Difference Between Gainsharing & Profit Sharing

When trying to motivate employees, managers often talk about praise and recognition. While these issues do matter, employees can't pay their bills or improve their quality of life with praise. Because money motivates, companies often institute financial programs that let workers share directly in corporate success.

Some companies use profit-sharing plans that hand out bonuses based on how profitable the company was. Gainsharing, however, gives employees a bonus based on a metric they have more direct control over, such as reducing waste or increasing productivity.

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 require 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 are more closely tied to the performance of specific employees or groups of employees.

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 employers to judge and reward employees based on parameters that the employee can actually control.

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 by 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. Instead, they're asked to be partners in formulating and carrying out the strategy.

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 are usually paid more frequently than profit-sharing bonuses, often disbursed monthly rather than annually or quarterly. This allows for employees and managers to better monitor progress toward goals and, if necessary, adjust their performance.