Companies want to give people an incentive to work harder and smarter.

They also want to reward people when performance is there, but avoid getting locked into high levels of guaranteed pay.

They believe bonus systems provide all of this.

Because they want a simple system where bonuses track with profits, they often choose profit-sharing.

They believe they have an effective incentive system.

The problem is
profit sharing isn’t an incentive system
and probably won’t incentivize their people . . . at all.

Why not?

Profit sharing typically involves distributing a portion of the profits to employees as a bonus, often at the end of the year. People don’t get much information throughout the year, except possibly some updates about the profit levels year to date and the prospects for a payout.

Why Doesn’t Profit Sharing Incentivize People?

Profit sharing doesn’t work well as an incentive, because typically:

(1) People don’t know what they did to create the profits, and

(2) They don’t know what they need to do today to “carry their weight” to earn a bonus.

Since they don’t see how their efforts had an impact on profits, it’s unlikely that bonus payouts will influence their future behavior.

Proactive vs Retrospective

Also, profit sharing shares the profits after they’ve occurred.

The focus is on the past—where you’ve been.

It’s like driving a car when you can only see out the rear window!

Imagine if you had one of those sun blocks on your windshield that people unfold to block the sun when their car is parked, and you had to drive forward, but could only see out the back window to guide your driving.

In contrast, an incentive system aims to influence future behavior. So you’re driving the car looking out the windshield.

Motivation Essentials

An effective incentive or gain sharing system has these features in common:

(1) People know what the goal or needed production is

(2) They know what they need to do to achieve their part of the goal

(3) They believe that their efforts will yield the results/impact they want

(4) They get monthly, weekly, perhaps daily feedback as they work towards their goal, and

(5) They have something important to them tied to being successful (bonuses, etc).

Although money is important, it’s not the only reward, or even the most important in many instances.

People want to see they’re making an important contribution, that they’re seen as “carrying their weight,” and are part of something bigger than themselves.

The real key to an effective gain sharing or incentive system is that it makes peoples’ work into “a game,” where they’re driving the results because it’s important to them personally.

When this happens, people drive the performance whether anyone is watching them or not, because they want to do it for themselves.

When we can make these deeper connections, the bonuses answer the question, “I see the company is doing better, but what do I get out of this?” The bonuses “close that circle.” And we’ve successfully motivated people on many levels.

It’s not as though profit sharing is bad or undesirable. Often companies will have both a gain sharing and profit sharing system. There’s not an inherent conflict between the two.

Profit sharing can be a very effective way to fund retirement vehicles. But it does not work well to motivate or incentivize employees.

Summary

So gain sharing and profit sharing may seem like they’re largely the same.

People often use the terms interchangeably and the confusion is understandable. For example:

(1) Both profit sharing and gain sharing pay bonuses
(2) Profits are “gains”
(3) Both have the term “sharing” in their names.

But profit sharing and gain sharing are very different in their ability to motivate, guide and drive performance.

The most important differences are that (1) a gain sharing system tells people what they need to do to drive the gains and (2) gives them “real time” feedback so they can adjust their efforts along the way.

Profit sharing shares the profits “after the fact,” but does little to guide performance.

Because there’s such a great disconnect between what people do and the profit sharing bonuses, profit sharing provides little or no incentive at all.

People don’t see the connection between what they do and the rewards they get.

This can lead to great disappointment since the company is paying significant bonuses but not getting the impact they were seeking.

Your Homework

Look at the “Motivation Essentials” listed above.

Are there parts of your company where you have these pieces in place, but other parts where you don’t?

What is your action plan to “bolster” weaknesses or fill in missing pieces?

Just one missing piece can ruin the outcome you’re looking for.

Just like if you were baking a cake and forgot to mix in the eggs . . . you won’t end up with a cake. It will be something else!