Jackson Gainsharing: Boosting Productivity, Quality and Profit by W. M. Jackson & Co., Inc.

Updated Contact Information: W. M. Jackson & Co., Inc. P. O. Box 556 Marion, IN 46952 Attn: Bruce Carl Telephone: (765) 664-‐2656 Or (800) 638-‐3830 Email: brcarl@wmjackson.com March 2016

Jackson Boosting Productivity, Quality and Profit

William M. Jackson

Jackson Gainsharing

several machines. I felt I had gone back in time 40 or 50 years. In my previous management experience, I had always measured company performance as total payroll costs compared to the value of goods produced. This factor at Bahr Bros. in 1966 was 41 percent and, of course, there was no profit. All possible expenses had been cut, including management salaries, advertising, and telephone. They even used smaller light bulbs to conserve electricity. As I look back, it is hard for me to believe that the business continued to exist in such a condition. As the new owner, I had to invest in additional equipment in the plant. We raised wages to attract better people. We selectively raised selling prices of the product and everyone rolled up his sleeves and struggled to survive. After about a year of what we called a "shake-down cruise," we called all 20 employees together and described what we called a new plant-wide group incentive. We explained that we would report to all employees every week the total cost of plant payroll and benefits. We would also report the total value of all products produced, and we established a goal of 30-percent people cost as compared to the value of products produced. Any time payroll costs were less than the 30-percent target, the difference would be distributed to all employees by separate check. The information would be reported every week and the bonus, if earned, would be paid at the end of every four weeks. To move from a 41-percent historical payroll cost to a 30-percent goal would not be easy. Many things had to change and everyone had to respect the possibility of reaching and beating this goal. Now, at that particular time I was well known in the foundry industry. I had been on the board of directors of the

Jackson Gainsharing

lishing and distributing to employees sales dollars, payroll dollars, and even information about the value of products produced that could not be sold because they were defective and had to be scrapped. Observers from neighboring businesses and other foundry owners resisted this style of management. They thought I was crazy to share information with workers and to ask them about their opinion on how things should be done. You can see how this is a cultural matter, not a mechanical one. The word respect comes into focus. At that time, I felt like the owner of a whaling ship. I was doing great (because of increased profits, I was able to buy three farms, a new Lincoln Town Car, and an airplane). We increased sales 1,000 percent in eight years. While I was making profits, the employees were earning substantial bonuses every month, because payroll costs stayed under 30 percent. By this time, Bahr Bros. was on the map. We were being recognized throughout the industry as a progressive, fastmoving company. And gainsharing had become a proven payfor-performance plan.

People Cost vs. Output Value

The simplest illustration is in the service industry. Most car wash companies measure the number of cars put through the line per hour or per day. Car wash companies that have switched to dollars tallied on the cash register find a more accurate picture of a day's success. People who are paid as a percent of dollars collected have more interest in selling more expensive wash and wax jobs than just low-priced washes. They also know that if the customer is not satisfied, they will have to run the car through again with no additional income. So they are more concerned with quality and customer satisfaction. The average wage-cost-per-hour has been used by some corporations. An explanation of one such case is described as follows. One company located in Chicago, part of a multi-plant operation, considers itself to be in an extremely competitive business. Its headquarters on the East Coast has continually criticized the company's average plant people cost, which was more than $18 per hour. Headquarters said they could manufacture the same products in the Southern states for $8 per hour. In response to this criticism, the human resource manager in Chicago negotiated with the union for a two-tier wage structure. Senior employees would get $18 per hour, but new hires would be paid only $8 an hour. As new people were hired, the blend of these two rates would lower the average and impress the East Coast headquarters. It worked. The more new people they added to the payroll, the lower the average wage cost. However, the resistance to add workers disappeared, and in fact, more people than necessary were added. We conducted a study of this operation and this is what we found: Â

Jackson Gainsharing

Over a two-year period, the average wage-cost-per-hour had fallen from $18 to $16. However, in looking at another measurement, the total payroll during that same period, when compared to dollars produced, had gone from 9 percent to 11 percent. Not only had too many lower-paid people been employed, but many of the new hires were less experienced and less productive than the more senior workers. What's more, animosity between the two groups developed, and this lack of teamwork and respect had a debilitating effect on productivity, quality, and teamwork. It is not what you have to pay people that is important. What is important is what people cost in relation to what they produce. Dollars are the best measurement.

