial productivity concepts. Multifactor productivity is calculated by adding together labour and capital inputs, and relating the combined inputs to the output, that is dividing output by the sum of labour and capital used. One can argue that multifactor productivity measures also can include other inputs in the denominator beside labour and capital. In practice, however, multifactor productivity measures tend to include only labour and capital as inputs because of measurement and conceptual difficulties associated with other inputs. A typical way to calculate multifactor productivity is to use constant (deflated) currency values and sum up the labour and capital (flow) inputs in constant currency values.

The multifactor productivity measure, therefore, shows that "labour" productivity improvement has been brought about by infusing capital into the production and/or distribution process. The provision of capital means some substitution of capital for labour input, but at the same time capital also enables labour to increase productivity more than would be possible without the capital. Think about trying to make shoes without machines or billing without computers. The difference between labour productivity measures and multifactor productivity measures provides an insight into some of the factors bringing

about labour productivity changes and the effects of substitution of other factors on labour productivity movements.


Multifactor productivity measures, however, are not as readily available as labour productivity indicators, and involve more measurement difficulties and uncertainties. As a result, they are less precise than labour productivity measures. For example, the aggregation of labour and capital inputs must be done through weighting their relative shares of input, and the true economic life of the capital assets needs to be assessed.

1.9.3 Total Factor Productivity

In addition to partial and multifactor ratios, there are "total factor productivity" ratios. These measures include total output and all inputs of the units measured. Total factor productivity relates gross output to all inputs, including labour, capital, materials and components as well as all other intermediate inputs. Examples of total factor measures are: gross output per employee plus capital plus material, plus all other intermediate inputs.

The total factor productivity measures are the only productivity measures which include all outputs and inputs. They do involve, however, a great deal of estimation, weighting and other methodological assumptions. They are meaningful at the level of major national aggregates, such as the national economy as a whole, or its major components such as agriculture, manufacturing, or non-manufacturing, rather than individual establishments. Regarding individual establishments, total factor productivity measures are not useful to show the specific factors or precise amounts causing the productivity variations. Rather, they simply indicate that there are many factors that influence an organization's productivity.

If reliable data could be obtained on all the factor components of total factor productivity measures, then total factor productivity would probably be the most "equitable" measure for gainsharing (explained in the "Gainsharing" chapter) or sharing productivity gains among the stakeholders. In theory then, a total

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factor productivity measure would enable the sharing of productivity gains on the basis of how much each factor contributed to the total productivity improvement or gain. In the real world, however, besides that of labour and capital, the measurement of the contribution of many of the other factors to productivity improvement is too complex and considered to be operationally practical.

For this reason, productivity gainsharing schemes are very often built on either labour productivity measures or multifactor productivity measures. The use of these productivity measures is furthermore justified because the two included factors, labour and capital, are the factors within the enterprise which contribute to output and are under the control of the enterprise. Also, labour or multifactor measures which are calculated for gainsharing purposes are beneficial to labour because any productivity gains brought about by the other, unidentified factors, are also shared with labour. Today, multifactor productivity measures may be particularly useful because the rapidly growing technology and related expensive capital investments are major factors in bringing about productivity improvement.

Figure 5, for example, shows the relative annual compound growth in labour and capital use in the manufacturing industries of the United States, as well as the resulting compound annual increases of labour productivity and multifactor productivity ratios. The data illustrate that while the compound annual growth rate of labour hours in U.S. manufacturing was 0.6% during the 1949-1991 period, the compound annual capital input has grown by a much more rapid 4.0%. The resulting annual compound increase in the labour productivity measure was 2.5% while the compound annual growth of the multifactor productivity measure (which includes both labour and capital in the denominator) was 1.3% (3) .

In Figure 5, the smaller multifactor productivity figure which includes both labour and capital inputs indicates that a significant amount of the productivity improvement was due to capital and not just labour. Mores specifically, improved technology and capital investment account for some of the productivity improvement. Therefore, the labour productivity measure actually exaggerates the impact that labour has made on productivity improvement. As a result, any productivity improvement bonus paid solely according to a labour productivity measure will pay labour a larger bonus than was actually earned by labour. Therefore, a bonus plan using a multifactor productivity measure would technically be more equitable.

Regardless, labour productivity measures are very popular in group incentive plans, because they are easily understood and highlight the importance of labour. One aspect of gainsharing incentive systems that helps mitigate the inaccuracy of a bonus based only on the labour productivity measure is the practice of splitting the productivity gains or bonus between labour and the company. This way the company is sharing in the reward, and other inputs such as capital are being recognized as having contributed to the productivity improvement.

1.10 Productivity Improvement

Productivity improvement must start with considering the customers. Their needs and wants must be solicited so that products and services are produced for them effectively and efficiently. These two elements, effectiveness and efficiency, make the enterprise productive. Effectiveness means doing "the right thing", and efficiency is "doing it the right way", with the least effort and the least cost.

To achieve this all the factors of production must be combined optimally. The factors of produc tion are anything the company needs to produce its products or services, including

labour, materials, capital (machines, buildings, equipment, furniture & fixtures, etc.), energy, etc. The company's overall productivity performance is

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influenced or determined by factors that are internal and external to the enterprise (see figure 6).

In order to bring together the factors of production more efficiently and effectively, managers and workers need accurate information on the productive strengths and weaknesses of the organization, and the causes of these strengths and weaknesses. Such information can be obtained from suitable productivity measures. "The success of productivity measurement and analysis depends largely on a clear understanding by all parties concerned (including enterprise owners, managers, workers, trade union leaders as well as government institutions) of why productivity measurement is important for the effectiveness and efficiency of the organization. The answer is that it indicates where to look for opportunities to improve performance, and also shows how well improvement

efforts are faring". (4)

Therefore, creating, tracking and improving a relevant family of productivity measures will focus an enterprise's productivity improvement effort. Productivity reflected by partial and multifactor productivity can be improved by using less of the relevant input(s) to produce the same number (or volume) of outputs or more outputs than before.

These measures reflect the same enterprise performance but from different angles. For example, output per person-hour (labour productivity - a partial productivity measure) reflects how much has been produced per person-hour, influenced by all the factors of productivity. The output per person-hour of a hotel maid, for instance, is not only affected by how skilful she is or how smart she works, but also by what equipment is available to her, how well her work is organized, how much she has to walk, and so on. In other words, as pointed out earlier, all factors that affect productivity are reflected in each of the partial, and multifactor productivity measures.

Equally, if the maids turn off the lights when not needed, minimize other waste and generally perform high quality work that influences guests to return to that hotel, the maids' actions will be reflected in the output per person as well as in the other productivity measures, because the maids' productivity improvement action will reduce costs while also enhancing sales. Since the maids saved energy this will also be reflected in the partial energy productivity ratios.

Accordingly, the family of productivity measures can direct efforts to needed areas. Relatively high labour costs, material costs, or marketing costs can point to poor market position or inadequate labour qualification, poor training, poor management, poor labour-management relations, poor quality raw materials, or waste in production, under-utilized machine capacity, and so on. In order to improve productivity, the weaknesses and strengths must be known in a timely and reliable manner.

The support of staff at all levels is essential. Therefore, it is desirable to have them participate in the measurement design. Employees will need training in productivity which must include explaining the meaning, significance and methodology of productivity proper, as well as the tools and techniques that can be used to improve productivity. Indeed, a "productivity culture" needs to be instituted with top management commitment to the productivity effort.

Figure 6: Key Factors of Enterprise Productivity

Internal factors

* Management

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* Workers

* Labour-management relations

* Work organization and systems

* Products and/or services

* Plant and equipment (capital)

* Materials and components

* Procedures, methods and techniques

External factors

* Labour force (availability, skills, attitude)

* Natural resources (land, raw materials, water, energy)

* Infrastructure (physical, information technology)

* Economic conditions and financial resources

* Social system and attitudes

* Government and public bodies (systems and policies)

* Organizations (tripartite, employers', workers')

* Markets and customers

* International economic, social and political environment

Commitment means management must take an active part in the productivity improvement process in order for it to be successful. Clear goals, objectives, methods and strategies must be defined for the organization with the input of employees. To e nsure a productivity culture, management must seek productivity improvement in all actions of the enterprise including marketing, purchasing, design, production, warehousing, distribution, administration, as well as investment in technology. It is usually advantageous to start the productivity improvement effort with actions that are likely to bring about beneficial results quickly to ensure the credibility of the productivity improvement program. Actions which affect more important areas of the organization, and promise

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bigger pay offs should also be given priority.

The participation and cooperation of labour in decision making and information sharing is welcomed and fostered under the participative management approach which is vitally important for successful productivity improvement efforts. Workers are the persons who know best what is wrong with their equipment or operation, and how they could be improved. They are the persons who can build quality into their products and services. Workers will cooperate in productivity improvement if they are assisted in understanding that productivity improvement is in their own best interest and are given an opportunity to be involved. Financial and non-financial (including more involvement) rewards can be very effective motivators towards higher productivity. Harmonious labour-management relations are essential to ensure a proper work environment, productivity culture, and successful productivity improvement effort.

Technological change and capital improvement are other major sources of productivity improvement. They are not, however, a panacea! The proper justification, selection and utilization of capital assets are of utmost importance. Design an appropriate system first and then, and only then, select and purchase the new equipment that is needed. Dramatic productivity improvements have been brought about by such simple actions. Once the capital is bought, it is essential to utilize it as fully as possible. One major requirement for full utilization, that is often neglected, is the proper training of workers in the use of the new equipment and technology.

Capital productivity concerns not only fixed capital, that is plant, machinery, equipment and furniture, but also inventories, including work in process, and the proper collection of accounts receivable. Each of these have a significant bearing on productivity levels. Also, the quality and value of raw materials, components, and other intermediate inputs have great bearing on the productivity of the enterprise. For example, consistently high quality raw materials reduce the need for quality control and rework.

Indeed, one requirement that is common to all factors - and determinants - of productivity is quality. All contributors to the productivity of goods and services must strive for improvement of quality because quality is the key to attracting consumers as well as the key to saving on costs. It is believed that nearly one-half of the labour force works on redoing or fixing up things (goods, bills, or other services) that should have been done right in the first place, or apologizing for the errors. Poor quality increases waste, scrap, reworking time, engineering and management time, warranty problems and costs, and so on. Quality is often much more important to consumers than price.

This is why the concept of "Total quality management" (TQM) was born. It is "total" quality management because it involves everyone (management, labour, customers) and all aspects of production and services (materials, purchasing, production, warehousing, distribution, administration, etc.). High quality increases both productivity and profits as well as jobs and employment opportunities.

Sometimes the productivity improvement effort requires drastic, rapid changes of the business definition, processes, and structures in order to better serve customers. The term "business process re-engineering" became popular in the early 1990's, essentially referring to such a productivity improvement approach that redesigns a business or part of it around processes rather than functions to better serve customers. It is useful to remind those who strayed from a "marketing orientation" (orienting and designing your business according to the customer) to return to the most important aspect of all businesses, the customer.

The author believes "productivity" should be defined and approached in a very broad manner, always conscious of the market. As a result, it is recommended

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that the productivity improvement effort of all organizations should continually seek to answer: "What are we doing?"; "How could we do it better?"; "Why are we doing it"; "Who are our customers?"; "Who else could be our customers?"; "What do the customers want and need?" and "What business are we really in?!" The answers will help determine the best route to productivity improvement.

Therefore, productivity improvement has many sources, factors and elements. "

equal importance to being lean, mean, green and clean. Vague though all such catchwords inevitably remain (what, currently asks the European Commission, is a "green product"?), they draw attention to the fact that "productivity" has to balance the immediate and more distant economic, technological and human

elements internal to the company with the desires of its external stakeholders: shareholders, customers, trade unions and society at large" (5) .

a key characteristic of raising productivity is a holistic approach, paying

In fact, through productivity improvement, a company is contributing to sustainable development which is defined as development that is economically , socially and ecologically sustainable (6) . The contribution of productivity improvement to economic sustainability is quite clear. If one goes back to the underlying concept of productivity, its contribution to ecological and social sustainability is also clear. Through effective and efficient utilisation of inputs such as materials and energy, a company is contributing to resource conservation and protection of the environment through production of less waste. Through participatory approaches and the equitable sharing of productivity gains among the key stakeholders, a company contributes to social sustainability.

1.11 Possible productivity improvement actions

Accordingly, it is emphasized that "proper" productivity improvement efforts require three types of planning, short-term (usually defined as 0-1 year), medium-term (2-4 years), and long-term planning (5 years and more). It is clear that what a company does in the short run affects the long run, especially regarding workers and the environment. Companies are learning that a quick profit gain at the expense of workers or the environment is plain "bad for business". Law suits already abound against companies who did not take precautions to protect the health of workers, while other more socially/environmentally conscious companies are grabbing huge market shares because their business philosophy and practices are winning customers in droves.

Regardless, a poor economy, poor management, changing tastes, natural disasters, etc., can result in job loss. Productivity improvement efforts can help strengthen an ailing company and economy. In the event a company finds itself with "redundant" workers, a commitment can be made to retaining all personnel while aggressively pursuing productivity improvement. Workers from "redundant" areas can be retrained and reassigned. Additionally, management and labour can work together to help ensure future job security such as by:

1. training workers to do many needed jobs;

2. giving priority to displaced workers when the company expands or creates new jobs;

3. offering out placement services for workers;

4. giving generous severance packages or early retirement;

5. lobbying government to enable workers to transfer benefits, such as pensions, to other branches or companies;

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6. remaining flexible to job sharing or rescheduling;

7. expanding markets and business definition.


Nevertheless, in the long run the company that focuses on its customers and improves its productivity more than its competitors will have more and better jobs to offer workers. See Figure 7 for a summary of some possible productivity improvement actions.

Once it has been determined what can be done to improve productivity, corrective actions must be taken, while utilising all three "c"-s, namely communication, coordination, and cooperation, so that one action does not harm or offset another objective, cancelling out the benefits gained. After having taken the necessary corrective actions, the search for productivity improvement opportunities must continue by again asking oneself: "Is this necessary?", "Does the consumer want it?" "Is there a better way of doing this?" and "Does the proposed change justify its costs?".

Therefore, all stakeholders (see chapter 2 for a more detailed description) can contribute to productivity improvement. Labour can make suggestions for improvements in products and services, take advantage of skill improvement opportunities, and aim towards minimizing errors and waste. Management can improve communication with customers and qualification of markets, improve utilization of resources by equitable distribution of the workload, encourage labour productivity improvement by adopting participative management, provide incentives and appropriate training, and optimize the use of assets. Consumers can contribute to productivity improvement by communicating their needs clearly to the suppliers and encouraging improvements by wise purchases. The governments can create the conditions conducive to the success of enterprises by educating potential employees, promoting international trade and tourism, assisting the modernization of enterprises through taxation measures, improving the general national, state, and local infrastructure, and advancing working conditions through appropriate legislation.

