Often people mistakenly say “Profit Sharing” when they are talking about their Company’s Gainsharing System. I get the impression that people use the terms interchangeably.

Gainsharing is quite different from Profit Sharing.

1. Power to Motivate Rank and File Employees

For motivation to work, there must be two basic elements present.

A. People Must Understand What To Do to Drive Performance.

One of the main differences between Gainsharing and Profit Sharing is that Gainsharing very directly spells out what people need to do to drive the gains. A Profit Sharing system pays out if the company beats the goals set to trigger the Profit Sharing payout, but it doesn’t tell people what they need to do to make the profits happen.

A Gainsharing system is very specific in telling people what needs to happen, both overall and in their specific area, if we are going to hit the targeted performance level. This intensive planning and feedback system is key to Gainsharing’s enduring power to drive employee and company performance.

Since the Profit Sharing bonuses just “happen” from time to time and people don’t know exactly what they did to make them happen, Profit Sharing becomes an “entitlement.” That is, an expected part of their compensation.

This is one of the main ironies of Profit Sharing. People often develop a Profit Sharing system because they want pay for performance and they do not want entitlement.

That is, they only want to pay if the performance is there. But a Profit Sharing system gives them the exact thing they do not want – a sense of entitlement.

Because people don’t understand the connection between what they do and profits, they feel entitled to the profit sharing. You don’t need to do anything particular to receive it. If you work here when it’s paid out, you receive it.

It’s like having snow fall on you if you live in Minnesota. You don’t need to do anything to make it happen. If you live there long enough, the snow will fall on you.

B. Employees Must Believe They Can Influence Profits or Overall Results.

With Profit Sharing, people may not believe that their efforts will actually influence performance. They may feel that “Sure we can work hard. But management will just go buy a new machine or some other major expenditure and that’s where our bonus will go.”

It’s not as though Profit Sharing is a bad option.

It can work well to motivate high-level management who can see how to drive the performance. They have the information and resources to “connect the dots” and make the profits happen.

It can also work well to fund retirement instruments, etc.

It’s just that Gainsharing is a much better tool to motivate rank and file employees.

2. Costs Included

Gainsharing focuses on the most important costs in a company’s financials. Profit Sharing includes the entire P&L.

You can’t focus on everything. It’s a contradiction.

3. Frequency of Feedback

Gainsharing systems usually provide weekly or monthly feedback. Many have planning systems that specify what needs to happen on a shift-by-shift basis. This frequent feedback allows them to make adjustments “during the game.”

4. Frequency of Payouts

Gainsharing systems typically have a (potential) payout on a monthly basis. Profit Sharing systems typically payout (potentially) on an annual basis. Of course, the more closely we tie the rewards to the performance, the greater the motivational impact of the rewards paid out.

In Conclusion

Gainsharing is a powerful motivator because (1) people know what they need to do to drive the gains, and (2) they see the “gains” varying with how well they actually do what they need to do to drive the gains. They see the cause-effect connection.

This connection is what makes Gainsharing work better than profit sharing in driving performance.

Profit Sharing is different, but effective in it’s own way.

It can be effective to motivate high-level executives, and fund retirement instruments. It is often used effectively in conjunction with Gainsharing.