Understanding People Cost People cost to sales is a much more realistic and much more reliable measure when trying to anticipate profit or loss. It can be reported accurately every week and, with some degree of accuracy, every day. What's the right number of people to have on the payroll? Some heads of multi-plant companies believe they know the right number of people for each division and it is painful if the manager has more than the stipulated number of employees. In this case, it is less painful to work people overtime than to hire too many. Some heads of multi-plant companies strongly object to paying premium time and closely monitor this factor. Division managers simply carry a few extra people on the payroll so when the need arises to satisfy customers, they do not have to work overtime.

People Cost vs. Output Value

I contend that it does not matter how many people are hired or how they are paid. What really matters is how much people cost as related to what they produce. Division managers can make better decisions for the company and the profits will improve when this factor is emphasized. There can be many benefits when management shows respect for the ability of plant managers to make decisions on whether to work overtime or hire more people. One company hired an ex-marine captain to manage a plant employing 100 people. The new manager was able to get the same output with only 80 people because of his particular style of management. My problem is, how does he know 80 is the right number? I would prefer a system that might find the right number to be 78, 75, or even 69 people. If everyone understood why we need the right number of people and "What's in it for me," the decision would be better and easier to arrive at. It is management's job to manage, yet there are many managers looking for a system that would manage their business for them. If there were such a system, we would not need managers. We would simply push some buttons on a computer and everything would happen the way it is supposed to. Managers do need help in the way of tools, however, and it is important they select the right ones. The worst tool is one that is too complex, not understood, and therefore not respected. These are programs with too many measurements and too many factors. For example, a bonus will be paid to employees based on the number of pounds produced, the number of people on the payroll, the percentage of defects and customer returns, the report on customer satisfaction, on-time delivery record, the number of accidents reported, a grade for housekeeping, and a few other things.

Jackson Gainsharing

In such a plan, it is difficult for people to identify which goal or factor to work toward in order to get a reward. Four or five goals might be met, but others may be ignored. It's tough to focus when there are too many. Some management teams have decided that more than one goal is no goal at all. What is needed is a goal that takes all things into consideration and leaves nothing out. Total people cost, as compared to total produced value, encompasses all the factors referred to in previously discussed fragmented and complicated programs. Total people cost includes: number of employees, direct and indirect hours worked, overtime paid, vacation pay, holiday or paid leave, group insurance, pension, jury duty, or other benefits. Produced value can be measured as: net sales, net sales plus or minus finished goods inventory, the produced value going to the warehouse, the net dollars collected, the value added to materials or services purchased, or some other combination of the above. I am not suggesting that all other costs other than people cost be ignored. We must manage and give attention to the costs of salaries, supplies, depreciation, rent, maintenance, sales, advertising, general and administrative expenses, etc. I am suggesting, however, that the most attention be given to the most important factor in the manufacturing or service business, and that is people cost. Once you've established a target, a goal, or standard for which you are aiming, keep in mind that you cannot meet it if you have: too many people, too much overtime, too much downtime, too many accidents, too many people absent or late, inefficient machines or people, poor housekeeping or working conditions, not enough production, too much scrap, too many customer returns, too many late deliveries, etc.

