The Productivity-Boosting Gain-Sharing Report
Rogan Corp. found it took a well-designed weekly gain-sharing report to encourage the labor-cost savings that reward employee and employer alike
Back in 1980 the future didn't look so good for Ed Rogan and the plastic-knob-manufacturing business that had been Rogan Corp.'s bread and butter for decades. As sophisticated instrumentation moved from analog to digital displays and no longer needed old-style controls for calibration, company president Rogan feared that "technology was going to make us obsolete." So he invested more than $2 million to replace the molding machines, and he introduced new products.
Rogan knew the success of his strategy rested on dramatically ratcheting down expenses. Yet labor, which constituted a large chunk of costs, seemed untouchable. Rogan's shop-floor employees expected annual raises regardless of the company's performance. And to buck that, Rogan feared, would set off "a big cultural battle." He visited Mexico with an eye to relocating operations there but preferred to stay in Northbrook, Ill., where the company had been since its founding, in 1934. Instead he cast about for a solution that would "satisfy our concern for our people who were loyal, as well as let us survive."
In 1983 Rogan's quest led him to consider a gain-sharing program that would encourage employees to increase their overall productivity. The technique pegs workers' bonuses to improvements in efficiency. Rogan and Tom McGrath, a consultant from Jackson Gainsharing Co., in Marion, Ind., worked for six months analyzing the company's financial statements to determine the historical cost of labor as a percentage of expenses. Using that information, they set a target for productivity. When output efficiency surpassed that goal, employees would enjoy the rewards.
But Rogan realized that success would require universal enthusiasm. He had to sell the program to the workers. He firmly believes "this is not something to try alone. Bring in a professional." As an outsider, McGrath was in a position to act as an ombudsman on the shop floor who could consider without prejudice the concerns of employees. Ed Rogan embraced the program and rolled it out in 1986.
"We wanted to start in an up cycle," Rogan says, "so we could have a modest payout." For the first four-week cycle, gain sharing paid out an extra $11,712, and for the next, $12,279. In the first year and a half gain sharing rewarded employees with checks equal to 16.3% of their wages, in addition to their regular pay.
For a gain-sharing plan to succeed, employees must see the link between their performance and their pay. Accordingly, Rogan has institutionalized regular publication of the company's production and financial results. The company posts every day's shipping totals on the factory walls. It is the weekly gain-sharing report, though, that Rogan uses to focus everyone's attention on production improvements and efficiency. Every Friday Rogan or one of the four other members of his steering committee (they rotate responsibility on a five-week cycle) reviews the report with every department and shift. The committee members know it's crucial that each of the 65 workers in the program understands his or her own potential to affect the bottom line.
And people have learned -- as evidenced by the variety of ways employees have taken it upon themselves to make improvements on the shop floor. They have contributed more than 300 ideas for making production more efficient. Recently, the company adopted employee proposals to conduct the inventory count in one day rather than two. "This is a reward-for-efficiency compensation plan," says Rogan. Employees understood, he explains, that "we'd get one more day to work on increasing gain sharing in that period. The result was, we got another $40,000 of value produced."
Rogan considers the program a triumph. "We've had negative results in only three periods. The workers weren't happy. But everything started at zero in the next period. We don't come back and penalize the employees. We just say, 'OK, we lost that game.' We don't subtract it from pay. This is a shared, not an adversarial, relationship."
Ed Rogan explains how to read the gain-sharing report:* * *
|Period # 85||Week 1||Week 2||Week 3||Week 4||Total|
|Gainsharing earned (lost)||3,975||(1,369)||8,017||14,798||25,421|
|Week 1||Week 2||Week 3||Week 4||Total|
This is the report for the 85th four-week period since we started. We'd been doing this for six and a half years. The four-week cycle is tied to our production/shipping schedule.
A push in Week four typically follows a bad week or two. With the economic uncertainty surrounding the new president, we have chosen to work overtime regularly rather than hire new employees. Week two's low overtime pay shows there were fewer hours worked that week. Now I try to reconstruct exactly what happened in weeks two and three. It could have been that one of two things was going on: On-time delivery was up for that week, so production might have been higher. Or, some department's work in process was low. That week, I learned, it was the latter. The important thing is that these numbers alert me to a shift in the work flow. To keep everyone's confidence and enthusiasm high, I have to be able to say, "Here's what is happening -- and what we're doing about it."
From Gross sales, the amount we bill, we subtract Returns -- what our customers send back. One of the beautiful things about the program is that now we literally pass the returns around and say, "Hey, this $500 order was sent back by XYZ company. Why?" Until we started the gain-sharing program, we hadn't done anything to make our whole company aware of the problem of defective work. Last year rework took $8,000 out of gain sharing. Employees can do something about that. So we post a chart that tracks rework and scrap and how much they cost. Our employees know that individually they can affect their paychecks.
We don't get credit for orders that are filled out of Inventory. We get credit for products when we build them. That's what those parentheses mean. In Week one, orders worth $4,289 came out of inventory. In Week three, a lot of orders came through, including $35,509 worth of new products that we put into inventory because they wouldn't ship for a week or two.
This percentage of the Value produced [19.3%] is what we've determined is a fair return on the company's capital investment. It took more than five months to settle on this figure. In the previous 10 years direct labor had been costing us about 21% to 25% of production. We figured that if we could get a couple of percentage points' improvement, then the company would gladly give anything better than that -- the difference between the 19.3% target and the Total labor -- to the employees as an efficiency gain.
The key number is Value produced. This line represents the orders produced by our people in that period. They have no control over whether orders are on credit hold or if the customer asks us to reschedule six or seven months down the road. Labor builds the product, and in this gain-sharing system, we award credit for work when it is done, whether the orders ship or go into inventory. Real orders. Real work.
We break pay into guaranteed Regular pay and unguaranteed Gain-sharing-earned pay. And when we see consistent improvement in our efficiency, we change the mix. In December 1991 people voted to add one personal day and one holiday to benefits, and last November we raised regular pay by 5%, but the cost to the company remains the same. We were able to do those redistributions because our people earned them. If efficiencies don't go up, gain sharing doesn't work. In a successful plan, people get used to that extra paycheck. So following a redistribution, our people dig in and get that unguaranteed Gain-sharing-earned portion back up again.
We're trying to make the employees aware of all the direct costs of running this place. Everybody in the company is paid weekly. So we take Vacation pay for the year and divide that cost among the 52 weeks. Same with the 10 paid Holidays and the Personal days. " Other," which includes maternity leave, jury duty, workers' comp, and illness not covered by Insurance, can change. When our controller introduced a new health plan that saved us $900 a week, everyone was ecstatic.
When I flip the board around in presentations, people's eyes go right to this figure [gainsharing earned or lost]. They know that their gain-sharing check is a portion of that number and is determined by multiplying the gain-sharing percentage -- which is the 23% we derived by dividing total gain-sharing dollars into the total pay -- by their regular and overtime pay for that period. Then, they scan the other numbers to figure out what made the difference to that bottom line during the period.