Figure 7: Possible Productivity Improvement Actions

A. Steps management can take

Improvement Actions A. Steps management can take Focus on productivity, provide incentives, share gains

Focus on productivity, provide incentives, share gains Concentrate on serving the customer, upgrade quality Measure productivity to know the facts & design strategies Re-engineer for superior processes & methods Ensure employee participation, open communication Utilize human and physical capacity, justify investment Provide (re)training to benefit all involved Standardize and simplify products and procedures

involved Standardize and simplify products and procedures B. How workers can contribute to productivity gains Focus
involved Standardize and simplify products and procedures B. How workers can contribute to productivity gains Focus
involved Standardize and simplify products and procedures B. How workers can contribute to productivity gains Focus
involved Standardize and simplify products and procedures B. How workers can contribute to productivity gains Focus
involved Standardize and simplify products and procedures B. How workers can contribute to productivity gains Focus
involved Standardize and simplify products and procedures B. How workers can contribute to productivity gains Focus
involved Standardize and simplify products and procedures B. How workers can contribute to productivity gains Focus

B. How workers can contribute to productivity gains

B. How workers can contribute to productivity gains Focus on the customer's requirements 11 of 64

Focus on the customer's requirements

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Provide high quality products and services Cooperate with

Provide high quality products and services Cooperate with management on productivity improvement Get involved in relevant activities if possible Look for better ways of making or doing things

if possible Look for better ways of making or doing things Search for possible savings in
if possible Look for better ways of making or doing things Search for possible savings in
if possible Look for better ways of making or doing things Search for possible savings in

Search for possible savings in resources and activitiesif possible Look for better ways of making or doing things Make formal productivity improvement suggestions

Make formal productivity improvement suggestionsSearch for possible savings in resources and activities Take (re)training opportunities, upgrade skills Be flexible,

activities Make formal productivity improvement suggestions Take (re)training opportunities, upgrade skills Be flexible,

Take (re)training opportunities, upgrade skills Be flexible, accept various suitable assignments Ask for guidance if unsure of requirements

assignments Ask for guidance if unsure of requirements C. How governments can advance enterprise productivity

C. How governments can advance enterprise productivity

Develop suitable physical infrastructure Promote communication through an information highway Provide optimal education and training Develop economic policies for stability and competition Minimize the burden of laws, rules and regulations Eliminate obsolete and out of date requirements

regulations Eliminate obsolete and out of date requirements Enhance productivity in the public sector Enhance
regulations Eliminate obsolete and out of date requirements Enhance productivity in the public sector Enhance
regulations Eliminate obsolete and out of date requirements Enhance productivity in the public sector Enhance
regulations Eliminate obsolete and out of date requirements Enhance productivity in the public sector Enhance

Enhance productivity in the public sectorregulations Eliminate obsolete and out of date requirements Enhance productivity-supportive labour legislation Support

Enhance productivity-supportive labour legislation Support co-operative labour-management relations
Enhance productivity-supportive labour legislation Support co-operative labour-management relations

Enhance productivity-supportive labour legislation Support co-operative labour-management relations

Enhance productivity-supportive labour legislation Support co-operative labour-management relations

Ensure the protection of the environmentlegislation Support co-operative labour-management relations D. Tripartite organizations, unions and associations Promote

D. Tripartite organizations, unions and associations

Promote awareness and understanding of productivity Encourage the sharing of productivity gains Enhance labour-management-government cooperation

gains Enhance labour-management-government cooperation Provide venues for cooperative actions, e.g. manuals

Provide venues for cooperative actions, e.g. manualsgains Enhance labour-management-government cooperation Undertake surveys of needs and opportunities Investigate

Undertake surveys of needs and opportunities Investigate other opportunities for cooperation
Undertake surveys of needs and opportunities Investigate other opportunities for cooperation

Undertake surveys of needs and opportunities Investigate other opportunities for cooperation

Undertake surveys of needs and opportunities Investigate other opportunities for cooperation

Promote learning through exchanges of experiencesInvestigate other opportunities for cooperation Enhance the objectives of total quality management 12 of 64

Enhance the objectives of total quality managementother opportunities for cooperation Promote learning through exchanges of experiences 12 of 64 2/17/2012 11:18 AM

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1.12 The Gains from Productivity Improvement


In recent years, increasing recognition has been given throughout the world to the fact that productivity is the key to prosperity (7) . Think about how much improvement has been achieved in the standard of living and quality of working life over the past decades. This advance has been brought about by productivity improvement. One could borrow money to finance improvement but that money has to be paid back. The only source of sustainable economic progress is from productivity improvements. If we produce more, we can have more.

The overall benefits are visible from the dramatic improvement in living and working conditions, such as the elimination or reduction of child labour, the feasibility of earlier retirement, the reduction of weekly working hours, improvements in health, safety and work satisfaction. Development has varied widely around the world, as testified by the following observations: At the turn of the century, the average working week as about 60-65 in hours Canada as compared to around 38 hours today. Also, at that time, children usually began their working careers at age 9 or 10 while today general schooling lasts to about age 16. Early this Century, one had to continue working practically all of one's life while now retirement in the 50's or early 60's is commonplace.

Annual productivity increases of 5 per cent or more are quite realistic, and many companies have achieved much more. Annual productivity increases of such magnitude enable the achievement of continued financial and non-financial productivity gains.

Financial gains result from higher quality and value produced from relatively lower costs, which increase sales due to more competitive goods and services. Such gains make possible higher returns for owners and shareholder, higher pay and benefits for workers and managers, as well as lower prices, better goods and services, and more satisfaction for the consumers. Governments benefit from higher tax revenues from increased sales and income.

Non-financial benefits, which are often valued more than financial benefits, include increased humanization of work, increased job security and satisfaction, improved quality of working life as well as more time for family and leisure. Enterprises enjoy the security of continued survival and sustainability, while the consumer is provided with better goods and services. As studied earlier, productivity improvement is the key to sustainable development.

Chapter 2:

The Stakeholders of an Enterprise

The living standards and competitiveness of every nation depends on the ability of its enterprises to achieve high and rising levels of productivity. It is the nation's enterprises that create the goods and services for their people. It is the productivity gains of the enterprises that can be shared among the stakeholders (see Figure 1) who ultimately form the nation. To have a high and rising standard of living and t o have increasing gains to share, the productivity of the enterprises must grow.

Figure 2.1

The Stakeholders in an Enterprise

Productivity gainsharing - C. Bernolak - Employment Sector


* Public at large

* Governments

* Consumers

* Workers' families

* Workers

* Managers

* Lenders

* Entrepreneurs/owners/shareholders

What are the respective roles and interests of the stakeholders? The enterprise is created and maintained by the entrepreneurs, the enterprise's owners and shareholders. They risk and invest their funds in order to produce goods and/or services in order to earn profits. In privately owned companies, the owners risk their money and want profits. In publicly held companies, the shareholders risk their funds and want to earn profits. Since most companies need more resources than they own, they need to borrow funds from creditors or lending institutions to acquire the resources they require. The lenders also want to earn

a profit for the risk they take and the investment of their money. Of course, each of these investors want to earn as much as possible and, since all their profits come from the profits of the enterprise and, in turn, from its productivity, they all have a stake in productivity gains.

Entrepreneurs want to increase or at least maintain the profitability of their enterprise and are, therefore, vitally interested in its sustainability. They want the enterprise to survive and thrive, and this can be achieved most effectively through productivity improvement. The operation then must have enough surplus from its operation to expand, keep renewing its investment, and modernize its facilities in order to maintain its competitiveness and viability. Continuous productivity improvement efforts will greatly assist organizations in maintaining competitiveness, viability, and profitability.

In order to make a large profit, it is not necessary to have a high profit on each item sold, because large overall profit can be made from relatively small profit per item sold, if the number of units sold is large. This is a very important consideration and has a major impact on the competitive success of a nation. It has

a significant bearing on how to share the productivity gains among the stakeholders. During the 1980s, output per person-hour in Japanese manufacturing

increased significantly. Nevertheless, most of the gains have been distributed to the consumers in the form of higher quality and lower prices. This distribution

of the productivity gains to the consumer resulted in the global success of many Japanese firms. (8)

Managers are also stakeholders in the enterprise. Since their job and earnings depend on how well they serve the interests of the enterprise, achieving its optimal profitability is also in their interest. Managers also want to keep the enterprise economically viable and sustainable and must, therefore, organize and utilize the company's resources to achieve the maximum productivity and competitiveness, as is acceptable to the other stakeholders. Managers also must ensure that the sharing of productivity gains among the stakeholders is done in such a way that it ensures the enterprise's future.

Productivity gainsharing - C. Bernolak - Employment Sector


Another major group of stakeholders is the company's employees, its professional, technical, and other direct and indirect workers, as well as their families. The security and safety of their jobs, their wages, fringe benefits and other earnings, such as bonuses, depend on the profitability of the company. This, in turn, is largely determined by its productivity. Productivity improvement increases competitiveness and employment opportunities. Productivity increases can free resources and permit the improvement of the quality of working life, safety and security, and foster job enrichment and promotions.

Productivity improvements enable the enterprise to reward the workers for their skills and efforts. Also, sustaining productivity improvement requires the training and retraining of workers, improving labour-management relations, and the involvement of workers in productivity improvement. The workers not only benefit from the enhancement of the enterprise's productivity, but also significantly contribute to it.

Other stakeholders in the productivity of the enterprise are the consumers of its products and services. Of course this set of stakeholders includes the enterprise's managers, owners, workers and their families who are also consumers. They all gain from better and higher quality products and services, less defects and problems, as well as lower prices of important goods and services.

Governments are also stakeholders in the productivity of the enterprise, not only because successful enterprises provide the revenues for the governments' operations, but also because national success and competitiveness is the result of the efforts and success of its enterprises. On the other hand, the enterprises and its workers depend on government policy and many government services for the improvement of health and education, training and retraining, social safety and protection. Governments provide the physical infrastructure that is needed for the productive operation of the enterprises, the conservation of natural resources, minimization of pollution and the repair of the environmental damage.

The public at large then is a major stakeholder in the enterprise, both as consumers and members of the overall national economic and social framework which depends on the productivity of the totality of the nation's enterprises.

Chapter 3


3.1 Defining Gainsharing

"Gainsharing" refers to a category of incentive systems that involves a group of employees in the productivity improvement efforts and shares the resulting gains with the group based on its overall performance improvement. Better use of inputs such as labour, capital, materials and energy can create productivity and profitability gains. Gainsharing plans share these gains with employees according to a predetermined formula that reflects the productivity or profitability improvement over historical levels.

Gainsharing helps align individual employee's goals and organizational goals. When installed and managed properly, gainsharing plans heighten the employees' sense of identity with an organization, explain how their work contributes to the attainment of organizational objectives and shares the gains equitably with employees. Indeed, the foundation of successful gainsharing plans are employee involvement, cooperation, good communication, and mutual respect between all employees - labour and management.

Productivity gainsharing - C. Bernolak - Employment Sector


Nowadays many actual gainsharing plans have evolved to be hybrids of the Scanlon, Rucker, Improshare, and Profit sharing basic plans. Often custom- tailored plans are simply referred to as Gainsharing plans, because they are too different and cannot be identified as any particular basic plan. Ultimately, the "correct" gainsharing plan is the one that labour and management feel is fair, fosters a sense of identity with the organization, and improves productivity and profitability of the organization.

3.2 Gainsharing Plan Design

The basic elements of a gainsharing plan are:

a) a system for employee participation or involvement in productivity improvement

b) a group financial bonus payment according to a predetermined formula.

Experience indicates that having both the above elements creates an optimal synergy to bring about the greatest improvement. It is possible to have a successful incentive system that only has an employee participation system. The non-financial reward in that case is being a sense of belonging, higher sense of accomplishment and appreciation of worth that management fosters amongst employees. Similarly, paying employees a financial bonus without an employee participation system can also improve performance. However, a program encompassing both a participation system and a financial bonus can create even greater improvements than either element alone.

Also, it has been found that paying a group bonus instead of individual bonuses fosters and reinforces the team spirit and sense of identity with the organization. Finally, a predetermined, agreed-upon sharing formula is important for building trust between management and employees. The set formula means employees know what they can expect and how they will be rewarded. Therefore gainsharing is defined as including an employee participation system and a group financial bonus that uses a predetermined formula.

A typical way to proceed when designing a gainsharing plan is:

1. Obtain as much information on gainsharing as possible.

2. Appoint a Gainsharing Officer to spearhead the gainsharing effort. Visible top management support of the gainsharing plan is crucial.

3. Form a workers management consultative committee to discuss and agree upon the timing and basic parameters to be used in gainsharing plan design

4. Consider getting help to install the plan.

5. Analyze organizational records and culture to create a fair bonus calculation and plan.

6. Advise employees and unions on features, benefits and drawbacks of the proposed plan.

7. Solicit and review employee/union feedback on the proposed plan. Amend the plan according to their input where appropriate.

Productivity gainsharing - C. Bernolak -

Employment Sector

8. Have employees vote on whether to install the plan.


9. Share information with employees to foster good communication and trust. Encourage employee audits of bonus calculations.


Review plan regularly.


Gainsharing in Unionized Organizations

Gainsharing can work very well in unionized organizations. Union activity is not diminished or replaced by gainsharing. To avoid confusion between gainsharing and collective (union) bargaining, it is important to keep the purpose of each process clear.

Collective bargaining conducted by the union usually settles the wage rates, health and safety issues, as well as grievances. Gainsharing does none of that. Gainsharing is a category of group incentive systems designed to better align employee goals with organizational goals, improve the productivity and profitability of the organization, and share the resulting gains with employees. Gainsharing however, could be the subject of collective bargaining.

Gainsharing then should not be used to alter the collective bargaining process or "roll back" wages. Hence, in North American companies, for example, it is commonly suggested that they keep the gainsharing process separate from collective bargaining where possible. For example, different union representatives from the collective bargaining team can represent the union in gainsharing matters.

In any case, the union is not excluded from gainsharing. A union representative should be part of key gainsharing committees. Also, in some countries it may not be viable to separate gainsharing from collective bargaining. In those situations, it is still crucial to focus on the purpose of the gainsharing effort to ensure success.

Regardless of whether the organization is unionized or not it is recommended that the gainsharing bonus be paid using a separate "gainsharing cheque". This procedure emphasizes that the gainsharing bonus is a special share of the resulting gains from improved performance and not regular pay.

3.4 The Basic Historical Gainsharing Plans

Generally, the best known gainsharing plans are:

* Profit sharing

* Scanlon plan

* Rucker plan®

* Improshare®.

Gainsharing can be subdivided into two types of plans, "productivity sharing" and profit sharing type plans. Productivity sharing plans are simply the

Productivity gainsharing - C. Bernolak - Employment Sector


gainsharing plans that base the bonus measurement on productivity improvement. Therefore, productivity sharing plans are most often defined to include Scanlon, Rucker, and Improshare plans, as well as other plans that use productivity as the bonus performance measurement (see Diagram 1).

Occasionally the definition of productivity is debated with respect to gainsharing. The first chapter explained that it is acceptable to define productivity as output over input in financial (as opposed to physical) terms if the figures are deflated. Also, comparisons of changes in value added over input (deflated) are equally valid measures of productivity improvement. Productivity purists may note that the Scanlon and Rucker bonus measurements are input over output and therefore are technically the inverse of productivity. However, what is important to note is that these plans, therefore, are generally referred to as productivity sharing plans, because they are based on real relationships between output and input.