Jackson Gainsharing

doing the work? What happens if our goal is 24 percent and our people beat that goal? Do they get a reward? Do we give them a new toaster? A day off with pay, a jacket with the bank's name on it, or money? What would happen if we had a history of 26.6 percent payroll cost to the spread, established a target of 24 percent and consistently beat the target? Would we as a bank make more profit? Would we be willing to pay our people a bonus? Would we increase the communication, understanding, and respect throughout the organization? Would this culture promote productivity, quality, and teamwork? Would everyonethe customers, the stockholders, the officers, directors, and the team of employees that helped make it all happen-win? Think about the situation just described. To beat the target of a 24 percent people cost to the spread, we had to do at least 10 percent better than our history of 26.6 percent people cost. To do this, we either had to reduce people cost at the same volume or we had to increase volume with the same people cost or some combination of both. How can we lose? The answer is, we cannot! The only thing necessary is to be sure of our numbers, analyze all alternatives and possibilities, and do it. More importantly, however, is that we must establish a culture of respect and practice it through communication, understanding, recognition, and involvement. There are no standards that should be applied equally to a steel mill, a foundry, a plastic molder, a screw machine company, or bank. Each industry and each company in every industry has a separate set of circumstances. A non-ferrous foundry has a much higher material cost than an iron or steel foundry. People costs also vary by industry and also by degree of mechanization and/or automation. Every company is different in many ways and all factors must be considered before a pay-for-performance plan can be considered.

Jackson Gainsharing

When measuring people cost to net value using the valueadded approach, we automatically take into consideration: the amount of product and/or service created, the cost of materials in the product, the amount that might be defective and scrapped, the amount of rework, the amount of down or delay time, the efficiency of the people and machines, the number of employees, the hours worked (regular and premium), the negotiated benefits, the time lost by accidents, the cost of housekeeping, and many more minor factors. In a culture that promotes respect and understanding, there must be clear and understood communications that also answer the question, "What's in it for me?" Employees must understand why we need the right number of people, the right amount of direct and indirect effort. They have to understand that some overtime is good and some is bad; that overtime to satisfy output or delivery to a customer or to get a machine back into production is good overtime. Extra hours to rework poor workmanship or to do things that should have been done on regular time is bad overtime. Vacation and holiday pay are fine, but must be paid for by producing products or services during working days. Group insurance and retirement pay are earned benefits and should not be abused. It is easy to communicate the results of too much downtime or delay time to employees. Simply calculate the value produced during the hours actually spent and multiply this amount times the normal hours available. This information can be a real motivator to reduce downtime, especially when ' you point out what could have been paid if the downtime had been production time. Every accident or injury is serious to that person and to the cost of insurance to the company. We should also point out the cost of lost production and reflect this back to lost

People Cost vs. Output Value

bonus opportunity. The same is true with absences or tardiness. When an employee is late or doesn't show up, plans for the day or week are disrupted. Such behavior is not fair to the people who do show up and perform their duties. The biggest benefit of this measurement technique is the effect on total quality. There is no benefit to increasing production if scrap and rework also increase and negate any gains. It simply can't work that way. Do it right the first time so it doesn't have to be done again. Do your part so the next operator will not have problems and the product can go on through the process with the least amount of rework or delays. Above all, make sure it is right before it gets to the customer. A fast way to lose business is to supply customers with poor-quality products or service. Every person in the company contributes to product quality and delivery.

Understanding the Difference Between Gainsharing and Profit Sharing Some people associate gainsharing with profit sharing. They believe that if they write someone a check, they will not have as much money than if they had not written the check. They do not understand the difference between profit-sharing checks and gainsharing checks. When profit-sharing checks are written, the profit of the company is reduced by the amount of the check written. When gainsharing checks are written, it is because productivity has improved, and quality, teamwork, and profits have increased as a result of these improvements. Take a look at the chart following:

People Cost VS. Output Value

There are plans or programs that are lumped under the general heading of "gainsharing" that pay bonuses to people based on various factors that management hopes will improve profits but are not necessarily directly related to profits. These should be called bonus plans; not gainsharing plans. There are many companies that measure their success at the end of a month by the amount of gainsharing paid. They know from past history that the higher the gainsharing pay, the greater company profits. It just has to be that way!

Jackson Gainsharing

directors have little respect for the rest of the staff. In a meeting with some middle management people in a bank, I emphasized how important everyone was to the success of the bank-especially tellers, secretaries, loan officers, receptionists, and employees with direct contact with customers. After I gave a thorough explanation of teamwork, pay-for-performance, and gainsharing, the vice president of human resources said that their committee had a problem with these ideas. He explained that if I told the officers and directors of that bank how important the people were, it could be a cultural shock. In other words, we were wasting our time. It was not that the bank's committee had a problem with the concept of pay- forperformance, or that they did not want to calculate some kind of bonus plan. The mechanics of such an idea was not the problem. The problem was a cultural one. The respect factor necessary was missing. It is a good thing all bankers do not think this way.

