Creating an incentive bonus tied to the success of the company can be a powerful way to improve staff loyalty and performance.

But which model is best for your company?

The two most commonly used incentive programs today are Profit Sharing and Gainsharing.

Profit Sharing

  • The employer can choose when and how much to contribute to a profit sharing plan.
  • Gives employers flexibility designing the key features.
  • Money contributed in the plan may grow through investments.

Profit Sharing is an arrangement between an employer and an employee in which the employer shares part of its profits with the employee.

Profit sharing generally works best when company earnings are relatively stable (or steadily increasing).

As payment under a profit sharing plan, employees can be given stocks or bonds, or cash (cash profit sharing plan).  If the profit-sharing dollars are part of an employee’s retirement plan (deferred profit sharing plan), it will be received at retirement rather than now, and depending on the retirement plan it may be tax-deductible. There can be eligibility requirements for profit-sharing plans.  For example, the employee may be required to work for the company for a certain period of time before he or she can partake in profit-sharing.

Gainsharing

  • Staff only share in the extra “profit” generated based on “productivity” improvements, or gains.
  • Gainsharing provides a structure for input & collaboration, so as to incentivise employee ideas
  • Productivity gain will offset such cost where necessary.

Companies use Gainsharing to both measure performance and reward employees when it improves. Companies use a pre-determined calculation (formula) to share the savings with all employees.

It could also be called “savings sharing.” In other words, a company shares with employees the savings from improved performance.

Companies with successful Gainsharing plans view Gainsharing as much more than a bonus or incentive system. Instead, they see the system as an important part of their business strategy and a method to drive organisation change. When properly designed and implemented, Gainsharing gradually grows into a company’s core communications and compensation program.