The following section describes the basic gainsharing plans starting with Scanlon, then Rucker, Improshare, and Profit sharing. Though Employee Stock Ownership Plans (ESOPs) are not considered bona fide gainsharing plans, they will be briefly discussed at the end of the profit sharing section to mitigate confusion between ESOPs and profit sharing.

3.5 Scanlon Plan

In the mid 1930s, Joseph Scanlon, president of a local branch of the United Steelworkers Union, developed a plan to help save the failing steel company of which he was an employee (9) . The plan was based on a philosophy of identity with the firm, labour-management cooperation and participative management.

3.5.1 Scanlon Employee Involvement System

Scanlon created an employee participation or involvement system that solicits, considers and implements employee suggestions. This system differs from bona fide suggestion systems in that Scanlon employees do not receive an individual financial reward for suggestions. Rather, the Scanlon philosophy of working together as a team is emphasized and a group bonus is paid for overall productivity improvement.

The Scanlon employee involvement scheme is based on two connected committee systems:

the departmental or production committeesscheme is based on two connected committee systems: the screening committee. Generally, each department in the

the screening committee.committee systems: the departmental or production committees Generally, each department in the company will have a

Generally, each department in the company will have a departmental committee, consisting of a management representative, typically the supervisor, and one or more elected representatives of the employees. The committee members encourage and help employees to make productivity, profitability and quality improvement suggestions, and cost reduction suggestions.

Departmental committees also hand out forms to document the suggestions, and take action on suggestions that are made. Each departmental committee typically meets every 1-4 weeks and can implement straightforward suggestions immediately if the cost is under the respective committee's spending limit. Otherwise, the suggestion will be referred to the screening committee.

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Senior management such as, the chief executive officer, the top financial, marketing, and production officers, and an equal or greater number of elected, non-managerial employees, including the top union representative make up the screening committee. This committee usually meets every month to calculate and discuss the bonus, reviews company figures and problems, plots strategy, and considers suggestions from the departmental committees.

If a suggestion is rejected, it is imperative that the originator of the suggestion receives timely feedback about why the suggestion was not used. Managers who consider gainsharing always seem to worry that suggestions will cease to be made after awhile. Experience shows that if employees see that their suggestions are taken seriously and receive timely feedback, suggestions continue to be made time after time. If, however, timely feedback is not given, then employees begin to question the sincerity of management and the gainsharing plan will start to crumble.

Continual information sharing, therefore, is a central part of successful employee involvement systems and gainsharing. Company progress, bonus data, problems, and other relevant information should be documented and communicated to everyone in the company. Besides, information is shared via committee meetings in the form of memos, handbooks, bulletin-boards and by discussions amongst committee representatives and individual employees.

To promote cooperation, information sharing, and productivity improvement throughout the organization, the Scanlon plan provides a group financial bonus based on the performance of the total organization.

3.5.2 Scanlon Bonus

The Scanlon bonus computation starts with the calculation of the company's Scanlon base ratio. As illustrated below, this base ratio divides the total payroll costs of the company by the total value of production.

Company S

(base period in US $)

Sales 98,000

Less Returned Sales 3,000

Net Sales 95,000

Inventory Change (increase) 5,000

Net Sales Value of Production 100,000


Salaries (indirect labour) 10,000

Productivity gainsharing - C. Bernolak - Employment Sector

Wages (direct labour 10,000

Vacation pay 4,000

Other Fringe Benefits 6,000

Total Labour Costs 30,000

Other Expenses 25,000

Supplies 20,000

Miscellaneous 15,000

Total Other Expenses 60,000

Operating Expenses (Labour & Other) 90,000

Profit $10,000

Total payroll costs $30,000


To establish the base ratio, the company's recent financial and production history must be re viewed. Generally, a month-by-month analysis is undertaken of the most recent 3 to 5 years of the company's history of sales, production costs, personnel costs, etc. The period chosen should be typical of normal operations of the company and preferably one in which the company was making a profit. Avoid periods of major alteration or technological innovations. If the company has inadequate production history, was not profitable, or was subject to major change, then setting a fair base ratio will be challenging and require the judgement of labour, management, and probably industry experts. (10)

To eliminate inflationary distortions, all the currency values (dollars in this case) need to be expressed in base period values. This can be achieved by using base period unit prices or by using current values (prices) and dividing them by the appropriate price index (base period = 100). Nonetheless, some Scanlon plans do not do this, rather choosing to ignore distortions in order to keep the plan "simple".

The Scanlon base ratio then is the standard for the monthly bonus computation. Bonuses are paid whenever labour productivity is superior to what it was in the base period. Therefore, a bonus is earned when total payroll costs are a smaller percentage of the total value of production than in the base period. This could happen either by producing constant level of production value with lower payroll costs, increasing production value while payroll costs remain the same, or increasing production value with a less than proportionate increase in payroll costs.

In the above example, employees and management at Company S agreed to a base ratio of .30. In other words, the historical records of Company S revealed that over a typical 5 year period, total payroll costs averaged 30% of the net sales value of production. Say that in January of this year (current year) the net

Productivity gainsharing - C. Bernolak - Employment Sector


sales value of production was $140,000, then one would expect the payroll costs to be (.30 x $140,000) = $40,000, according to the historical analyses reflected in the base ratio. Say, however, that the actual Company S payroll costs were only $30,000, then productivity has improved over the base period by $12,000, and $12,000 goes into the "bonus pool".

The bonus pool is allocated as follows:

1. a percentage goes to the company;

2. a percentage goes into a reserve fund;

3. a percentage goes to each employee.

The actual percentages are determined by the members of the company. They should be seen as fair to employees, and maintain the company competitiveness. Some feel that 60% of the bonus pool should go to employees and 40% to the company for reinvestment. The Improshare plan considers a 50-50 split of the bonus between the company and employees as fair. One reason to use a 50-50 split is that it intrinsically values the employees and company as equally important.

In order to clearly illustrate the Scanlon bonus calculation, however, assume Company S allocates 60% of the bonus to employees and 40% to the company. Also, say that Company S has a reserve fund of 20% (reserve fund is explained in the Sharing Losses section below). As illustrated in the Company S January bonus report below using the earlier example, the remainder in the bonus pool ($5,760) is distributed to all employees. (11) Each Company S employee gains a bonus of 19.2% multiplied by his or her respective salary or wage for the month of January.

Company S Bonus Report for January (current year)

1. Scanlon base ratio .30

2. Actual Sales Value of Production for January 140,000

3. Expected payroll costs (1. x 2.) or (.30 x 140,000) 42,000

4. Actual payroll costs 30,000

5. Bonus pool (Expected-Actual costs)=(42,000-30,000)= 12,000

6. Share of bonus given to company = 40% x 12,000 4,800

7. Employees' bonus share = 60% x 12,000 7,200

8. Reserve fund =20% x 7,200= (20% x employees' bonus) 1,440

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9. Bonus for immediate distribution = 7,200 - 1,440 5,760

10. Bonus for each employee as a percentage of pay for

January = (5,760 bonus/30,000 actual costs) 19.2%


Therefore, Company S employee Jane Watson who earns $1,500 per month salary, will gain a Scanlon bonus of (19.2% x $1,500) = $288. To emphasize that the bonus is for improved performance and not "automatic pay", the bonus should be issued as a separate Scanlon bonus cheque and not included in the regular pay cheque.

3.5.3 Sharing Losses

Of course, it makes no sense to reward employees when productivity performance is low nor does it strengthen their job security. Therefore, losses should be shared. In periods when bonuses are earned an amount is withheld and put into the reserve fund (in the above example it was 20% of employees' bonus or $1,440). Accordingly, in periods when productivity declines, a charge is made to the reserve fund. In other words, when actual payroll costs are more than expected payroll costs and a negative bonus results, the employees' share of the negative bonus is charged to the reserve fund.

For example, say that Company S had a poor month in February (current yr) where sales value of production was $70,000 and actual labour costs were $40.000, the following calculations would result.

Company S Bonus Report for February (current year in US$)

1. Scanlon base ratio . 30

2. Actual Sales Value of Production for February. 70,000

3. Expected payroll costs (1. x 2.) or (.30 x $70,000) 21,000

4. Actual payroll costs 30,000

5. Bonus pool (Actual costs - expected)=(21,000-30,000)= 9,000

6. Share of loss absorbed by company = 40% x $(9,000) 3,600

7. Employees' share of loss = 60% x $(9,000) 5,400

Therefore a charge of $5,400 is made to the reserve fund to cover the employees' share of the loss. Unfortunately, the amount in the reserve fund in the current year is only $1,440 (see January example). Thus, the question then arises as to who covers the remaining $1,440 - $5,400 = $(3,960)?

Productivity gainsharing - C. Bernolak - Employment Sector


Often the company absorbs it. Of course, management will argue that this is not equitable because the company is absorbing more than its share of losses. Also, year end surpluses in the reserve fund are normally distributed to employees even if deficits have occurred some times during the year.

To avoid these inequities and ensure an adequate reserve fund, the design stage of the plan should include an analysis of "bad month" scenarios, testing different percentages for the reserve fund. Though reserve funds are usually 20% to 25% of the employees' share of the bonus, percentages of up to 50% can be useful.

Another possibility is to carry losses forward and offset them by not distributing earned bonuses until the employees' share of the negative bonus is paid back. Also, a year end reserve fund surplus or a portion of it could be carried forward into the new year instead of distributing it to employees.

3.5.4 Variations of the Basic Scanlon Plan

The Scanlon base ratio, also referred to as the single ratio, is popular because it is easy to understand and use. Unfortunately, it does not respond well to product mix changes. As a result, some organizations use a "split ratio", that is, having a base ratio for each product line and calculating the bonus pool for each product line, then summing and distributing the total bonus. The productivity of each product line is then highlighted by the split ratio bonus calculations.

Another variation of the simple, single base ratio is the "multi cost ratio". As the name suggests, the multi cost ratio adds more costs to the numerator of the base ratio than just payroll costs. Company S may decide that to better reflect their costs and productivity and to motivate employees to reduce other costs such as materials and supplies, the multi cost ratio may include payroll, materials and supplies in its numerator. <

Therefore, if the constant dollar amounts of these inputs used in production is decreased relative to the outputs, then productivity has increased and a bonus earned. Equally, if the amount of inputs remains stable but output increases, then productivity has improved and a bonus earned. A company could also include energy costs in the numerator of the multi cost ratio so as to motivate employees to decrease energy costs.

In fact, the company can include as many costs, that is inputs, in the numerator as makes sense. This is especially advisable when other costs are more significant than labour costs. Similarly, the bonus reports can be very detailed highlighting which input costs were reduced the most. The more detail, however, the more complex the system is to administer. The multi cost ratio then is more expensive to administer and more difficult to understand than the simple ratio.

Accordingly, companies tend to begin their Scanlon plan with a more simple base ratio and then over time may expand it (multi cost ratio) or split it or both. Some Scanlon plans adjust the base ratio when major changes occur in the company, such as a significant capital investment. Regardless of how complicated your formula may become, it should be easy to understand and credible to all employees, and make sense given the company's particular situation.

The Scanlon plan is normally voted in by the employees for a trial year. At the end of the year the plan is reviewed and a vote is taken whether or not to continue the plan. Once installed , the plan should be evaluated frequently. Questions asked should include:

* Were all suggestions dealt with quickly and fairly?

Productivity gainsharing - C. Bernolak - Employment Sector

* Is the bonus formula still valid?


* Are all employees knowledgeable about the progress of the gainsharing plan and the company?

* Do employees know what productivity is and what they can do to improve it? Is more training needed?

Often cited accomplishments of the Scanlon plan include:

1. increased productivity;

2. improved teamwork and cooperation;

3. faster responses to problems;

4. better product quality;

5. more employee involvement;

6. less resistance to change; and

7. lower rates of absenteeism and turnover.


To increase the chance of success of gainsharing plans, it is imperative that there is obvious and continual top management commitment to the plan. (See next chapter for Scanlon case.)

3.6 Rucker Plan®

Allan W. Rucker, an economist, developed the Rucker plan in the 1930's after noticing that the payroll cost, as a percentage of value added remains relatively

stable over long periods of time. (13) It is this relationship that forms the basis of the Rucker bonus calculation. Value added is net sales plus, or minus, inventory changes minus outside purchased materials and services.

The Rucker plan has similarities to the Scanlon plan in that it has a "suggestion committee" based employee involvement system. In the Rucker plan the committees are called Rucker committees. The traditional Scanlon plan is usually considered to emphasize participative management more vigorously than the Rucker plan. Nevertheless, a Rucker (value added) type plan can emulate the Scanlon employee involvement system already described.

3.6.1 Rucker Bonus

It is the definition of productivity or performance where the Scanlon and Rucker plans differ greatly. The Rucker base ratio, establishes the historical

Productivity gainsharing - C. Bernolak - Employment Sector


relationship between labour (payroll costs) and production value added, and not production sales value as in the Scanlon plan.

In order to calculate the base ratio, the "production value" or value added in the base period must be determined. Therefore, a 3 to 5 year historical analysis of the company records must show that a stable relationship exists between labour and production value. Otherwise, the Rucker plan cannot be used. Say for example, in Company R (with the same cost structure as company S), a stable relationship exists between labour and production value and payroll costs were $30,000 in the base period, then the calculations are as follows:

Company R

(base period in US$)

Sales 98,000

Less Returned Sales 3,000

Net Sales 95,000

Inventory Change (increase) 5,000

Net Sales Value of Production 100,000


Salaries (indirect labour) 10,000

Wages (direct labour 10,000

Vacation pay 4,000

Other Fringe Benefits 6,000

Total Labour Costs 30,000

Other Expenses 25,000

Supplies 20,000

Miscellaneous 15,000

Productivity gainsharing - C. Bernolak - Employment Sector


Total Other Expenses 60,000

Operating Expenses (Labour & Other) 90,000

Profit $10,000

Company R

(base period)

Sales value of production $100,000

Less amount paid to outsiders for

Materials, Supplies, Miscellaneous 60,000

Production Value (Value Added) 40,000

Payroll costs $30.000

Rucker Base Ratio = ----------------- = --------- = .75

Production value (value added)$40,000

Therefore, in any month that actual payroll costs are less than 75% of production value (value added), productivity has improved and a bonus has been earned. Regarding gainsharing plans that use value added in the bonus calculation, some consultants feel that 100% of the bonus belongs to employees, while others suggest various splits including 50-50. To highlight the calculation, say that Company R splits the bonus 50% to the company and 50% to employees, actual payroll costs were $20,000 in January of the current year, and the reserve fund is 25%, then the bonus would be as follows:

Company R Bonus Report for January (current year)

1. Base



2. Actual Value of Production (value added) for January 40,000

3. Expected payroll costs (.75 x $40,000) 30,000

4. Actual payroll costs 20,000

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5. Bonus pool (Expected-Actual costs) = ($30,000-$20,000) 10,000

6. Share of bonus given to company = 50% x $10,000 5,000

7. Employees' bonus share = 50% x $10,000 5,000

8. Reserve fund = 25% x $5,000 (employees' bonus share) 1,250

9. Bonus for immediate distribution = $5,000 - $1,250 3,750

10. Bonus for each employee as a percentage of pay for

January = ($3,750 bonus/$20,000 Actual costs) 18.75%

Therefore, Company R employee Mike Watson who earns $2,000 per month pay, will receive a bonus cheque of (18.75% x $2,000) = $375 for the month of January.

