Publications

Gainsharing (1995)

Gainsharing is attracting interest in the public sector as public officials confront the dilemma of how to provide more and better services for the same or fewer tax dollars. Gainsharing is a bonus incentive system designed to improve productivity through employee involvement, with the gains from "working smarter" shared between the employer and the employees according to a predetermined formula.

Although gainsharing programs have found widespread acceptance in the private sector, with a few notable exceptions, they have not caught on in the public sector. While legal barriers to public sector incentives are all but gone, many public officials are under the mistaken perception that group incentive programs cannot be used. More commonly, employee incentives are viewed by many public officials, and the public, as inappropriate. Any "gain" of tax dollars, by this reasoning, should be returned to taxpayers rather than employees. Perhaps the largest obstacle to gainsharing is the current political climate — many elected officials have an ideological, anti-government bias, and rather than improve government services wish only to eliminate them. Finally, the very nature of many governmental services makes productivity measurement difficult and imprecise, thus making gainsharing problematic.

Although gainsharing has not been widely implemented in the public sector, it has recently been the topic of many management journal articles and conference sessions. From AFSCME's perspective, gainsharing may offer a viable alternative to the twin trends of contracting out and competitive bidding. While AFSCME does not endorse gainsharing in all its variations, programs established with formal employee involvement, meaningful and attainable goals, and employment security provisions may serve AFSCME members well.

What isGainsharing?


The New York City Municipal Coalition Agreement defines gainsharing as:

"the sharing by labor and management of savings generated by significantly increased and measurable productivity initiatives and reforms while maintaining or increasing existing City service levels."

Gainsharing programs can take on a number of different forms to meet a variety of needs.For example, gainsharing programs have been used: to save jobs that otherwise might have disappeared; to avoid contracting out; as a means of setting annual wage increases; as a replacement for individual incentive plans; and as they were originally intended — a bonus incentive program enacted in the absence of any threat, with no concessionary strings attached.

Participation in a Gainsharing Program


The simplicity and common sense of gainsharing can appear attractive. Before getting involved in such a program, however, carefully consider the program's goals, design and implementation. Poorly designed or badly implemented gainsharing programs are almost guaranteed to fail.

Also consider the state of labor-management relations. If labor-management relations are poor, a gainsharing program is not likely to succeed. In such an environment, distrust and a lack of cooperation may doom gainsharing to failure. Successful programs require labor-management cooperation in the work place.

Further, a fundamental element of cooperative ventures between labor and management is a strong and stable collective bargaining environment. The more balanced the power relationship between the union and the employer, the more likely it is that the program will be designed and implemented in good faith.

Once the decision to participate in a gainsharing program is made, here are some considerations.

  • Budget Realities Must Be Considered


    Particular budgetary restrictions may affect gainsharing. Regulations may present a barrier to retaining any or all of the savings gained. When funds are provided by another level of government, normally there are limits on their use. Local governments using state funds, or state governments using federal funds, may be prohibited from sharing any savings as bonuses. For example, state-subsidized local school districts may be restricted from using "saved" subsidies for employee bonuses. The same principle may apply to transfers between funds within a jurisdiction. For example, if General Fund dollars are used to partially fund a public health facility's operations, any savings generated in the Health Fund may have to be returned to the General Fund, rather than distributed to Health Fund employees.

  • Gainsharing Must Not Be Linked to Concessions


    Negotiations over a gainsharing program should not be confused with concession bargaining. The employees, the employer and the public should be better off. For gainsharing to work well, it cannot be used as a substitute for regular merit or cost-of-living increases. Gainsharing bonuses should be just that-bonuses based on real savings.

  • Gainsharing Must Not Result in Layoffs


    Both the union and management should agree that there will be no layoffs as a result of gainsharing. Any staffing reduction should be achieved by attrition and/or reassignments. For example:
Under an informal gainshare arrangement between the City of New Rochelle, New York, and AFSCME Council 66 and Local 663, the City split productivity gains with sanitation employees to fund higher-than expected wage increases. The sanitation department was able to increase its productivity by converting its crews from four employees to three, strictly through attrition.

Gainsharing Should Be Designed With Employee Input
In order for gainshare formulas to be meaningful, targets to be attainable, and bonuses to be motivating, employee involvement is essential. For example:

The Midwest Transit Authority (MTA) and the Amalgamated Transit Union jointly developed a gainsharing program in 1990 using two labor-management teams and an outside consultant. One team designed the employee involvement system, while the other worked on the gainsharing formula.