Assets and people Assets allow things to be done. People make things happen. Many managers think the only way to improve productivity is to spend more money on machines. Industrial engineers and others are schooled in managing money and material things but they forget about managing people. One way to improve productivity is to talk to people and ask them for their ideas. For example, when some company officials I know bought a fancy new labor-saving machine, they couldn't decide where to put it. I suggested they pick a ridiculous spot and let the employees tell them where it should go. The people who work the machine know best where it belongs. We can't operate factories or offices today without investing in modernized, mechanized equipment, but when we

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Jackson Gainsharing

people, belonged to the right organizations, or in some cases, married the boss's daughter. This again does not mean they are not good managers, it is merely a description of how they got the job. Diplomatic managers might have to work harder to receive respect, but it can be done. Expert managers receive positions as managers because of their expertise in some particular field. They may have been the best sales manager, engineer, controller, or specialist in some aspect of the business and because of their success, were awarded the job as manager. Experts had respect in their professions and must now earn the respect as managers. Quarterback managers have the ability to organize people into a team. They allow their team players to perform their responsibilities and they coach or assist them as needed. Quarterback managers are much in demand in today's world because of their ability to organize and get the most out of their associates. Quarterback managers use a simplified score sheet that all participants can easily understand, and the score is constantly reported so everyone knows it at all times.

Management mentality Another way to assess your management style is to think of it in terms of mentality. See if you can recognize your management mentality in the categories below. The accountant mentality The manager with this type of mentality usually approaches problems with solutions based on paperwork, reports, audits, and similar methods. Such managers want to control output with production reports, costs with time reports, and quality with statistical reports. Some, if not all, of these tools may be important in doing business, but should not be depended on too much to improve productivity, qual-

Jackson Gainsharing

then that the automation and/or mechanically engineered devices, or systems work the best. People have much more respect for engineers' ideas when they are asked to participate. New machines, devices, or systems designed by engineers work much better when the operators are involved from the beginning. The more engineers show respect for others, the more respect they will receive for their ideas. The sales mentality Managers with strong sales training and experience often rely on that ability to get their job done as a manager. They work at selling or convincing others of the importance of doing the job. Salespeople are often good politicians and know how to get people to agree on how to do things and be successful at productivity, quality, and teamwork. Sales-type mentalities feel good about their ability to negotiate prices with customers, wages with unions, and salaries with staff. They tend to prefer actual costs to standard costs and are always aware of changes in the market. When new ideas or changes are suggested by engineers or others, they want to be sold on the change or idea. The sales mentality often thinks problems can be solved with more sales. The team mentality Team-type managers come from varied educational and experienced backgrounds and rely on their coaching and/or quarterback ability to direct their team. They show respect to others for their abilities in accounting, engineering, sales, personnel, purchasing, production, etc. Team-type managers allow responsible people to make decisions and sometimes to make mistakes. They offer assistance when asked and continually promote interaction between other managers of departments. This type manager likes clear, understandable accounting information and meaningful and timely manufac-

Is Your Company Right for Gainsharing?

turing information. A strong emphasis is placed on everyone having respect for other people and their ideas. The response to errors or mistakes is an offer of advice on how to do it different or better next time. The score sheet and how productivity, quality, and teamwork relates to profit is available to everyone and questions and suggestions are encouraged.