When value added is used in the bonus calculation, employees are encouraged to reduce labour costs as percentage of value added through the reduction of waste of materials, supplies, as well as improved labour efficiency. As can be seen from the formula, value added can be increased by more efficient use of purchased inputs such as materials, supplies and energy. Regardless of these benefits, actual Rucker plans are relatively hard to find. One reason seems to be that people have trouble understanding value added and prefer to participate in a plan with a formula they understand and therefore trust.

3.7 Improshare®

Improshare or Improved productivity through sharing was developed by Mitchell Fein and first used in the 1970's. Since then over 300 Improshare plans have been installed in union and nonunion firms, chemical plants, mines, hospitals, distribution warehouses, metal fabrication plants, food processing plants, R and D firms, and many others. (14)

Mr. Fein describes his interesting plan in detail in Improshare: An Alternative to Traditional Managing. (15)

The goal is to produce more products in fewer work hours. In simple terms the plan establishes how many work hours it took to produce a certain number of acceptable product in the base or representative period and compares that to the number of hours it took to produce the same number of goods in the present period. "Savings" are earned when the actual labour hours are less than the hours required in the base period to produce the same number of acceptable product. These savings are shared by the firm and employees 50-50.

Workers may wonder why gains should be shared 50-50 when they produce the products. Fein explains that under traditional work measurement practices, when changes are made in methods, procedures or other factors which affect how operations are performed, new operation time standards are set and the company receives all the gains even when workers created the improvements. Conversely, in Improshare plans operation standards are frozen at the base

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period level even though management or workers may change and improve operations. Any increases in productivity are shared equally (50-50) with no attempt to pinpoint whether employees or management created the improvement. Therefore, employees receive 50% of the productivity gains as a bonus

whether or not their efforts caused the increase. (16)

None of the Improshare gainsharing plans specifically try to pinpoint productivity gains or attempt to reward individuals for great ideas or improvements. Instead, all employees are encouraged to work together as a team where members will be rewarded for an improved group or company performance. A 50-50 split equally values the inputs of employees and management, neither being more or less important than the other.

Two aspects are key to the Improshare calculations:

1. the work hour standard

2. the base productivity factor.

The work hour standard is simply the average number of direct labour hours it takes to produce 1 unit in the base period. In the Company I example below, it took 1.6 hours of direct labour to produce 1 unit of output.

The base productivity factor (BPF) represents the relationship in the base period between the actual hours worked by all employees, both direct and indirect

labour, and the value of the work in hours produced by these employees . (17) In Company I then the BPF in effect states that in the base period it took 1.5 clock hours to produce 1.0 standard hour of product.

As shown below, the Improshare standard equals the Work Hour Standard multiplied by the BPF. The Improshare Standard of 2.4 hrs/unit means that it took 2.4 hours (direct and indirect labour) to produce 1 unit of output in the base period. This is the standard representing the productivity level for the base period.

Company I Number of units produced during base period 50,000 units

Total direct labour hours used to produce the 50,000 units 80,000 hours

Indirect labour hours during the base period 40,000 hours

Total standard hours Total direct hours

Work Hour Standard = ------------------------ = --------------

Units Produced Units Produced

80.000 hours

Productivity gainsharing - C. Bernolak - Employment Sector

= --------------- = 1.6 hrs/unit

50,000 units

Total Direct and Indirect Labour Hours

Base Productivity Factor (BPF) = --------------------------------

Total Standard Hours

Total Actual Hours

= --------------------------------

Total Direct Labour Hours

120.000 hours

= ----------------- = 1.5

80,000 hours

Improshare Standard = 1.6 hrs/units x 1.5 (BPF) = 2.4 hrs/unit


Multiplying this standard by the units produced in a given period will give you the "expected" or Improshare standard hours. Therefore, the Improshare Standard Hours is the amount of hours one would take to produce the present output at the base period rate. If actual hours used to produce the present output is less than the Improshare Standard Hours, than productivity has increased and a bonus has been earned, such as below:

Company I Bonus for January (current year)

Units produced in January 1,300 units

Total Actual Hours Worked 2,500 hrs

Improshare Standard Hours: 1,300 units x 2.4 hrs/unit 3,120 hrs

Hours Gained: 3,120 - 2,500 620 hrs

Employee Share: 620 hrs x 50% 310 hrs

Productivity gainsharing - C. Bernolak - Employment Sector

Improshare Bonus: 310 hrs x 100 = 12.4% 2,500 hrs


Therefore, employee John Watson (yes they are all related!) will earn a bonus equal to 12.4% times his wage or salary for January. The company's share of the gains can be used to develop improved products, better tooling or services, reduce prices to customers, strengthen the company's position in the market place and thereby improve job security. (18)

Productivity gains are typically calculated weekly, with a moving average spanning several weeks, such as 4-6 weeks, to create a stable output level. In some plans bonuses are paid weekly, others pay monthly, always using a separate Improshare cheque.

Mitchell Fein incorporated in Improshare methodologies to handle some contentious issues that are usually faced in gainsharing. Improshare maps out a method to address major technology, capital or standard changes.

Improshare plans freeze standards at the average of the base period and are not changed except for capital equipment and technology changes or a buy-back of standards. Consequently, Improshare plans include:

1. An agreed ceiling on productivity improvement

(usually set at a productivity level = 160% of the base productivity, which means a bonus of 30%);

2. A cash buy-back of measurement standards when productivity exceeds the ceiling;

3. A method of sharing gains created by capital equipment and technology changes. (19)

3.7.1 Cash Buy-back of Standards

In Improshare, whenever productivity or bonuses exceed the ceiling in a period, the excess (gained) hours are "banked" and moved ahead to the next period. Banking the excess improvement is an incentive for employees to keep improving productivity, because banked hours can be used in future periods when productivity is below the ceiling. The banked hours then create a cushion for inferior productivity periods. If productivity or bonuses continually rise above the ceiling, Improshare provides a simple buy-back of the measurement standards, for the price of one year's savings created by the changed standards. 11 Therefore, employees will receive an extra, substantial, lump-sum payment for allowing management to raise standards.

For example, say Company I employees and management agree that a 30% bonus is plenty, which means productivity is 160% of the base period or there has been a productivity increase of 60% over the base period productivity (recall that the employee bonus is only 50% of the productivity improvement, so a 30% bonus represents a 60% productivity improvement above the base period). If the present productivity levels in Company I are 180% of the base period and the ceiling was set at 160%, then 20% is the excess which can be banked.

If the productivity levels stay consistently at 180% of the base period which could mean that there were some permanent changes in work methods, procedures or product design and that the standards are no longer representative, then a buy-back of the standards can take place if employees agree.

Productivity gainsharing - C. Bernolak - Employment Sector


Employees would receive 50% of the 20% excess, projected for a year, at their regular pay. Therefore, a $10/hr employee would receive a cash payment of

$10 x 2000 hrs * x 50% x 20% = $2,000

* 2000 hrs = hours a full-time worker at Company I works in a year.

This buy-back will allow management to reduce all time standards by a multiplier of 160% divided by 180% = 1.6/1.8 = 0.8889. (20) This brings the time standards more representative of the prevailing work situation which possibly involve less direct labour hours to produce one unit of the product or less indirect labour hours involved. With the new standards, the productivity ceiling of 160% is maintained.

3.7.2 Sharing Gains of Capital or Technology Changes

Improshare plans will define a certain expenditure for capital (say $15,000) as a capital change. Once a capital change is made, there will probably be a reduction in the labour time. In Improshare 80% of this labour time savings will be deducted from the standard. The remaining 20% labour time savings (productivity gains) will be shared as usual between the company (receiving 50% of the 20% gain = 10%) and employees (receiving 50% of the 20% gain = 10% of the gain). Therefore, employees receive 10% of the labour time savings into their bonus pool, while the company gains the rest.

The reason the company enjoys most of the productivity gains is because the company paid for the capital change that brought about most of the performance improvement. However, Improshare recognizes the importance of labour in capital productivity improvement and gives the 10% gain to employees so that they have an incentive to welcome and use new capital to the best of their ability.

When the capital expenditure is less than $15,000 employees share 50% of labour time savings as does the company, and the performance standard is not changed. Technology changes are handled in the same manner. (21)

3.7.3 Other Improshare Issues

Improshare does not detail the employee involvement system to be used. Quality circles or labour-management committees are possibilities, as is a more Scanlon type system.

Quality is encouraged and rewarded in Improshare since the units counted for the bonus must be "finished acceptable product", which is total units minus rejects.

Does Improshare work? Data obtained from 72 Improshare companies (1974-1980 data) showed a 22% productivity increase on average over two years. More recently, Roger Kaufman found that of the 100 Improshare firms he surveyed (using 1981-1988 data), the median productivity increase was approximately 8% in the first year and 17.5% by the third year. The average productivity increases were even larger than the median increases. (22)

3.8 Profit Sharing

Productivity gainsharing - C.

Bernolak - Employment Sector


In 1835, Edme Jean LeClaire, a Parisian house painter, started contemplating a radical idea to reduce worker-employer antagonism, by sharing profits with

his employees. LeClaire, now considered the "father of modern profit sharing", instituted profit sharing and in 1843 declared his technique a success. Today, in the United States, there are about 1,00,000 profit sharing plans. (24)


Profit sharing is a gainsharing plan that pays employees, in addition to regular pay, current or deferred sums based on the profits of the business. Profit sharing recognizes employee contribution to the welfare of the company and accordingly, rewards employees for their efforts. Proponents of profit sharing believe that measuring performance by profits is the best standard, because profitability and thriving in the market place is the ultimate goal of all firms.

When designing a profit sharing plan the following features need to be considered:

1. goal 8. vesting

2. type 9. forfeitures

3. coverage 10. withdrawals

4. eligibility 11. deferred plan payments

5. company contribution 12. administration & investment

6. employee contribution 13. employee involvement

7. allocation 14. tax implications

3.8.1 Goal

Design of a profit sharing plan cannot begin until the goal of the plan has been clearly defined and clarified. This goal will incorporate the company philosophy and will steer the plan towards specific features.

For example, if the goal is to improve productivity and profitability, as well as create a sense of identity with the firm then the company may install:

1. a cash plan with quarterly or monthly payments to tie the bonus payment more clearly to the effort exerted;

2. a plan that includes all employees so that everyone feels part of the team;

3. a plan that incorporates a comprehensive participation system to foster frequent productivity and profit improvement discussions and problem solving.

If, on the other hand, the main goal of profit sharing is just wage flexibility, then the scheme may have limited coverage and may not have strong productivity

Productivity gainsharing - C. Bernolak - Employment Sector


improvement participation element. This may not be easily sustainable in the long run, however. Other plans combine employee savings plans goals and could thus have employee contribution elements.

3.8.2 Type of Plan

There are three types of profit sharing plans:

1. cash plans

2. deferred plans

3. combination plans.

Cash (or current distribution) plans pay the bonus to employees in cash or company stock soon after the company profit is known. Conversely, in deferred plans the bonus is withheld from immediate distribution, placed in a trust fund and is invested by management until a specific date when the employee can collect his/her cumulated bonus. Combination plans have cash and deferred elements. These plans pay out part of the bonus in cash, and put the rest in the trust fund.

A cash plan is very easy to administer and is considered more motivational than deferred plans, because rewards are distributed immediately. Deferred plans can encourage and reward long service, and are especially appreciated if the company has no pension plan. Still, deferred plans are more complicated to administer than cash plans. Combination plans offer the attributes of both cash and deferred plans, but are more work to administer.

3.8.3 Coverage

1. broad

2. limited

Broad coverage plans, include all employees. This type of coverage adheres to gainsharing principles of fostering teamwork, cooperation and good communication, by including and rewarding the entire group. Nonetheless, some broad profit sharing plans leave out commissioned sales persons, rationalizing that they already have an incentive to sell.

Limited plans restrict coverage to a specific group, usually senior management in which case the coverage is referred to as "top hat". A company may require

a top hat plan to attract the best senior managers. Additionally, the company could have a broad plan for the rest of employees. (25) It depends on the situation, goals and culture of the company.

3.8.4 Eligibility

Eligibility rules determine when and which employees will become members of the plan. Generally, the most common eligibility criteria is a waiting period of

Productivity gainsharing - C. Bernolak - Employment Sector


3 months to 2 years before employees can join the profit sharing plan. This stipulation helps reduce employee turnover and associated costs by giving new employees an incentive to stay in the firm.

3.8.5 Company Contribution

The company contribution formula stipulates the percentage of the profits the company shares with employees and how often. As in the other gainsharing plans, a historical analysis should be undertaken before the company decides what formula to use. Generally it is believed that bonuses of under 5% of earnings are not considered significant by employees. Therefore, try to set a formula that could realistically render 5% or more bonus without creating hardship for the company. Of course, gainsharing plans can thrive even when no bonus is earned providing there is visible and enthusiastic top management commitment to the plan as well as good communication and supportive employee involvement.

It is recommended that at least some of the company contribution be a fixed percentage as opposed to a discretionary amount. Gainsharing works best when

employees know how much they can expect to earn if performance improves.

Examples of Company Contribution Formula:

A basic example of a contribution formula is Company 1 which contributes 15% of net profit before taxes to the profit sharing bonus pool. The resulting

bonus calculation would be as follows.

Company 1 Profit Sharing Bonus Calculation (in US$)


Total income for period 1 50,000


Total payroll of eligible employees 60,000


Net profit before taxes 30,000


Company contributes 15% of net profit before taxes


profit sharing bonus pool: (15% x $30,000) 4,500


Profit sharing bonus as a % of payroll:

Total bonus $4.500

--------------- = --------- = 7.5% bonus

Total payroll $60,000

Productivity gainsharing - C. Bernolak - Employment Sector

6. Therefore, employee Watson earning $15,000 receives a profit sharing bonus of

$15,000 x 7.5% = 1,125


The following three brief examples are actual contribution formulae used in some companies and were compiled by the Profit Sharing Council of America, based in Chicago. They are included to illustrate alternative formulae in use (not necessarily the best ones) and steer employees towards questions they may wish to ask regarding contribution formulae. Details are not included here; however, when installing a profit sharing plan managers should include explanations of financial terms and example calculations in the employee profit sharing handbook. The definition of financial terms used in these examples can be found in Annex 1 "Understanding the financial statements".

Company 2

A specific amount, $5 million, is allocated to profit sharing if operating margin equals 5%. An additional percentage of operating earnings is allocated to profit sharing, depending on larger operation margins as follows:

Operating margin Additional % of operating earnings


- 6.99 % 10 %


- 8.99 % 20 %


- 11.99 % 30 %

12 % or higher 35 %

Operating earnings = Operating revenues minus operating expenses.

Operating margin = Operating earnings divided by operating revenues.

