Academic journal article Journal of Business and Entrepreneurship

Improving the Effectiveness of Gainsharing: The Role of Target Costing

Academic journal article Journal of Business and Entrepreneurship

Improving the Effectiveness of Gainsharing: The Role of Target Costing

Article excerpt


Declining productivity increases have prompted companies to involve employees to reverse the trend. Gainsharing and profit sharing are reviewed and critically compared, and the former is advocated as an employee involvement program that can be of benefit to small businesses. Providing an international perspective, the Japanese unique cost management system of target costing is analyzed and argued to be crucial for share plan success. This, and Japan's quality philosophy, stand in contrast to U. S. systems and may well explain the mixed success of U.S. profit and gainsharing plans. Little is known about the key process issues that are involved in the installation and maintenance of successful gainsharing plans. It is argued that understanding and integration of target costing into gainsharing plans will enhance their long-term success.


Interest in share arrangements has resurged in the 1980s and 1990s, due to fierce pressure to contain costs and to pay workers in accordance with the value they add to their product. Many industries which were previously quasi-protected are now subjected to a deregulated, internationally competitive environment. Companies have been looking for ways to increase productivity, reduce costs and improve quality (Miller & Schuster, 1987).

Group incentive plans may be helpful in improving these areas. They include gainsharing and profit sharing, which generally reward employees for cost reduction and productivity improvement, respectively. Gainsharing is the fastest growing nontraditional pay-forperformance reward system, with 26 percent of U. S. companies utilizing some gainsharing programs (Perry, 1988). Approximately 73 percent of existing group incentive plans have been installed since 1980 (OTDell, 1987). They basically tie performance to pay; although the two plans are very similar in theory, some differences exist.

Modern market economies make the ideal behind gainsharing and profit sharing difficult to realize. Placing value on individual efforts is difficult, as wage structures tend to be rigid and opportunities for promotion are limited. Compensation becomes increasingly detached from worker productivity. The work ethic suffers and needs to be restrengthened; better labormanagement cooperation is needed if U.S. industry is to compete effectively in world markets. Unfortunately, there is now little direct meaningful reward for American workers to creatively think about ways to become more productive. Innovations suffer if there are insufficient economic payoffs for increased performance (Berniker, 1993).

Organizational scientists have long urged business to improve the motivational potential of work. Gainsharing has been argued to enhance productivity and to be a key component in all high-involvement management systems (Lawler, 1986).

However, gainsharing plans have been argued to be deficient because the implementation phase relies heavily on worker's participation, either in the form of suggestions made for improving the work process (via Scanlon or Rucker plans), or in the form of increased effort (via ImProShare). Unfortunately, these plans become subject to free-riding by noncontributing workers who engender questions of fairness and distributive justice (Cooper, Dyck, & Frohlick, 1992). Gainsharing can destabilize the company's social order, may heighten role conflicts for employees, and entail redistribution of power (Thorncroft, 1991). A major drawback of traditional gainsharing programs is their susceptibility to the plateau effect (Ost, 1990). Not surprisingly, it is likely that half of all gainsharing plans are eventually abandoned (White, 1979). Nevertheless, gainsharing and organizational development complement each other; therefore, organizations will probably continue to try to improve performance through their use (Doherty, Nord, & McAdams, 1989).

However, 1991 and 1992 put a squeeze on profits. …

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