Perception of supervisors After you have taken a good hard look at your management style, examine your shop. Do your supervisors promote a climate of respect? Here are four classes of supervision as perceived by employees. You should be able to identify these supervisory types in your organization or one you have known. Every employee-whether an hourly worker or head of the department-has an opinion of his immediate supervisor. Their perception is as follows, and is crucial when thinking about fostering a climate of respect. Non-manager. This type may be okay as an individual, but not as a supervisor. Non-managers cannot manage other people. They might be great salespeople, truck drivers, or engineers, but given the position of supervising others, they fail. In fact, top management often promotes the best salesperson, mechanic, engineer, or accountant to a position of managing other people and sometimes simply loses a good technical or productive person and gains a poor manager. Employees can always identify this situation. Policeman. Some supervisors are perceived by their people as being a policeman. They were probably trained by an old-type supervisor whose job it was to police his or her department. They issue warnings or tickets for too much scrap, coming in late, or not being at their assigned work station when they should be. Many years ago, managers looked for

Jackson Gainsharing

turned and started back to the huddle, the all-pro guard Jerry Kramer started toward his quarterback and asked, "What did the coach say we should do?" Without hesitation, Bart pointed his finger at Kramer, stuck it in the middle of his chest, and, looking him square in the eye through a rising cloud of steamy breath over his face mask, said, "He told me to run a quarterback sneak and I'm coming over you." Not another word was exchanged except for Bart calling the play of a quarterback sneak over the right guard. As they lined up for the play, both teams knew that this play would make one team a conference champion and send the other home a loser. Across from Kramer was all-pro defensive lineman Jethro Pugh, and he was determined to stop any play the Packers tried to run. When the ball was snapped back to the quarterback, Kramer exploded from his stance and drove Pugh five yards back into the end zone with Bart following close behind. We all know what happened. Green Bay won, but why did they win? Was it Bart Starr, Coach Lombardi, Jerry Kramer, or was it a team of people that had much respect for each other, plus a burning desire to win? Respect and desire are important to anyone's success. The success of your company depends on your team. Is your company right for the rewards of gainsharing? Assess your managers, assess your supervisors, and ask some hard questions. Do you recognize the importance of your people? Are you willing and able to communicate respect to your people? Do your people have the desire? Are you and your managers and supervisors able to inspire desire? If you respond with respect and desire, then gainsharing can work for your company, your customers, and your employees.

Jackson Gainsharing

The final question is, will it help develop and improve a cultural environment based on respect throughout the company? Ifthose questions are all positive, it is time to announce and explain the plan to all concerned.

Â Implementing the Plan

was doubtful that the poor group was going to change and the good group was doing just fine. The employees in the middle group were leaning one way or the other and were not sure which way to go. If we could capture the attention of 80 people and show appreciation for good performance, we would have 90 people going in the right direction. Ninety out of 100 is a good ratio. This approach resulted in major improvements in productivity, quality, and teamwork. Some of the poor performers changed their attitude, some left the company, and those few remaining are not much of a problem anymore. The respect of management company-wide has improved and the company's attention is directed to all employees and not just a small group. The culture of this company has improved and so has its profits.

Discipline and equal justice Managers who want to be successful leaders must also administer discipline when necessary. A team of employees expects and respects discipline when it is administered fairly and without discrimination. We all know we should be on the job as assigned, do our share of the work, be attentive to quality, cooperate with fellow workers. When someone fails in any of these areas or violates rules of conduct or safety, some type of discipline should be used. Most violation of rules or conduct should be followed with a verbal warning and explanation, followed by a written warning, followed by a suspension from work without pay before any consideration is given to discharge. There are, of course, a few situations in which immediate discharge or discharge after a review is the proper course of action.

Implementing the Plan

and with no discrimination, it will be rare that you use F number 5. There was a case where a janitor was seriously criticized for her workmanship and the housekeeping condition of an office. The staff strongly recommended that the janitor be replaced. The manager had a frank and friendly meeting with the janitor and the problem went away. In another case, a talented young machine operator had a problem getting to work on Mondays and other days he sometimes came in late. Other people in the department were more attentive and it was not fair for this person to not carry his load of the work. It was an unfair burden to others to get the customer satisfied. The supervisor used the first three Fs to no avail. It wasn't until he was suspended from work without pay the second time before he decided to correct his problem of being at work on time. Since that time, that same person has been promoted to supervisor and is now using the five Fs system. To further explain how universal the five F's can be, I will describe another experience in how they were used. A company manufacturing highly engineered and complicated machines was having major problems in the organization. The board of directors decided that the chief engineer was the source of the problem. His attitude was disruptive to the people producing the product. He kept telling them they did not know how to do their job. He also voiced this opinion to the sales department, saying they did a poor job of selling machines. The board of directors decided to replace the chief engineer and suggested the president take care of it. The president thought it would be good experience for the executive vice president so he assigned the problem of the chief engi-