Company 3

13% of consolidated net income of participating subsidiaries is allocated to profit sharing. There is no profit sharing allocation if the consolidated net profit of the company is less than 4% of stockholders' equity.

Company 4

8% of pre-tax profits is allocated to profit sharing. However, profit sharing contributions may not reduce profits to below $0.3125 per share of common stock outstanding.

Productivity gainsharing - C. Bernolak - Employment Sector

3.8.6 Employee Contributions


Some deferred profit sharing plans, particularly those that take some form of a savings plan, require covered employees to make contributions, while others leave the choice to employees.

3.8.7 Allocation

The allocation section of the plan describes the way company contributions are to be allocated among the individual employees. In The Profit Sharing Handbook, Donald Nightingale describes the most common allocation formulae as:

1. employee earnings - most popular method

(used in Company 1 bonus example above);

2. employee earnings and years of service - usually the more earnings and years of service, the more bonus an employee receives;

3. employee contributions - in some deferred plans allocations are based on employee contributions which may be voluntary or mandatory;

4. employee earnings and employee contributions;

5. equal shares - equal amounts can be paid to all employees. 18

Management of companies that have a combination plan which includes cash and deferred elements, must decide how to allocate monies to each (or they could give employees the choice).

3.8.8 Vesting Rules

Vesting determines how much of the employee's deferred profit sharing trust account the employee has a right to claim. Once fully vested, an employee has the right to the total in his/her (deferred plan) trust account. There are two main types of vesting:

1. full and immediate vesting

2. gradual vesting

Usually, in plans with full and immediate vesting, the employee is fully vested after a short waiting period such as one year. Therefore, after this waiting period all the money in an employee's trust account belongs to the employee.

When the plan specifies gradual vesting, the employee becomes proportionally more vested with the passage of time. That is, the employee gains gradual ownership or entitlement to the monies in his/her account as time passes. For example, a plan may have a gradual vesting schedule that gives employees the

Productivity gainsharing - C. Bernolak - Employment Sector


right to 10% of their trust account at the end of the first year, 20% at the end of the second year, 30% at the end of the third year and so on. Therefore, an employee who is 30% vested and leaves the company, will only be entitled to 30% of the money in his/her account and will forfeit the other 70%.

Gradual vesting tends to appeal to long service employees. Conversely, immediate full vesting tends to motivate all employees to improve performance since their full claim exists immediately (after the nominal waiting period).

3.8.9 Forfeitures

Employees forfeit any non-vested amount of their accounts when they terminate employment with the company. Usually, the forfeiture amounts are added to remaining employee accounts in the same way that the profit sharing bonus is allocated.

3.8.10 Withdrawals

Deferred profit sharing plans often permit limited withdrawal from the respective trust account. For example, employees may access their accounts in order

to cover a medical emergency or buy a home.

3.8.11 Deferred Plan Payment Alternatives

This section of the plan covers the payment options of the deferred profit sharing trust account. Unless (early) withdrawals were made, all monies in the trust account will become available to employees at retirement in one of the following ways:

1. lump sum payment (one payment of the total);

2. monthly payments;

3. annuity (fixed amount payments);

4. amount put into another financial vehicle, such as shares or a retirement instrument.

3.8.12 Plan Administration and Trust Investment

A number of people need to be assigned to the task of administering the plan, including calculating bonuses, allocating them as per allocation formula,

investing monies of the deferred trust accounts, communicating information about the progress of the plan, retirement counselling, and monitoring the plan. Responsibilities need to be specifically assigned.

Outside experts and investment counsellors may be needed to assist in trust investment decisions. Generally, a well diversified portfolio should be investigated. Also, the plan may include "employee choice", that is, the plan may give employees the choice of where their profit shares are invested. This feature will directly involve employees in the decision making process.

Productivity gainsharing - C. Bernolak - Employment Sector

3.8.13 Employee Involvement


A comprehensive involvement system is not usually, explicitly described in profit sharing plans. Nonetheless, an involvement scheme of some degree typically accompanies these plans. For example, profit sharing companies will hold annual, biannual, quarterly, even monthly meetings with employees and management in attendance. Typically, at these meetings, profits, bonuses, productivity improvement, and some strategic issues will be explained, as well as ideas on how to increase profits in the future. A booklet or handbook about the company plan is compiled and distributed to all covered by the plan. Interim memos dealing with profit sharing issues are also often distributed.

Some profit sharing companies, however, have more rigorous employee involvement systems, such as labour-management committees, quality circles and/or comprehensive training and information sessions. The goal of the plan, as well as the resources and culture of the organization will help determine the optimal amount of employee involvement.

3.8.14 Tax Implications

The current tax laws can greatly affect the choice of profit sharing plan and its features. The respective tax laws may create certain tax breaks or obligations. Therefore, reliable tax advice should be sought regarding designing, installing, and maintaining a profit sharing plan.

3.8.15 Is Profit Sharing Successful?

According to the Profit Sharing Research Foundation that surveyed about 200 profit sharing companies (1990 data) (26) , the percentage of those firms that said their profit sharing plan was a great or moderate success in meeting the following objectives were:

1. increase employee interest in the firm 89%

2. sense of employee-employer partnership 89%

3. group incentive to motivate productivity 77%

4. recruit key personnel 77%

5. increase or stabilize profits 67%

6. enhance job security 63%

7. lower costs 54%

3.9 Employee Stock Ownership Plans (ESOPs)

Employee share ownership can occur via a variety of ways such as profit sharing, ESOPs, stock purchase plans, stock option plans, and worker cooperatives.

Productivity gainsharing - C. Bernolak - Employment Sector


Profit sharing is technically the only gainsharing plan among the above-listed share ownership methods. Nonetheless, there is interest in the other methods, particularly ESOPs, as a way to improve employee and corporate economic health. ESOP is a type of employee share ownership that takes advantage of tax laws created to encourage share ownership. The National Center for Employee Ownership in the U.S. states that "ESOPs are a defined contribution employee benefit plan, technically a stock bonus plan that can borrow money. They can be used for a variety of purposes and can give employees anywhere from


1-100% ownership of a company.

ESOPs possess a number of tax advantages. When a company installs an ESOP, it sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can buy new or existing shares using a bank loan, with the company guaranteeing the loan and making cash contributions to the ESOP (trust fund) to enable it to repay the loan. The company contributions to the trust are tax-deductible, up to 15-25% of covered pay. Also, if the ESOP borrows money the principal payments on the loan are tax deductible by up to 25% of annual payroll of plan participants, while all

interest payments on the loan are deductible, if certain criteria are met.


An ESOP then is an employee benefit plan that invests mainly in employer stock. After an ESOP trust fund is set up, the company makes contributions to the plan. Usually all full-time employees with one year's service are included. Stock acquired by the ESOP is allocated to individual employee accounts. In the USA, an employee will receive his/her vested ESOP shares (or their fair market value) when the employee leaves the company. (29)

The usefulness of ESOPs is to generate employee ownership, buy shares of departing owners, and to borrow money at a lower after-tax cost to finance such purchases as new capital equipment or other firms. Also, many argue that ESOPs, as other share ownership vehicles, motivate employees because each becomes an owner and has a personal stake in the company. Research shows that employee ownership can substantially improve corporate performance if it is combined with a participative management program such as employee committees. The research also indicated that employee ownership without an involvement scheme has no consistent impact on performance. (30).

Chapter 4

Case Examples of Gainsharing Schemes

The following actual case examples illustrate gainsharing plans in use today. They highlight many of the gainsharing issues already discussed. In particular, it can be seen that these plans evolve to meet the needs of the respective organization and often incorporate features, concepts or formulae from more than one of the gainsharing plans. In fact, many plans of today are not classed as any of the traditional plans, but rather are simply gainsharing plans - group incentive plans that share gains with employees according to a predescribed formula and incorporate employee involvement tailor-made according to the particular objectives and requirements of the companies. Other bases for sharing are also being used e.g. improved quality, timely delivery, etc. reflecting performance parameters the company considers to be very important. The case discussion includes:


1. Donnelly Corporation Scanlon approach;

Productivity gainsharing - C. Bernolak - Employment Sector

2. Gainsharing in the Barbados Governmental initiatives;

3. The Barbados Hotel, Tourism Association

& the Barbados Workers' Union Gainsharing plan;

4. Hewlett-Packard Cash profit sharing;

5. Williams Industries Inc Productivity and profit sharing elements;

6. Avis ESOP and participation;

7. TRW Gainsharing/Improshare.

4.1 Donnelly Corporation: Scanlon Approach


4.1.1 Donnelly Corporation has been a "Scanlon" company for more than 40 years and is an excellent example of how the Scanlon plan can evolve over the years. The company was founded by Bernard Donnelly in 1905 and began manufacturing furniture mirrors. The company has greatly prospered and today, with sales of about $350 million, has approximately 80% of the U.S. market in auto mirrors and is a major producer of other glass products. Donnelly employs about 2,700 people worldwide and 2,400 in the U.S. It has had a plant in Ireland for 25 years, presently has a sales office in Japan, a joint venture in Scotland, and is in the process of expanding into France and Mexico. The company is not unionized in the U.S., but is unionized in Ireland. (31) 1

In 1932 , John F. Donnelly, son of Bernard Donnelly, became president of the company. By 1952, he was convinced that t he Scanlon plan's information sharing, participative management and simplicity of its formula would enhance the corporation. Hence, a relatively basic Scanlon plan was installed. Initially, the base ratio was established using performance figures from 1948-1952. The historical analysis revealed that payroll costs (including benefits) were 31.4% of sales. Therefore, according to basic Scanlon plan procedure, Donnelly paid employees a bonus whenever payroll costs were a smaller percentage of sales

than in the base period, in this case 31.4% of sales. (32)

Once a few years had passed, it was concluded that basing the bonus solely on payroll encouraged employees to waste materials so they could produce faster. The profits of the company were eroding. After conferring with employees, management changed the bonus formula to a Scanlon multi cost ratio. This new performance standard included payroll, materials and operating supplies over sales and equalled 78.5% in the base period. A bonus would be earned then whenever production was such that the total of payroll, materials and operating supplies costs were less than 78.5% of sales. It was decided that a fair split of the bonus pool was 40% to the employees. Therefore, after deducting the actual expenses from 78.5% of sales for the month, 40% of the savings was the employees' total bonus, paid out to individuals as a percentage of their pay. (33)

The multi cost ratio was an acceptable performance evaluation and bonus formula for many years. Then, in 1977, the product mix changed significantly and

Productivity gainsharing - C. Bernolak - Employment Sector


though the company earned good profits, the bonus fell to almost nil. The previous chapter mentioned that the basic Scanlon formula can become unrepresentative once the product mix changes significantly. One solution is to develop and use base ratios for each product line (split formula). Donnelly, however, took another approach. The company decided to change to a profit sharing formula that was statistically developed to be fair and likely to pay out similar bonuses as in the past using the Scanlon formula. The resulting new bonus formula was 44% of after-tax profits above a 5.25% return on net worth. It is calculated and paid monthly as before. (34)

The bonus formula, therefore, has evolved from a Scanlon single base ratio to a multi cost ratio to a profit sharing formula. Regardless, the company is still considered a Scanlon company. Scanlon principles of identity, equity, and participation are stressed as much as ever.

4.1.2 Employee Involvement: Work & Equity Structures

Involving employees in decision making is almost a religion at Donnelly. Moira Donnelly, Manager of Training and Corporate Development and niece of John F. Donnelly, described their employee involvement system as a Scanlon committee syste m that evolved into a pyramid of interlinked committees and work teams. The primary involvement structure is called the "Work team structure", and there is a supportive parallel "Equity structure".

The work team structure is the main employee participation mechanism. Every employee is a member of a work team and participates in at least one committee or task force. Most employees belong to 2 or 3 groups. The "first level" employee work teams discuss and solve problems relating to productivity, quality, materials and supplies. These work teams each consist of about 10 employees and will meet on a regular basis as needed, usually weekly. Some teams, however, meet each morning for 5 minutes to discuss goals or relevant issues such as problems encountered on the previous shift. The work teams have a team leader, and the team leaders of different work teams meet as needed to discuss pertinent topics.

Additionally, there is the Equity structure. Each work team has an "Equity rep" that is chosen by an employee vote. All Equity reps from a specific business group, such as modular windows, belong to a Business Group Committee and meet on a regular basis. The chairperson of this committee belongs to the Donnelly Committee.

The Donnelly Committee consists of about 15 people including the president of the company with the only management vote, the chairperson (no vote), the human resources manager (no vote), mostly production employees (about 75% of the committee) with votes, and some office and administration personnel (about 25%) with votes. The Donnelly Committee discusses human resources policies, wages and benefit packages, grievances, and health issues. All decisions must be made by a unanimous vote.

This pyramid work team and committee structure has all levels linked horizontally and vertically by each group's rep. For example, the Equity rep will report back to the work team on what was discussed and concluded at the Business Group Committee meeting, and the Chairperson Equity rep will report back to the Business Group Committee on the Donnelly Committee discussions.

The committees usually meet once a month, the work teams usually once a week, but ultimately they meet as needed for as long as needed. Efforts are made to keep meetings to about 1 hour, not more than 2 hours. Conversely, a task force created to complete a specific project might exist for 2 months to a year, and meet for many hours at a time if needed. Additionally, company representative such as Ms. Donnelly attend the annual Scanlon Conference to share plan progress and innovations with other Scanlon companies.

Productivity gainsharing - C. Bernolak - Employment Sector


Donnelly Corporation has made the list of the best 100 companies to work for. Also, Donnelly won the National Suggestion Award for 1994. Ironically, the company's success has created a number of problems. Donnelly has quadrupled in size over the past 10 years. This growth meant hiring new employees fast, without giving them an adequate orientation and training on the Donnelly culture and Scanlon participative principles. As a result, many new employees do not understand or relate to Scanlon.

Also, there is too much bureaucracy in some areas. The company needs to rationalize product lines and streamline operations. This will be a challenge because Donnelly is expecting a significant increase in demand for some of its products and is opening up new plants in France and Mexico, and just opened one in Kentucky.

Ms. Donnelly believes part of the answer lies in updating and streamlining the productivity and performance measurements. Some of the many measurements presently tracked include units/shift, person-hrs/unit, turnover, product delivery time, parts/million quality measures, floor space utilization, value added, waste reduction and others.

There has been an ongoing discussion on how to improve the bonus measurement. Right now, the bonus is a total corporate bonus meaning that every employee with Donnelly regardless of which plant, country or business group they work in receive the same percentage of the same corporate bonus. This can penalize employees of business groups that significantly improve their performance, when the other plants or business groups perform more modestly. Decentralization has been an inevitable result of the fast growth. Nonetheless, Donnelly wants to maintain the Scanlon ideal of including everyone in one team and rewarding them accordingly. Therefore, the company is seriously considering a bonus that has two parts:

1. a corporate-wide umbrella bonus; and

2. a business group bonus.

Each employee then would have an incentive to cooperate with all other employees in the entire corporation and also would receive a reward for effort and results in their particular business group. The important point is that the bonus decision will be made with extensive employee consultation and with the objective of fairness towards all Donnelly stakeholders, in particular employees, customers, shareholders, and suppliers.

