Performance Improvement through Partnership and Commitment

Home > Gainsharing Background < Gainsharing Versus Profit Sharing
Gainsharing Background
What is Gainsharing?
Gainsharing vs. Profit Sharing
Gainsharing Defined
Gainsharing Philosophy
Gainsharing Q & A

The Difference Between Gainsharing & Profit Sharing

Many people who confuse Profit Sharing and Gainsharing 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.


Profit Sharing

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

The Differences in the Performance Pie

The Profit Sharing Pie

  • Based on year end profit
  • Paid annually
  • No employee involvement

The Gainsharing Pie

  • Based on operational performance
  • Paid more frequently than annually
  • Employee involvement critical

Masternak & Associates
Liberty Tree Plaza
1114 North Court, Suite 195
Medina, Ohio 44256
Phone: (330) 725-8970

  If you would like to learn more about Gainsharing or our consulting services, please contact us.