The Difference Between Gain-sharing & Profit Sharing

Many people who confuse Profit Sharing and Gain- sharing view them as being one in the
same. Employees have an opportunity to earn a bonus under both approaches, but that is where
the similarity ends. There are always exceptions, but the following provides a general outline of
the major differences.
Gain-sharing Profit Sharing
Purpose To drive performance of an To share the financial success of the
organization by promoting total organization and encourage
awareness, alignment, teamwork, employee identity with company
communication and involvement. success.
Application The plan commonly applies to a The plan typically applies
single facility, site, or stand-alone organization-wide; companies with
organization. multiple sites typically measure
organization-wide profitability rather
than the performance of a single site.
Measurement Payout is based on operational Payout is based on a broad financial
measures (productivity, quality, measure of the organization’s
spending, service), measures that profitability.
improve the “line of site” in terms of
what employees do and how they are
compensated.
Funding Gains and resulting payouts are self- Payouts are funded through company
funded based on savings generated profits.
by improved performance.
Payment Target Payouts are made only when Payouts are typically made when
performance has improved over a there are profits; performance
historical standard or target. doesn’t necessary have to show an
improvement.
Employee Typically all employees at a site are Some employee groups may be
Eligibility eligible for plan payments. excluded, such as hourly or union
employees.
Payout Payout is often monthly or quarterly. Payout is typically annual.
Frequency Many plans have a year-end reserve
fund to account for deficit periods.
Form of Payment is cash rather than deferred Historically profit plans were
Payment compensation. Many organizations primarily deferred compensation
pay via separate check to increase plans; organization used profit
visibility. sharing as a pension plan. Today we
see many more cash plans.
Method of Typically employees receive the The bonus may be a larger % of
Distribution same % payout or cents per hour compensation for higher-level
 bonus.
Plan Design & Employees often are involved with
Development the design and implementation
process.
Communication A supporting employee involvement
and communication system is an
integral element of Gainsharing and
helps drive improvement initiatives.
Pay for Gains are generated only by Profit sharing often is viewed as a
Performance improved performance over a entitlement or employee benefit.
Plan versus predetermined base level of
Entitlement performance. Therefore, Gainsharing
is viewed as a pay-for-performance
initiative.
Impact on Gainsharing reinforces behaviors that
Behaviors promote improved performance.
Used as a tool to drive cultural and
organization change.
Impact on Heightens the level of employee
Attitudes awareness, helps develop the feeling
of self worth, builds a senses of
ownership and identity to the
organization.
employees. The % bonus may be less
for lower level employees.
There is no employee involvement in
the design process.
Since there is little linkage between
“what employees do” and the
“bonus,” there is an absence of
accompanying employee
involvement initiatives.
Little impact on behaviors since
employees have difficulty linking
“what they do” and their “bonus.”
Many variables outside of the typical
employee’s control determine
profitability and the bonus amount.
Influences the sense of employee
identity to the organization,
particularly for smaller
organizations.