Perhaps, therein lies Donnelly's key factors for success. Indeed, the gainsharing plan includes all employees while also fostering and valuing their input. There is visible, continual top management support of the plan and flexibility in the company to try new management methods. The plan is constantly evolving to meet new challenges, but most important, there is a commitment to balance the needs and wants of the Donnelly stakeholders.

4.2 Gainsharing in the Barbados: Governmental Initiatives

Governments can and do become involved in gainsharing. In Barbados, for example, several gainsharing schemes have been in operation for quite some time. The country's current significant momentum towards a wide implementation of gainsharing schemes has been the result of deliberate government policies that

are of a tripartite nature, involving the government, employers and workers. (35)

The recent governmental thrust started in 1991 when deficits were threatening the economy. In October 1991, the government of Barbados entered into a

Productivity gainsharing - C. Bernolak - Employment Sector


stabilization program with the International Monetary Fund (IMF). The program included financial assistance from the IMF, although the bulk of the stabilization effort came from a massive curb on domestic demand and spending.

The "Development Plan 1993 to 2000" sets out the government's development objectives, strategies and programs for Barbados. (36) It aims to increase the output of goods and services, reduce unit costs and make Barbadian products and services more competitive in the international markets, and to provide jobs through more productive activity.

The goal is to transform the Barbados from the category of "developing" country to "developed" nation in the shortest possible time. The plan recognizes that sustainable economic progress will require higher levels of domestic and foreign investment as well as further development of the country's human resources through improved training and education. The development plan also highlights the need for an emphasis on high quality output and customer satisfaction, timely service, and employment flexibility. In order to achieve these objectives, the methods of productivity improvement must be widely understood and utilized.

As a result, the government of Barbados created a tripartite National Productivity Board (NPB) in 1993. Its mission is to promote growth through better understanding of productivity, to undertake practical methods of productivity measurement, analysis and management, and provide assistance towards devising productivity-related payment schemes.

At the same time, the social partners have recognized that in order to enhance competitiveness, the growth in real wages must be matched by growth in productivity. Representatives of government, workers and employers signed a Protocol stipulating that basic wages would remain unchanged for two years since wages are an important element in price formation. (37)

In the Protocol, the social partners agreed to the restructuring of the economy on a sustainable basis. Therefore, the Protocol has specified that increases in

wages and salaries will be permitted "in terms of profit-sharing arrangements or productivity bonuses, based on an assessment of profitability or improvement

in productivity. Collective bargaining will still be maintained to address conditions of work, as well as the sharing of productivity gains." (38)

The National Productivity Board assists social partners by providing, among others, guidelines for wage contracts that link pay and productivity. To date, the staff of the NPB have been recommending a Scanlon-type approach to gainsharing, although sharing gains has been stressed and not employee involvement.

In the future to optimize the effort, employee involvement in the productivity improvement aspect of the plans should be emphasized.

4.3 Gainsharing plan of the Barbados Hotel

& Tourism Association & Barbados Workers' Union

A sector that is of primary importance to the economy of Barbados is the hotel and tourism sector. A gainsharing scheme from this sector was developed by

the Barbados Hotel and Tourism Association with the assistance of the National Productivity Board, then further improved in discussions with the Barbados

Workers' Union and the National Productivity Board. (39)

Productivity gainsharing - C. Bernolak - Employment Sector


John Pilgrim, Chief Economist of the National Productivity Board of the Barbados, explained that although the gainsharing formula cannot be described as either pure productivity sharing or totally profit sharing, it contains sufficient elements from both systems for ensuring an equitable sharing of gains from both productivity and profit improvement. (40) As illustrated in Table I (included at the end of this example), the improvement from which the gains can be shared is derived from a comparative analysis of the results of the current year with the preceding year. The preceding year is used because it is a reasonably representative period for which data is available.

Mr. Pilgrim continues that the overall analysis sticks to the basic guidelines associated with the traditionally accepted Scanlon-approach, although the modus operandi in calculating the gain to be shared is slightly different. The agreed formula is based on a measurement of sales per person-hours (PH) worked by non-management employees. The sales per person-hour is the basis compared from one year to the next.

In the formula, net total sales is the sum of revenues derived from room revenue, and food and beverage revenue. Price changes in the average room rate are taken out of the calculation, hence inflation distortions are excluded. The average room rate is defined as room revenue from rooms sold, divided by total rooms occupied. If the average room rate decreases or increases (for example because more expensive rooms are sold), and the variance is multiplied by the number of occupied rooms, an increase or decrease in sales would result, comparable from year to year.

Apparently, there is no attempt to extract price increases associated with food and beverage revenue, probably because food and beverage revenue represents a smaller percentage of the total hotel revenue.

Certain cost items deemed to be affected by labour are included in the formula. Reductions in these cost items may be achieved more easily through increased care and attention on the part of staff during the course of their daily tasks, thus resulting in gains via cost reduction. Saving of these costs, therefore, can be gained by workers' extra attention. These items include china, glass, silver, linen, towels, and utilities. The (a) china, glass, silver, food and beverage (F&B) linen variance, the (b) rooms linen and towelling variance, and the (c) electricity, water and gas consumption variance need to be calculated separately before their subtotal variances can be incorporated in the calculation shown in Table I.

The F&B china, glass, etc. calculations are to be included on a per cover (customer served) basis, while the rooms linen and towelling costs are to be calculated on a per room basis. Electricity consumption is measured in kilowatt-hours (KWH), gas consumption in therms, and water consumption in gallons (or litres) to reflect the real variance in volume terms. The utility price rates are also gathered in order to yield the total cost of each input.

For the initial 3-month period of the agreement, the split between management and labour was 70 percent (for management) and 30 (to labour), but it was agreed to change the proportion to 60-40 subsequently. This proportion is used in Table I. A possible further change to 50-50 sharing is also being considered although the need for strengthening the hotels' earning capacity and survival are equally being taken into consideration.

The total hotel bonus is divided among the workers on the basis of each worker's hours worked. This is considered a fair distribution, and rewards workers for reducing absenteeism.

The bonus period pay out has been set initially for every 3 months, in order to ensure that each bonus payment is a significant amount. As continuous productivity improvement increases the gains to be shared, it will be feasible to consider bonus payments on a monthly basis.

Productivity gainsharing - C. Bernolak - Employment Sector


This hotel gainsharing method has been well received by both employers and employees. The work atmosphere is cordial which is reflected by the current practice that the employees are no longer called workers but "associates".

A greater emphasis on the importance, benefits, and methods of productivity improvement could result in more gains. Presently, productivity gains are around 2% per annum. The productivity improvement effort could be made more effective, such as by implementing employee involvement systems fostering improvement suggestions, information sharing, and undertaking training in productivity improvement. Annual productivity increases of 5% - 10% or more are attainable and would render significant monthly gainsharing bonuses.

Table I:

Simplified example of the calculation of gainsharing recommended by the Barbados Hotel & Tourism Association for the first quarter of the current year.

(Data are fictitious. Formula items are marked *)

Sales (S) First quarter last year First quarter this year

Net room, food & beverage sales

(less insurance) 3,870,916.00 5,462,406.00

Average room rate 140.27 174.86

*This yr/last ave room rate variance 34.59

Number of room nights 13,488 14,853

*Ave. room rate variance × room nights= +or- (513,765.27)


F&b china, glass, silver & linen variance= +or- (22,162.45)

Rooms linen, towel variance= +or- 5,540.00

Electric, gas, water consumption variance = +or- (8,313.04)

*Net total sales 3,870,916.00 4,923,705.40

Productivity gainsharing - C. Bernolak - Employment Sector


Number of person-hours (PH) 116,770 131,150

*Net sales/person-hour = S/PH 33.15 37.54

*(This yr S/PH) - (last yr S/PH) = +or- 4.39

*Difference × 100 divided by this yr S/PH) = % 11.7%

*11.7 % × gainshare % (set at 40%) = gain pay out 4.6%

Average hourly wage rate (without benefits) 6.57

*Pay out % × average hourly rate) = bonus rate 0.31

*Bonus rate × PH) = bonus pay out for quarter 40,656.50

4.4 Hewlett-Packard Company: Cash Profit Sharing

Hewlett-Packard (HP) has always had an incentive program. In 1957, HP changed the monthly production bonus to a semi-annual program. The incentive was not based on savings in labour costs as a percentage of the dollar value of the goods produced. In 1961 a cash profit sharing plan was introduced because HP believed that employees should be rewarded for more than the quantity of goods they produce. It was thought that a profit sharing plan would encourage everyone to make contributions to help the company be more profitable, such as by saving material and overhead costs. (41)

The cash profit sharing plan has not been altered much since its introduction. In 1985-1986 when the electronics industry went into a slump, HP remained committed to its employees and the plan. Employees were requested to work reduced schedules, but they did not lose any of the salary base on which profit sharing was calculated. The following is a summary of many of the features of the current HP cash profit sharing plan (42)

4.4.1 HP Goal/Principles

Profit is everyone's responsibility. The Cash Profit Sharing Plan was established as a method for employees to share in the profits as well as in the responsibility for achieving them. Since wages are partly determined by levels of responsibility, profit sharing bonuses for this plan are allocated according to employee's eligible earnings. The company will share 12% of its net profits for this plan prior to provision for the retirement plans and income tax.

4.4.2 Eligibility

Employees that work full-time and regular part-time are eligible.

4.4.3 Effective Date

Productivity gainsharing - C. Bernolak - Employment Sector


Eligible employees begin participation after six months of continuous, regular full-time or part-time employment. After six months, employee's eligible gross base earnings begin to accumulate.

4.4.4 Eligible Gross Base Earnings

This includes regular base pay, before taxes, within the cash profit sharing period, including shift differentials, paid holidays, flexible time off, actual commission dollars, and illness time. It does not include special payments such as overtime, company stock purchase contributions, cash profit sharing payments, weekend work bonus, or other special payments.

4.4.5 Cash Profit Sharing Periods

1. November 1 to April 30

2. May 1 to October 31

4.4.6 Profit Sharing Formula

12% of total HP earnings after state taxes and before profit sharing, retirement provision and federal taxes, will be given out as cash profit sharing bonus. The declared bonus percentage is determined by dividing the total profit sharing bonus pool to be distributed by the eligible earnings of all participating employees.

Example Bonus Calculation

Employee A is hired Aug. 1, 1980 then his/her participation begins Jan. 31, 1981. Say this person earns $800/month and the profit sharing bonus for the period is declared to be 7% then

Employee A's profit sharing bonus for the 6 month period of Nov 1 1980 - Apr 30 1981 is:

($800 x 3 months participation = $2,400) x 7% = $168 bonus.

Bonus Payment Dates

Bonuses are paid semi-annually. The bonus earned in the first fiscal half ending Apr 30 is usually paid in May, and the bonus earned in the second fiscal half ending October 31 is paid in November.


No modification of any kind may be made to any provision of the cash profit sharing plan without written permission of the Executive Committee.

Productivity gainsharing - C. Bernolak - Employment Sector


The HP profit sharing bonuses earned between 1962 and 1994, have ranged from a low of 3.12% to a high of 9.95%. The bonuses for 1993 and 1994 averaged more than 7%. (43)

The HP employee involvement scheme does not have a formal structure per se, but there is continual emphasis put on improving methods, quality, design, productivity, and profits. HP runs training programs including total quality control courses for employees. The profit sharing bonus is a tangible incentive that has helped create a focal point for performance improvement as well as team spirit. Employees appear to be very interested in the performance of their company and many come to work earlier than required to ensure that they hear the Chief Executive Officer's speech regarding the company's performance, related issues, and last but not least, the size of the bonus. (44)

4.5 Williams Industries Inc.: Productivity & Profit Sharing Elements

The core companies of Williams Industries Inc. of Barbados include C.O. Williams Electrical Ltd., Structural Systems Ltd., and BRC West Indies Ltd. Also, Williams Industries Inc. has controlling interest in Caribbean Metals Ltd. of St. Lucia, and Williams Enterprises Ltd. of St. Kitts. Additionally, Williams Industries Inc. is involved in several joint ventures.

Over the past twenty years, Williams Industries has been using various programs to improve productivity. Some of these efforts targeted productivity only, while others combined productivity with cost control, sales promotion, and profit improvement.

Mr. R. S. Williams, Chairman of Williams Industries Inc., developed these schemes and detailed them in "Williams Industries Inc: Outline of Productivity Enhancing Schemes Used Over a 20-Year Period". (45) The following summarizes Mr. R.S. Williams' informative report, schemes and findings.

4.5.1 Job Work Rates at Structural Systems Ltd

Initially, simple incentives called "job work rates" were introduced for hourly paid employees. The job work rates (JWR) were established by measuring the average time it took to do each kind of job, and then these were used to calculate the "standard" pay (JWR) for the job based on agreed wages. Workers were offered these rates to encourage them to produce as much as possible in a given time. The incentives achieved that objective, but led to quality control problems.

Also, it was difficult to establish the correct rate to pay when a new product was introduced, because workers seemed to work slowly during the trial run to maximize the time required to produce the item. Once established, any lowering of the incentive met resistance even though the rate of production achieved after the job work rate was set was often twice that achieved in the trial run!

Another problem was caused by one of the stipulations of the program that said the job work rate would apply to the items produced if this was more than the worker's hourly pay. Workers then expected to be paid by the hour when there was no job work due to a lack of orders, and by job work rates when orders came in. This meant that they often worked for say, 4 hours during a day on job work earning a full day's pay or more. Also, they expected to be paid at their

Productivity gainsharing - C. Bernolak - Employment Sector

hourly rate for the remaining 4 hours when no work was available for them to do.


Nonetheless, the system achieved maximum output from the plant and equipment when orders were abundant, but raised the labour cost of production. This was partially offset by the reduced overheads per unit which resulted from the higher output per hour. It also enabled the company to meet demand and retain valued customers. In a buoyant market then the advantages were felt to be greater than the disadvantages.

When the market contracted, the company suffered and, by 1992, the system had to be abandoned to save the company. Hourly rates were increased to compensate for the loss of job work, but the number of employees was reduced and staff were told plainly that "the gravy days were over". Everyone was expected to produce at their maximum rate otherwise the company would go bankrupt and everyone would lose their jobs.

Needless to say, labour cost was reduced considerably and the company is more competitive in the export market. The lesson learnt was that a cooperative team needs to be established that aspires to optimize production. It is more productive then to install an incentive system that rewards the entire team on overall performance over a longer period than to reward exceptional short term performance of individuals as in the job work system.

4.5.2 Commission Incentives

A system of monthly sales commissions covering all employees was introduced in all the Williams Industries Inc. Group companies, about eighteen years ago. The goal was to ease the payroll burden when sales were down, and reward employees when sales were up. This system was based on guaranteed salaries and wages which were well below the industry standard, and the sales commissions which brought remuneration up to a little more than the industry standard if budgeted sales were achieved.

Initially, key employees were paid an agreed percentage of sales (commission), and another percentage was split among all other salaried staff. Yet another percentage was split among all the hourly paid employees. This worked well until the companies grew and sales increased significantly. The key employees who were paid fixed percentages earned more and more even though other people had to be employed to handle the increased volume of business.

