Difference Between Gainsharing & Profit Sharing

Companies have a variety of ways in which they can reinvest profits or share them with employees or investors. They also can use programs designed to spur employees to better performance. To try to get workers pulling in the same direction, companies can choose to institute programs to let those workers share directly in corporate success. They include broad programs like profit-sharing, and narrower efforts known as "gainsharing."

Definitions

In a profit-sharing program, employees receive bonuses tied directly to the company's overall profitability. The more money the company makes, the bigger the bonuses. Employees in a gainsharing program earn bonuses, too, but those bonuses are linked to specific improvements in performance, such as increased productivity, higher sales or reduced expenses. Both types of programs aim to give employees a stake in the success of the company, but with gainsharing, bonuses can be more closely tied to the performance of specific employees or groups of employees.

Scope

Because profit-sharing programs depend on the success of the company as a whole, they are typically administered company-wide: If the whole company does well, everyone benefits -- even those who are dragging their feet. If the whole company does poorly, no one benefits -- even those who are performing at a high level. Gainsharing programs can be applied company-wide, but more often they're targeted toward specific facilities or units of a business. If a company has, say, five production plants, the workers at each individual plant might earn gainsharing bonuses based on the performance improvements at their particular facility. This allows workers to be judged, and rewarded, based on things they can control.

Psychology

Both types of programs encourage employees to view the company's success as benefiting them personally. But the psychology behind the incentives is somewhat different. Profit-sharing programs promote "buy-in" -- getting workers to support management decisions designed to increase profitability. New work schedules, job changes and transfers become easier to swallow when workers believe that they, not just the company, will benefit. Gainsharing, on the other hand, is more about challenging workers to take charge of improving their own performance. Employees aren't just endorsing a management strategy; rather, they're asked to be partners in formulating and carrying out the strategy.

Administration

An attractive feature of gainsharing programs is that they "pay for themselves." Employees get bonuses only if their own actions have saved enough money -- or produced enough extra money -- to allow them. In profit-sharing programs, by contrast, the bonuses come straight out of company profits. If the company is profitable on a broad scale, workers get bonuses whether they had a hand in it or not. Gainsharing bonuses tend to be paid more frequently than profit-sharing bonuses -- typically monthly rather than annually or quarterly. This allows for employees and managers to better monitor progress toward goals and, if necessary, adjust their performance.