Implementing the Plan

help and understanding. People want to be part of a company. They want to participate and know what's happening. Some means of communication on a regular basis is very helpful. We suggest using facts and figures that tell the people how their pay is affected. When people understand that productivity, quality, and teamwork can directly affect their pay, they are much more interested in communications from management. Because of the availability of information in this new era, many people are gathering information that is not always necessary or important for their needs. Information is so easy to generate from computers that much of what is collected serves no useful purpose. It is important that we collect and communicate meaningful information that can be understood and used to satisfy a need. Otherwise, it is not only a waste, but it can also create mistrust and deter credibility. Use of standard cost systems are a good example. A standard cost system's ostensible purpose is to help a company determine the cost of its products. This sort of cost system is found in many manufacturing industries today. When top management is asked how much they sell their product for and why, their usual response is, "We sell it for all we think we can get based on the market created by competition." When asked why they use a complicated standard cost system, their reply is: it helps us to identify which jobs are most profitable and which are not. When asked why they do not use an actual cost system that would be much simpler and easier to understand, the answers are often times, "We try to allocate costs the way they should have occurred and look at the variances from set standards," or "I don't know; We have always had a standard cost system; That's the way

Jackson Gainsharing

the company wants it; It is used to identify materials or departments or costs that get out of line." The trouble is, supervision and department heads do not have much confidence in such reports and their accuracy. One must then ask, what good is it? Standard cost systems are costly to maintain, and often are not trusted. Keep in mind that the standards being used to compare with actuals are simply someone's opinion. Why use a standard cost system? There are two good reasons. If your business is growing, profits are increasing rapidly, and you do not want anyone to know it, a standard cost system will help cover up these facts. If your business is going downhill, losses are occurring, and you don't want anyone to know, a standard cost system will confuse the facts. These opinions are based on interviewing hundreds of operations people who make decisions every hour of every day based on the information given them. I believe actual cost systems serve a better purpose and offer more useful information than standard costs, though many readers may disagree. There is a lot of information that would be helpful to operating people and greatly improve their ability to be successful. The collection of and the distribution of this information can be crucial to the success of any business in this competitive world. It is very important that people receiving this information want it, understand it, and have confidence in it. Information, like people and procedures, must have the respect of the users.

Benefits of Gainsharing

The value of what people do and the expense of what people cost varies among manufacturing and service industries. Consider the similarity between a firm's monthly or quarterly financial report and a physical given by an individual's physician. The accounting reports are an indicator of the overall health of the company and may give signs of financial problems looming on the horizon. Likewise, blood pressure and pulse tests are used as an early-warning sign of health problems that could develop. If blood pressure and pulse! tests are normal, they generally indicate good health. If not, there may be cause for concern. For a business firm, the weekly and/or daily measurement between "what people do" and "what people cost" can accomplish the same goal. If this relationship is satisfactory, other variables are generally satisfactory as well and profits will result. Based upon information derived through the accounting process, measurement parameters can be established that will tell us if we are "normal," in great shape, or headed for trouble. Many manufacturing and service industries today are not only using this type of information for managers and owners, but also sharing this information with all employees. The concept is based on a form of gainsharing that encourages employees to produce at maximum capacity while using the fewest resources, thus resulting in a high level of production efficiency and ultimately, sustained profits. Employees quickly realize how important it is to work together effectively and as a team, so their cost will be less than the goal and they can be rewarded. As this happens, they use fewer materials, supplies, utilities and equipment, so those reductions in cost go directly to the bottom-line profit. Gainsharing is used to establish a team goal that measures employee output against employee costs. Everyone in