The total paid out increased until a decision was made to fix the total percentage for each department regardless of how many people had to share it. This change encouraged managers to keep staff to a minimum in order to maximize each individual's commission including their own. Generally, the commission was split in the ratio of the individual's basic salary or wage to the total of all the salaries or wages paid to the department in which the individual worked. Therefore, if a person earned 10% of the total basic salaries or wages paid to all employed in the department, then the person would receive 10% of the commission fund for that department.

This incentive system has worked well to foster maximum sales, and lessen payroll burden when sales slump. Over the years, it has been refined as needed. For example, commissions were increased on cash sales and decreased on charge sales to improve cash flow. When this did not reduce the tendency to give credit too easily in order to maximize sales, a change was made to calculate commissions on money collected and banked rather than on sales made.

Another problem with the system was that workers on the shop floor had no way of knowing that their commissions were being calculated correctly. Therefore, there has been a great deal of emphasis on developing trust between management and employees. If there is disagreement, the worker is always given the benefit of the doubt.

Productivity gainsharing - C. Bernolak - Employment Sector

4.5.3 Profit Sharing


Profit sharing was introduced in all Group companies by department at the same time as the sales commissions scheme was introduced to counteract any tendency to maximize sales at the expense of profit. The profit sharing formula started out as a simple percentage of the profit divided amongst employees as a Christmas bonus. The split was determined by the directors after the results were known, and the Group's administrative costs were split among the departments before the profit share was calculated.

This scheme was modified because the individual company and department managers had no control over the administrative cost of the Group. They did have control, however, over the credit that their departments extended, the value of their inventory, equipment and vehicles they used, and the area of building space occupied by their departments. It was also felt that everyone should know how the profit will be split before the profit is earned.

Therefore, the modified system was designed to give each manager greater control over the profit share received by his or her department and show administration which departments were performing well and which were not. In the new system, each department was charged interest at the industry standard rate (ISR) for the money used to finance their inventory and receivables and an ISR of rent for the space their departments occupied. Each department was also charged depreciation on machinery, equipment, furniture, and vehicles used by the department. The department's profit share then was calculated on its contribution to profits. Members of the individual department, therefore, were in control of their own earnings and unaffected by the Group administration's spending.

Also, the percentage of the contribution which is paid as the profit share is varied from one department to the next according to the department's relative capital or labour intensity. For example, the electrical contracting business is very labour intensive and depends on self motivated people working without supervision. 30% of the contribution of this department is paid as profit share. The design department's profit share is 50% of its contribution. Conversely, the steel retail business is very capital intensive and the department profit share is 5% of its contribution.

A further refinement of the profit sharing scheme was introduced to discourage expansion at a faster rate than the profitability of the department could support. It was decided to achieve this by adding one third of the department's (positive or negative) cash flow for the period to the contribution before calculating the profit share. Therefore, a positive cash flow would enhance the resulting profit share, while a negative cash flow would reduce the profit share. Cash flow was calculated by simply subtracting the sum of the value of receivables and inventory at the end of the period from the sum of the value of receivables and inventory at the beginning of the period.

The profit bonus paid to employees includes a fixed amount according to their earnings and another discretionary amount determined by the department manager. The computerized PALS system which monitors each employee's productivity, lateness and absenteeism on a daily basis, helps determine profit share amounts.

This profit sharing system has worked well in the non-unionized companies for many years. Staff turnover is minuscule and, in general, the employees earn more than the Industry Standard Wage. Problems in the unionized companies stem from a fundamental disagreement over base wages. Some union members believe that the base pay should be higher and bonuses should be paid on top of that. Management feels that the reward should be proportional to risk and performance. Accordingly, a lower wage is guaranteed with opportunities to earn bonuses that when added to base wages, surpass industry wages.

Productivity gainsharing - C. Bernolak - Employment Sector

4.5.4 Joint Venture Incentive


The latest sharing concept of Williams Industries Inc., which was partially introduced in 1993 and will continue to be developed, is that any company or group can be treated as a 50-50 joint venture between capital and people in which disposable profit is shared equally.

This scheme pays investors (providers of risk capital) an Industry Standard Return (ISR) on the money they invest, while employees are paid Industry Standard Wages for their services. The remainder, after deducting these and all other operating expenses including taxes from gross sales, will be considered profit. The system provides for expansion by allocating 50% of the profit to the company for improvements and the other 50% will be defined as disposable profit to be split 50% to employees and 50% to the investors.

The 50% that is left in the company for expansion will be recorded as retained earnings on which ISR will be paid to the investors. Though the expansion funds are actually the property of the investors, they cannot access them. These funds will reduce the company interest expense on funds borrowed from banks and thereby increase disposable profit to be split between employees and investors.

Therefore, Williams Industries Inc. is continually looking for opportunities to improve as well as ways to share gains equitably with its stakeholders, in particular employees, investors, and customers. As a result, William Industries has been willing to experiment with incentive systems, make alterations, phase out incentives when they no longer achieve the objectives, and create new ones. Various incentive systems operate concurrently, such as the sales commission, profit sharing and recently the joint venture program. Each of these incentive systems is evolving to address problems and meet the needs of the dynamic conglomerate.

4.6 Avis: Employee Stock Ownership Plans (ESOPs)

In 1987, the 11,000 employees of Avis, a major car rental firm, became the owners of the company for a record $1.75 billion. In the first six months of 1988 after Avis became employee owned, operating profits increased 35% above the first six months of 1987. Also, airport market share increased 1%, on time arrivals of airport buses improved from 93% to 96%, and customer complaints regarding service (which were rising at the time of the buy out) decreased 35% in the first year of the ESOP. Revenues grew at an annual rate of 19% in 1989 for Avis when the industry rate was only 6%. This information, provided by the National Center for Employee Ownership, illustrates how well an ESOP can work. (46)

It is interesting to note that Avis instituted an employee participation program when the ESOP started. Avis management remembered that research showed the importance of employee participation and decided to include it from the start. Two aspects seem to be important in the success of the Avis ESOP and participation program:

1. top management was absolutely committed to it;

2. Avis started with a simple, flexible plan that could be installed quickly, evaluated and expanded.

The employee involvement system operates in each Avis location. Employees elect one or two people from each functional area, such as service, rentals, sales, etc., to create an employee participation group (EPG). These representatives typically meet once a month for one to four hours to discuss pertinent

Productivity gainsharing - C. Bernolak - Employment Sector


topics. The groups have tremendous autonomy to decide on local issues, such as local specials, advertising, service policies and procedures.

These groups then elect representatives to attend annual zone meetings where the representatives can discuss suggestions and company developments with top management. The representatives then report back to employees on topics and findings of all the meetings.

Many ideas from the employee involvement system have been put into effect corporate-wide, such as ameliorating Avis' luxury fleet to foster rentals of more expensive cars (a very successful suggestion), creating an internal credit card, and instituting guidelines to prevent tire and antenna damage on returned cars. Local offices have tested non-smoking cars, information tapes on Avis buses, cross-training schemes, special local sales and advertising, and a new lost and found tracing system.

Of course, the ESOP plan and participation system needs some improvements. One of the problems is that many employees still do not fully understand what an ESOP is. Often, employees not elected to the Employee Participation Groups (EPGs) are not participating in any way. There are communication and information sharing problems between the EPGs so that solutions to common problems found by one group are not shared with others. Also, some local managers are not amenable to the participation process.

Avis' headquarters, therefore, is running training sessions for managers on how to conduct useful meetings and encourage participation. Employees recommended instituting an automated information sharing system to enable them to learn how other EPGs have solved problems. Finally, some locations now hold meetings at least once a year that include all employees.

4.7 TRW: Improshare & other plans

TRW is a world-wide company that provides products and services with a high technological or engineering content to the automotive, space, defence, and consumer and commercial information markets. TRW employs more than 60,000 people around the world with about 20% in Europe. Net sales in 1993 were $7.9 billion of which $2.4 billion or 31% were international sales. The company has 30,100 shareholders many of which are employees.

In 1974, TRW started its first plan, a Scanlon plan in an automotive plant with a union. Ray Olsen, Vice President of Compensation and Benefits recalled that TRW installed the plan because it was learning and trying different management systems to move towards a team approach. (47) Management wanted to institute employee involvement and share the gains with employees in some equitable manner. The Scanlon plan was chosen because the union members knew about it and trusted it.

Today, TRW has over 30 group incentive plans operating! The plans tend to be operating at the plant or division level and are not corporate-wide. It is believed that employees can relate their inputs to the plant or division level, but cannot see how their efforts impact the entire, world-wide company. Typically, everyone except for top management will be covered by the plans in the plant or division. Top management has its own incentives. Each plant controls and runs its own plan, headquarters "keeps out of it". The following are examples of some of TRW's plans.

TRW Space and Electronics Group of California which undertakes research and development in the aerospace industry, includes employees in various group incentives. TRW believes that group incentives are an important part of their compensation strategy to share the success of the business with employees, so management built group incentives into government contracts. Each group incentive plan is agreed to by the customer. These group incentives relate to a

Productivity gainsharing - C. Bernolak - Employment Sector


specific project such as building a satellite and share the project's award fee (essentially profit) with employees.

The size of the award fee and hence the employee bonus depends on a score the customer gives the company for meeting project specifications, such as meeting project milestones and budgeted costs, maintaining security, and whether or not the technology is effective. Generally, to receive a bonus the project score must be at least eighty out of a possible hundred points. The higher the score, the greater the award fee and bonus. The bonus is allocated to employees according to the number of hours they charged to the project. There is no specific structure or schedule to meetings. Rather, they are held as needed and vary from project to project. (48)

TRW Space and Electronics Group also has an enterprise-wide incentive plan called the "success sharing plan" that rewards everyone in the group if the goals for return on assets employed (essentially profit over assets) are met. This is a new plan started in 1994. Happily, the 1994 goals were met therefore employees will receive 2% of their gross earnings as a lump sum bonus in February of 1995. The maximum possible bonus percentage that could be earned in this plan will be raised to 3% of the employee's gross earnings in 1995.

TRW also has had several Improshare plans in operation, specifically in the U.S., France and Germany. It is considered a good plan to introduce firms to gainsharing, because of the emphasis on fairness and its features are quite specific so installation is relatively easy. Also, Improshare has been welcomed by unions. The United Auto-Workers' Union in the TRW plant in Sterling Heights, Michigan, for example, requested the Improshare plan for that plant.

The Sterling Heights Improshare plan essentially follows the description provided in the Improshare section of the previous chapter. Employee participation is achieved via a cross functional employee team (Improshare Committee). Approximately 98% of all full-time TRW Michigan employees are covered by this plan. The remaining 2% are covered by other management incentives. This plan has been effective in improving quality and enhancing customer service.

The Improshare plan results in Europe were very good initially. TRW Jeudy, France reported that in 1986 productivity increased 13% over the 1985 level. In 1987 productivity increased to 27% over the 1985 level, and in 1988 the productivity increased to 47% above the 1985 level. The improvement in Jeudy is attributed to a changed work culture and employee involvement as a result of Improshare. Nonetheless, management is talking to employees about alterations to the present plan, because some of management feel the pay out became too high compared to value added. (49)

TRW is always looking to improve and evolve all management systems and plans. TRW Danville, Pennsylvania (Valve Division), for example, has instituted a "blended plan" that calculates the bonus according to a weighted average of performance measures such as:

1. profit after tax (50% weight);

2. external parts/million (25% weight);

3. net pieces produced (25% weight);

multiplied by a goal achievement factor (2% when threshold is met, 5% when target is met, 10% when maximum is met). This is a new plan that replaces an Improshare plan. Preliminary bonuses paid quarterly seem to be about 5% of gross quarterly wages. Regardless of this plan's outcome, TRW intends to continue gainsharing, because it is committed to employee involvement and the equitable sharing of gains with all its employees.

Productivity gainsharing - C. Bernolak - Employment Sector

Chapter 5



Productivity improvement is vital to the long term survival and competitiveness of all organizations. Improving the standard of living of individuals or of a nation may only be brought about by productivity improvements. In simple terms productivity is output over input. Ultimately though, productivity is an evaluation of the entire organization's operation. In order to improve productivity employees do not have to work "harder", but rather "smarter" and better utilize all other resources. Many times simple, inexpensive actions can vastly improve productivity.

Productivity is best measured by a set - or family - of productivity measures. The different partial and multi-factor productivity measures will help capture the important aspects of the organization's productivity improvement effort. The specific measures used, however, are not as important as top management commitment to the productivity effort and the fostering of a productivity culture amongst all employees. Open communication and cooperation between labour and management will not only improve productivity, but also lead to better job satisfaction and team spirit.

The increasing awareness of social and environmental issues is putting managers under greater scrutiny. They must consider the welfare of all the stakeholders before making management decisions. Indeed, each action affects another. The global village is shrinking due to technological advancements, the scarcity of certain goods, and the fragility of the environment.

A socially conscious productivity improvement effort, therefore, is the way to create more with less, so that all can have more. The stakeholders, workers, managers, shareholders, consumers, governments, and nations need to work together to promote productivity improvement and raise the standard of living around the world.

Gainsharing is an equitable method of sharing productivity and profit gains with employees, and motivating them to seek more improvements. Successful gainsharing plans are not dependent on the specific reward formula used, but rather on trust, employee participation, and visible top management commitment. If these aspects are in place, then the gainsharing plan can thrive and meet the needs of the enterprise stakeholders. Workers can learn as much as possible about productivity improvement and gainsharing methods to ensure fairness and optimal contribution to improvement efforts.

Governments can help create an environment favourable to productivity improvement and gainsharing, through its own set of incentives such as tax breaks, training sessions for governments, managers, workers, and consumers, information distribution centres, information and advertising campaigns, gainsharing and/or productivity improvement day, month, or year "celebrations", and productivity councils or bodies that would foster the upgrading of public and private organizational productivity through, amongst other means, gainsharing.

Today, the basic gainsharing plans are being modified by organizations to meet their needs. The Scanlon, Rucker, Improshare, and Profit sharing plans, therefore, are warehouses of gainsharing ideas and methods that can be used either in their basic form or rather as springboards to an evolutionary process that can create a new gainsharing scheme absolutely tailored to serve the organization. <

Productivity gainsharing - C. Bernolak - Employment Sector

Annex 1

Understanding the Financial Statements

Understanding the Financial Statements of the Enterprise


In order to ensure fair sharing of productivity and profit gains, it is necessary for negotiators and staff to understand the basic productivity measures (discussed in chapter 1) and the financial statements of an enterprise such as the balance sheet and income statement. These basic financial statements of the enterprise impact negotiations because they reflect the financial standing and health of the enterprise and its changes over time. Some of the important aspects of the statements are discussed below.

The balance sheet (see Example 1) shows the financial picture of the company at one point in time or a specific date, usually the last day of the company's fiscal (accounting) year. One side of the balance sheet shows the company's assets (what it owns and what is owed to the company). Statements vary in detail, however, a company's assets usually consist of "fixed assets" (land and buildings, machinery and equipment, road vehicles, and furniture, fixtures and office equipment) as well as "current assets" (cash, accounts receivable, inventory of raw materials, work-in-process, and finished goods). The other side of the balance sheet shows what the company owes called "liabilities", and these include what the company owes to others and what its shareholders own, the capital stocks issued by the company, and the earnings retained in the business. The earnings retained in the business are needed to ensure its future viability.