  • Gains Must Be Measurable


    A gainsharing program cannot succeed unless it measures work performance accurately. That's fairly easy for private sector manufacturing companies — the number of widgets produced per hour at a set quality level is easily measurable. But for service-producing entities, either private or government, figuring performance can be difficult. Do you define gain as revenues in excess of expenditures? Or do you measure current year costs against prior years to determine gain? What about citizen satisfaction? Do you use only financial productivity measures — revenues and expenditures — or should performance productivity measures, like quality or safety, be included?
Problems may arise using only financial productivity measures. For example, an office worker who processes licenses could, through work flow redesign, increase his or her performance productivity by processing many more licenses per year, with a constant or higher level of service quality, yet operating expenditures might not be reduced.
Public sector gains have been defined in the following ways:
The Indianapolis Department of Public Works (DPW) agreement with AFSCME Council 62 and Locals 725, 1887, 1831, 3131, and 3766 defines gain as the difference between bid operating costs and actual annual operating costs. Service improvement, defined as a reduction in the total number of annual calls, is also considered in computing gains.
The Monona Grove, Wisconsin, School District agreement with AFSCME Council 40 and Local 60 defines gain as the excess of food service revenues over food service costs for a single school year. Language proposed in other localities defines gain as the difference between "allowed," or budgeted, costs and actual incurred costs.
An agreement between the Sacramento Air Logistics Center at McClellan Air Force Base, California, and the American Federation of Government Employees (AFGE), involving a program that ran from 1988 to 1993, defined gain as expected costs minus actual costs, adjusted for inflation, technology changes, and workload changes.
The City of Loveland, Colorado's gainsharing program, which has been in effect since 1982, set three distinct criteria in defining gain: city revenues had to exceed actual expenses; actual expenses had to be less than or equal to the prior year's expenses on a per capita basis; and there had to be an acceptable level of satisfaction with city services as determined by a citizen satisfaction survey performed each year.

  • Gains Must Be Verifiable


    Regardless of how gains are measured, for a program to succeed, management has to be willing to share information and data it normally keeps to itself. It is all too easy to manipulate financial measures so that little or no gain is evident. Participating employees must have access to factual, audited expenditure data. If performance measures, such as quality or safety, are also used to determine gain, they should be subject to independent verification.

  • Targets Should Be Meaningful and Attainable


    A gainsharing program cannot succeed without well-defined, attainable targets. Targets that workers can't comprehend — complex financial measures or jargon-heavy benchmarks — mean nothing to most workers. Targets that cannot be reached will neither motivate nor reward workers. Gainsharing works best when workers believe that their individual efforts can affect overall performance goals. This may require tying bonuses to departmental, or even sub-departmental, performance. Linking bonuses to broad measures, such as municipal- or state-wide savings, may leave participants frustrated and disenfranchised.

  • Targets Should Be Tested and Benchmarks Set


    After designing the gainshare formula, historical data should be used to test it and to set benchmark goals. Gainsharing targets should be referenced to benchmarks, not past savings. Budgets should not be ratcheted down as savings are found.

  • Service Quality Must Not Be Compromised


    For a program to succeed and garner public support, service quality must not become a casualty of cost savings. For example:
The MTA-Amalgamated gainsharing formula explicitly addressed service quality by incorporating on-time performance, accident, and customer complaint measures.

  • Gains Should Be Fairly Allocated


    Although some programs designate all of the gain to participating employees, most gainsharing programs generally split the gain between employees and the employer. Bargaining over the split may be the most contentious issue in setting up a program, since it is essentially a philosophical issue, not a technical one. The percentage of gain returned to employees ranges from five percent to 100 percent. For example:
The Indianapolis DPW program allocates 25 percent of the gain to an employee incentive pool, with 75 percent of the savings returned to the City's General Fund.
The Monona Grove School District program splits the gain 50-50 between food service employees and the District.
The Sacramento Air Logistics Center program shared the gains 50-50 between management and employees. Of the employees' half, 90 percent was distributed as bonuses and 10 percent was used for such quality of work life improvements as child care facilities.
The State of Texas set up several demonstration programs in the late 1980's, where productivity savings were split between employees (25 percent), the department where savings originated (25 percent), and the originating fund (50 percent).
Employee bonuses may be allocated as a percentage of gross wages, as a flat amount per hour of work, or as an equal flat amount paid to all participants, regardless of hours worked. Equal distribution among all full time employees probably best fosters teamwork. Some programs explicitly require group-based productivity payouts, by eliminating annual individual performance ratings.
Another consideration is proration of bonuses based on employees' work schedules. Bonuses may be pro-rated for partial-year employees, employees who work part-time, and employees who take authorized unpaid leaves of absence. Legitimate absences, such as sick leave and other paid leave, should not reduce an employee's bonus. To maintain employee motivation, bonuses should be paid as soon as possible following the measurement period. Payments are typically made either quarterly or annually.

  • Bonus Payouts Must Not Be Discretionary


    In successful gainsharing programs, paradoxically, resistance to payouts may build as savings are achieved — elected officials may prefer to cut budgets commensurate with the new, higher performance standard, regardless of the promises made to workers. For a gainsharing program to succeed long-term, bonus payouts should not be discretionary, or subject to annual appropriation by management.

  • The Program Should Be Closely Monitored


    The union should be kept well informed of progress in meeting targets on a continuing basis, and monitor the status of revenues and expenditures and relevant performance measures. In Indianapolis, AFSCME locals have a computer link-up with the DPW's accounting database that allows continual monitoring of financial performance.

  • Alter the Program as Needed


    Gainsharing programs need not be etched in stone. The formula used to measure gain may become obsolete. The allocation of gains may require changes. At some point, further savings simply may not be possible. If bonus payments shrink to the point that they are meaningless, employees may lose their motivation. For example, the Indianapolis DPW agreement states that "the purpose ... is to provide incentive to the workforce to increase productivity and to reward individuals for attainment of results over and above normal expectations. The program is subject to change in future years in order to accomplish these goals."

Gainsharing programs are not a panacea for all that ails the public sector. For one thing, many public officials are unwilling or unable to change or give up management, prerogatives. Nevertheless, under certain circumstances, gainsharing may provide public employees an opportunity to participate in the redesign of government services and share in the rewards.

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