As productivity increased, gains have been shared with employees through general wage and salary increases and through wage incentives, as we have seen in two preceding chapters. But how to share these gains in a way that will develop an enthusiastic and willing work force is a persistent problem for management. Should all the gains go to employees, or only some proportion? How can we measure the gains in productivity? What approaches and what methods of gain sharing will encourage employees toward still higher productivity? These are among the perplexing questions, which continue to face management and unions.
Employee interest in higher productivity does not develop without some stimulation by management, either directly or through the creation of an atmosphere in which employees feel free to contribute their best efforts to the job. Wage-incentive systems have also been devised to stimulate higher output. Industrial engineering techniques accomplish little without a management philosophy that rewards employee ideas and efforts toward higher productivity and is willing to share economic gains as well as job satisfactions with all employees who contribute to achievement of the common objectives of the organization. We shall consider various ways of stimulating these employee ideas and of sharing the gains that result from higher productivity. Profit sharing, suggestion systems, and the Scanlon Plan for labour-management cooperation on production problems will be discussed in some detail.
The most commonly used measurement of labour productivity is output per man- hour” worked by production workers in manufacturing. This measure of “labour productivity“ does not measure the efficiency of labour in the sense of increased effort alone, and indeed no overall measure of this is possible. What it does measure is the increase in output resulting from all factors that contribute by reducing labour input per unit of output-better and more efficient machinery, better work flow, reduced waste, improved processes, more skilled workers, and increased efficiency and effort by workers. There is general agreement among economists that “real earnings” i.e. money earnings adjusted to cost of living should increase over a long period in about the same percentage, term as the increase in “labour productivity”. However, year-to-year fluctuations in the productivity index cannot possibly be matched by wage and salary changes; the correspondence should be over a longer period. In competitive manufacturing industries, product prices have fallen or product quality has risen.
If price competition were more widespread throughout the economy, the gains from higher productivity would be shared among employees, consumers, and investors (who gain through higher dividends or enhanced common-stock values if some earnings are reinvested in the business).
By and large, in practice, productivity gains seem to have been shared more with employees and investors than with consumers. Fall in product and service prices have not been nearly as conspicuous as have rising real wages and increased stock values.
One important company, the General Motors Corporation, USA and one of the largest unions, the United Automobile Workers, signed a notable agreement in 1948 which included a method of sharing the gains from higher productivity in line with principles that we have discussed in the preceding section. This agreement contained two innovations: a cost-of-living escalator clause to protect real wages and an “annual improvement factor” to increase real wages by a certain amount each year. At first this amount was 3 cents an hour, later increased to 4 cents in 1950, 5 cents in 1953, and 2.5 percent of base pay (with a minimum of 6 cents) in the 1955 agreement (continued in the 1958 and 1961 agreements). This amount was about equal in percentage terms to the long- term increase in output per production man-hour worked in manufacturing (2.6 percent), although the productivity increase in General Motors and in the automobile industry was probably greater than the national average.
The heart of the plan was method of “reasonable sharing of productivity and labour cost savings” coupled with stability of employment or income to assure “progress for the Company, the employees, and the public interest”. The first of the Committee’s underlying facts and assumptions” is especially worth quoting.
Progress is achieved by an industrial corporation and its employees as the result of many factors including, but not limited to, capital investment, advances in technology, public investment in community services and facilities, a skilled, intelligent and alert work force, competent and skilled management, mature labour relations, and free collective bargaining.
As a basis for sharing gains in increased productivity, the Plan noted that “in the case of labour performance, material and supply usage, yield improvement, and utilization of technological improvements, product costs are directly affected by the cooperation and performance of the employees, as well as by management. There is a clear-cut opportunity for improvement in these areas. The gains achieved, are, furthermore, measurable”.
These gains are computed monthly, by a rather complicated formula based on a ratio of employment costs to production value of 32.5 percent, with certain deductions from the reserve for increased benefits of other types, for replacement capital costs, and to even out fluctuations over 12 months. Adjustments are also made for those employees still on wage incentives. The monthly distribution, averaged 18 percent of standard wage.
More widespread than any of the above approaches, however, are three other methods of sharing the increased prosperity of the enterprise with employees. These are (1) profit sharing, (2) suggestion plans, and(3) labour-management cooperation and cost-savings plans particularly the one known as the “Scanlon Plan”. Like the labour-management agreements discussed above, they are designed also to increase employee interest in improving productivity, as well as to provide a means of sharing the gains.
Profit sharing initially appears to be an ideal way to share some of the gains in productivity within a firm. In many cases, however the incentive aspect of profit sharing is secondary. Although plans differ widely in specific details, there are basically three types: profits are shared (1) in cash, (2) in deferred payments, or (3) in a combination of cash and deferred payments. Under the cash plan, payments are usually at specified intervals. Under the deferred-payment plan, the money is placed in a trust fund to be disbursed usually when the employee is disabled, laid off, or retired. In the last instance, a combination of both, the employee’s share is divided (in a prescribed ratio), a part of it is paid in cash, and the remainder is placed in his account in a trust fund.
Suggestion systems can be well planned and successfully operated. It is not unusual to find the percentage of accepted suggestions between 25 and 35 percent and about one out of every three employees submitting suggestions. Suggestion systems that have achieved this degree of success usually have met the following standards:
A joint suggestion consisting of labour and management representatives offers management a valuable opportunity to share certain types of information with employees management and labour. If management stops short of encouraging participation of employees in the process of deciding upon suggestions, the suggestion system is likely to retain an air of paternalism – a means of “passing out a few extra bucks to the boys in the shop”.
Both the management and the union that embark upon a plan of this sort must be prepared to change their traditional attitudes towards each other. This comes slowly, for at first management may be interest only in a procedure for getting more suggestions from the worker force, while the union may see “cooperation as a way of preserving jobs or getting a voice in matters from which they are usually excluded.
As experience under a plan continues, however, a new spirit develops. This has been described as genuine participation, since union representatives on the joint committees now feel free to make suggestions, to criticize, and to ask questions about problems that formerly were considered to be “none of their business”. These problems are seen as joint problems for the workers, the union, and the management, affecting the welfare of all of them. Workers see a clearer relation between their job and the total product. Management, reluctant at first to reveal “confidential” information and sensitive to criticism, gradually comes to see the value in sharing all types of information with union representatives on joint committees and the benefit from suggestions that reveal managerial weaknesses.
Experience with successful cooperation plans seems to indicate that the following steps are usually necessary.