Example 1: furniture company ltd. Balance sheet as of (company's fiscal year end) Nov. 30, 1995

At November 30 (US dollars)

1995 1994


Current Assets

Cash (including bank balances) 76,400 77,100

Accounts receivable 102,200 109,200

Inventories 383,650 382,500

Other 36,400 43,100

Total Current Assets 598,650 611,900

Fixed Assets

Productivity gainsharing - C. Bernolak - Employment Sector

Land 101,465 101,465

Other fixed assets (1) 240,800

LESS accumulated

depreciation (2) 65,165

Depreciated fixed assets 175,635 168,790

Total Fixed Assets 277,100 270,255

Total Assets 875,750 882,155


Current liabilities 525,000 539,455

Long term liabilities payable (3) 56,700 64,200

Total Liabilities payable 581,700 603,655

Shareholders' equity

Capital stock (4 ) 82,500 82,500

Retained earnings 211,550 196,000

Total Shareholders' Equity 294,050 278,500

Total Liabilities plus Share-

holders' Equity 875,750 882,155


(1) Includes buildings, tools, equipment, electronics, furniture and fixtures.

(2) "Depreciation" means the amounts necessary for the replacement of "worn out" assets.


Productivity gainsharing - C. Bernolak - Employment Sector

(3) Not due to be paid this year.


(4) Composed of common and preferred stocks. Preferred stocks is a class of stocks which has prior claim over those of common stock o the earnings of the corporation.

The other main financial statement of an enterprise is the income statement (see Example 2) which shows how much money (revenue) the company earned during the year from the sale of its products and services. Out of all the revenues the company makes, expenses need to be paid.

The "operating expenses" shown in the "income statement" include "depreciation" which represents the annual decline in value of the physical assets of the company, such as buildings, equipment, machinery, electronics, furniture, fixtures, etc. It represents the amount necessary in order to be able to replace the "worn-out" assets, and to ensure the survival of the business.

The "other operating expenses" include the multitude of expenses incurred in order to produce the revenue from the sale of the company's products and services. This item includes the costs of, for example,

- direct and indirect production (or service) labour,

- training,

- raw materials, parts, components, supplies,

- fuel, electricity, water,

- equipment rental

- delivery, freight

- maintenance and repairs (if done outside the company),

- property and business taxes, fees, licences, dues,

- advertising, selling,

- management,

- general and administrative expenses,

- accounting, legal, collection, consulting

Productivity gainsharing - C. Bernolak - Employment Sector

- insurance,

- other expenses.


The balance of "other revenues" (such as interests received) and "other expenses" (including interests paid, mortgage payments, etc.) is added to (or deducted from) "profits before income tax".

The "net profit" is arrived at after deducting the income tax. The "net profit" is available for sharing among shareholders (owners) of the business in the form of "dividends", for profit sharing or productivity bonuses, and for earnings retained by the company for future improvements or expansions.

Example 2:

Furniture Company ltd. Income statement (1) for fiscal year ended Nov. 30

1995 1994

Operating Revenue $1,137,094 $1,162,610

Sales (goods or services)

less rejects, discounts (2) 1,093,657 1,118,198

Other operating revenues 43,437 44,412

Operating Expenses 1,068,868 1,104,480

Depreciation 22,000 25,810

Other operating expenses 1,046,868 1,078,670

Operating Profit 68,226 58,130

Other Revenue (Interest, etc.) 13,500 10,069

Other Expenses 11,993 9,871

Interest on debt:

Short-term debt 2,361 1,371

Productivity gainsharing - C. Bernolak - Employment Sector

Long-term debt (e.g. mortgage) 9,632 8,500

Gains/Losses (assets sold, etc.) 1,507 198

Profit before Income Tax 69,733 58,328

Income tax 13,828 17,498

Net Profit 55,905 40,830

Dividends to shareholders 35,355 25,000

Retained earnings (in company) 20,550 15,830



(1) The Income Statement is often called by other names such as Profit and Loss Statement (P & L Statement) or Statement of Earnings and Deficit. The statements show how much the company took in from its sales during the year and how much it spent on expenses. The remainder pays income taxes then the net profit is available for dividends to shareholders, profit or productivity sharing, and earnings retained for company needs. The Income Statement, therefore, reflects the company's earning power and financial strength.

(2) Often shown separately to indicate problem areas.


Asian Productivity Organization "Bangkok declaration on productivity - better quality of work life through productivity", APO News, (Asian Productivity Organization: Tokyo), October 1991.

Bernolak, Imre "Linking managerial action to productivity measures", International Productivity Journal, (International Productivity Service: Washington, D.C.) 1991-III.

Daly, Donald J. "The supply side and unemployment in Canada" Canadian Business Economics, (Canadian Association for Business Economics: Ottawa, Canada), Spring 1994.

Dean, Edwin & Sherwood, Mark "Manufacturing costs, productivity and competitiveness 1979-93", Monthly Labor Review, Bureau of Labor Statistics, (U.S. Department of Labor: Washington, D.C.), October 1994.

Doyle, Robert J. Gainsharing & Productivity: A Guide to Planning, Implementation, & Development (AMACOM: New York, NY), 1983.

Productivity gainsharing - C. Bernolak - Employment Sector


Fein, Mitchell Improshare: An Alternative to Traditional Managing (Mitchell Fein: New Jersey), 1981.

Fein, Mitchell "Improved Productivity Through Worker Involvement" (Mitchell Fein Inc.: New Jersey), 1982.

Fein, Mitchell & Lennon, Thomas "The Nature of Employee Involvement" 1991.

Frost, Carl F. et al. The Scanlon Plan for Organizational Development: Identity, Pa rticipation, and Equity (Michigan State University Press: Michigan), 1974.

General Accounting Office Productivity Sharing Programs: Can They Contribute To Productivity Improvement? (General Accounting Office: Gaithersburg, Md), March 3, 1981.

Government of Barbados "Prosperity through Increased Productivity", the 1993-2000 Development Plan of the Government of Barbados, Barbados, W.I.,


Government of Barbados, Employers' Representatives, and Workers' Representatives "Protocol for the Implementation of a Prices and Incomes Policy" (Government printing office: Barbados, W.I.), Nov. 1993.

Barbados Hotel & Tourism Association & the Barbados Workers' Union "1993 Hotel Bonus Proposal" Barbados, W.I., 1993.

Hewlett-Packard "Cash Profit Sharing" Benefits, Policies and Procedures - Hewlett Packard internal manual, Jan. 1992, p.4.

Hewlett-Packard "Cash Profit Sharing" internal guidelines booklet.

Hubert, Tony "Productivity '95: fads and fundamentals", EPI Europe Productivity Ideas, (European Association of National Productivity Centres: Brussels),


Kaufman, Roger "The Effects of Improshare on Productivity" The Industrial and Labor Relations Review (Cornell University: Ithaca, New York), Vol. 45, #2, January 1992.

Mark, Jerome "Developing single and multifactor productivity measures", EPI Europe Productivity Ideas, (European Association of National Productivity Centres: Brussels) 1/94.

Metzger, Bert Participative Gainsharing (Profit Sharing Research Foundation: Evanston, Illinois), 1984 - note PSRF now affiliated with the Profit Sharing Council of America and located in Chicago, Illinois.

Nightingale, Donald V. The Profit Sharing Handbook (School of Business, Queen's University: Kingston, Ontario, Canada), July 1983.

Pilgrim, John "Notes to the meeting

Barbados workers' union" (National productivity board of Barbados: Barbados, W.I.), 1994.


the Barbados hotel and tourism association to discuss the productivity formula


future discussion with the

Productivity gainsharing - C. Bernolak - Employment Sector


Profit Sharing Research Foundation's newsletter "Results: PRSF Update" (Chicago, Illinois), April 1992.

Prokopenko, Joseph Productivity Management: A Practical Handbook, (International Labour Office: Geneva), 1987.

The Employee Ownership Reader (National Center for Employee Ownership: Oakland, California 94612), 1993.

Tolentino, Arturo Productivity Management for Sustainable Development (International Labour Office, Geneva), 1995.

Williams, R. S. "Williams Industries Inc: Outline of Productivity Enhancing Schemes Used Over a 20-Year Period", Warrens, St. Michael, Barbados 1994.


Imre Bernolak, World Bank Consultant to the Barbados National Productivity Board, 1994.

Jeff Bianco, Manager of Compensation, TRW Space and Electronics Group, Redondo Beach, California, Jan. 4 & 10, 1995.

Moira Donnelly, Manager of Training and Corporate Development for Donnelly Corporation, Holland, Michigan, Oct. 21, 1994, Jan. 5, 1995.

Pat Garcia-Luna, Corporate Benefits, Hewlett-Packard, Palo Alto, California, Jan. 12, 1995.

Harvey Minkoff, Director of Compensation & Benefits, Cleveland, Ohio, Nov. 3, 1994.

Ray Olsen, Vice President of Compensation and Benefits of TRW (headquarters), Cleveland, Ohio, Oct. 27, 1994.

David Wray, President of the Profit Sharing Council of America (Chicago, Illinois), Aug. 5, 1994.

1. Imre Bernolak "Linking managerial action to productivity measures", International Productivity Journal, (International Productivity Service: Washington,

D.C.) 1991-III, p.30.

2. Jerome Mark "Developing single and multifactor productivity measures", EPI Europe Productivity Ideas, (European Association of National Productivity

Centres: Brussels) 1/94, p.2

3. Edwin Dean and Mark Sherwood "Manufacturing costs, productivity and competitiveness 1979-93", Monthly Labor Review, Bureau of Labor Statistics,

(U.S. Department of Labor: Washington, D.C.), October 1994, and unpublished data provided the Bureau of Labor Statistics, November 1994.

4. Joseph Prokopenko Productivity Management: A Practical Handbook, (International Labour Office: Geneva), 1987, p.23.

5. Tony Hubert "Productivity '95: Facts and fundamentals", EPI Europe Productivity Ideas, (European Association of National Productivity Centres:

Brussels), 1992, p.1.

Productivity gainsharing - C. Bernolak - Employment Sector


6. Arturo L. Tolentino: Productivity management for sustainable development (International Labour Office, Geneva), 1995, p. 9.

7. Asian Productivity Organization "Bangkok declaration on productivity - better quality of work life through productivity", APO News, (Asian Productivity

Organization: Tokyo), October 1991. p.6.

8. Donald J. Daly: "The supply side and unemployment in Canada" Canadian Business Economics, (Canadian Association for Business Economics: Ottawa,

Canada), Spring 1994, p.41.

9. Carl F. Frost et. al. The Scarlon Plan for Organizational Development: Identity, P articipation and Equity (Michigan State University

10. Ibid., p 12.

11. (Bonus report patterned from) Ibid., p. 15.

12. General Accounting Office Productivity Sharing Programs: Can They Contribute To Productivity Improvement? (General Accounting Office:

Gaithersburg, Md), March 3, 1981, p.9.

13. Robert J. Doyle Gainsharing & Productivity: A Guide to Planning, Implementation, & Development (AMACOM: New York, NY), 1983, p.11.

14. Mitchell Fein & Thomas Lennon "The Nature of Employee Involvement" 1991, p.17.

15. Mitchell Fein Improshare: An Alternative to Traditional Managing (Mitchell Fein: New Jersey), 1981.

16. Ibid., p. 50.

17. Ibid. p 44.

18. Ibid., p. 50.

19. Ibid., p. 49.

20. Ibid., p. 49-50.

21. Mitchell Fein "Improved productivity through worker involvement" (Mitchell Fein Inc., New Jersey, 1982).

22. Roger Kaufman "The Effects of Improshare on Productivity" The Industrial and Labor Relations Review (Cornell University: Ithaca, New York), Vol. 45,

#2, January 1992, p.311.

23. Donald V. Nightingale: The profit sharing handbook (School of Business, Queen's University, Kingston, Ontario, Canada), July 1983, p. (i).

Productivity gainsharing - C. Bernolak - Employment Sector


24. Interview with David Wray, President of the Profit Sharing Council of America (Chicago, Illinois, Aug. 5, 1994).

25. Donald Nightingale, op. cit., p. 15.

26. Profit sharing research foundation's newsletter: Results: PRS Update" (Chicago, Illinois, April 1992).

27. The employee ownership reader (National Center for Employee Ownership, Oakland, California), p. 8.

28. Ibid, p. 9

29. Ibid., p. 18

30. Ibid. p. 3.

31. Interview with Moira Donnelly, Manager of Training and Corporate Development for Donnelly Mirrors Inc., Holland, Michigan, Oct. 21, 1994, Jan. 5,


32. Metzger, Bert Participative Gainsharing (Profit Sharing Research Foundation: Evanston, Illinois), 1984, p.16 - note PSRF now affiliated with the Profit

Sharing Council of America and located in Chicago, Illinois.

33. Ibid., p.16-17.

34. Ibid., p.17.

35. Interviews with Imre Bernolak, World Bank Consultant to the Barbados National Productivity Board, 1994.

36. "Prosperity through increased productivity", the 1993-2000 Development plan of the government of Barbados, Barbados, W.I., 1993.

37. "Protocol for the implementation of a prices and incomes policy" by the Government of Barbados, employers' representatives, and workers'

representatives. Government printing office, Barbados, W.I., Nov. 1993.

38. Ibid., p.5-7.

39. "1993 Hotel bonus proposal by the Barbados hotel and tourism association to the Barbados workers' union". Barbados, W.I., 1993.

40. "Notes to the meeting

workers' union". by John Pilgrim, Chief Economist of the National productivity board of Barbados, Barbados, W.I., 1994.


the Barbados hotel and tourism association to discuss the productivity formula


future discussion with the Barbados

41. Hewlett-Packard: Benefits, policies and procedures "Cash profit sharing", Internal manual, January 1992. p. 4.

Productivity gainsharing - C. Bernolak - Employment Sector

42. Hewlett-Packard cash profit sharing internal guidelines booklet.


43. Ibid., Appendix A - with 1992-1994 bonus information added by Pat Garcia-Luna, Corporate Benefits, Hewlett-Packard, Palo Alto, California.

44. Interview with Pat Garcia-Luna, Corporate Benefits, Hewlett-Packard, Palo Alto, California, Jan. 12, 1995.

45. R.S. Williams "Williams Industries Inc: Outline of Productivity Enhancing Schemes Used Over a 20-Year Period", Warrens, St. Michael, Barbados 1994.

46. The Employee Ownership Reader (National Center for Employee Ownership, 1201 Martin Luther King, 2nd Fl., Oakland, CA 94612), 1993, p.91-92.

47. Interview with Ray Olsen, Vice President of Compensation and Benefits of TRW (headquarters), Cleveland, Ohio, Oct. 27, 1994.

48. Interviews with Jeff Bianco, Manager of Compensation, TRW Space and Electronics Group, Redondo Beach, Ca., January 1995.

49. Interview with Harvey Minkoff, Director of Compensation & Benefits, Cleveland, Ohio, November 1994.

Updated by GT. Approved by HH. Last update: 24 January 2000.