Posted: November 17, 2020
During the uncertain times of COVID-19, many businesses are facing challenges. Regulations affecting operations are constantly shifting, supply chains are being disrupted, and most gravely, profits have decreased across industries due to many consumers experiencing unemployment struggles and thus a steep decline in their discretionary income. In order to increase profitability, many organizations are focusing on two main initiatives: cutting costs and increasing productivity. We’ve seen recent accounts of cost-cutting efforts in the form of major layoffs within the airline industry, but approaches like this can damage employee morale leading to adverse effects on productivity and, ultimately, profitability. The second type of initiative-- focused on increasing productivity-- has been shown to improve employee morale and drive long-term profitability. One approach to increase productivity is to incentivize employees through compensation plans like gainsharing and profit sharing. Profit sharing is an incentive technique used across industries and is based on company-wide performance. If an organization reaches a certain level of profitability within a predetermined time period, a percentage of those profits are distributed to all employees. This distribution can take many forms (e.g., end of year bonuses or retirement contributions), and is one of the most common incentive compensation plans we see today which can lead to high employee satisfaction during a booming economy. However, when used alone, profit sharing can also leave room for issues like “the Free Rider problem” which stems from a lack of personal accountability. Furthermore, during economic downturns, employees will see their annual compensation decline. Gainsharing is a more focused approach to incentivization, and often puts more importance on the direct impact an employee is having on his or her team’s productivity. If an employee directly contributes to the improvement of a predetermined performance metric for the organization (e.g., operational efficiency or cost effectiveness), he or she is directly rewarded as a result of that effort. This type of incentive puts more control in the hands of the individual by rewarding tangible improvements in business performance and can ultimately lead to stronger profitability when individuals are recognized and rewarded for their contributions. In the case of profit sharing, when incentive compensation is tied directly to company profitability alone, we can see employee motivation dip during market downturns. If the organization is not reaching its profitability targets, employees will not receive the extra compensation they had become accustomed to during profitable times and therefore will become more likely to decrease in overall satisfaction and motivation, further damaging the organization’s bottom line. By implementing a gainsharing incentive plan (many times in addition to a profit sharing plan), organizations can give their employees the opportunity to succeed even when the macro environment is dictating otherwise. In times of uncertainty it is important to focus on the things we can control, and gainsharing can give employees the opportunity to do just that. By structuring incentive compensation around gainsharing, organizations give their employees the ability to focus on measurable outcomes and feel a sense of accomplishment even during an economic downturn. This can improve employee satisfaction as well as motivation, which would ultimately lead to increased profitability and sustainable growth. To learn more about maximizing executive salary, visit our Contact Page, or contact us directly by email at email@example.com or by phone at 415-618-6060.