HR Magazine, April 2000: Goal Sharing Score

Vol. 45, No. 4

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Tie bonuses to how well employees meet work-unit goals.

When employees have little or no ability to directly affect costs or profits it’s difficult for them to understand how their personal efforts link to company performance.

That’s why employers as diverse as a retail giant and a pet food firm say goalsharing programs focus employees on what they can control, such as setting and meeting productivity, quality and training goals. Linking goalsharing payouts to meeting those goals takes time and commitment, but it pays off for employers both in dollars and in employee involvement, according to goalsharing experts and employers.

Don’t confuse goalsharing with its better-known cousin, gainsharing, experts caution. Gainsharing rewards employees based on a company’s financial performance, such as increased profits resulting from belt-tightening measures taken by employees. Goalsharing has a broader approach. Experts say there is no hard-and-fast definition of the term, but it generally refers to group incentive programs that reward employees for meeting specific goals that are not necessarily related to the bottom line. These goals often reflect job performance, quality and service within a unit of the company.

Goalsharing plans may have a gainsharing component, but a goalsharing plan pays out rewards for non-financial achievements as well, says Harold “Rug” Altmansberger, a former compensation executive at Corning Inc. in Corning. N.Y.

Goalsharing is a natural follow-on to gainsharing because “eventually you squeeze all the cost out of the business” and move on to improving the business in other ways that goalsharing can reward, according to Jay Schuster, a partner with Los Angeles-based pay consultants Schuster-Zingheim & Associates and co-author, with Patricia Zingheim, of Pay People Right! (Jossey-Bass Inc., 2000).

Employees Influence Goals

Proponents of goalsharing say that it can help employees forge a link between their day-to-day work and the employer’s success.

In the case of one form of gainsharing, profit-sharing, very few employees feel they can make a real difference in their employer’s bottom line, Altmansberger says. Profits for an entire company can seem distanced from anything one employee can achieve. But goalsharing allows employees in a specific unit of a company to work toward and achieve a set of goals they have helped set and can influence directly. The key to employee buy-in is maintaining an appropriate “line of sight” for the employee. Altmansberger, now a consultant affiliated with the Overland Resource Group, of Overland Park, Kan., says “line of sight” refers to employees’ ability to connect actions they have taken with a business result.

For example, employees of the paper products company Weyerhaueser, based in Federal Way, Wash., have no control over some of the financial aspects of a plant’s success because they cannot control the fluctuating price of raw materials or the cyclical nature of the business, according to Zingheim. But the employees can make a visible difference in other, non-financial aspects of the manufacturing process, such as quality, safety and efficiency. Weyerhaueser sets goals in those areas, she says.

Keep Goals Few and Focused

To pursue goalsharing, an employer usually forms a committee that includes a cross-section of employees affected by the plan. The committee may include labor representatives. The committee identifies three to five goals for company units or subsets of the companywide workforce.

Why just three to five goals? Plans with too many goals do not work because “you lose people’s focus,” Zingheim says. Schuster adds that employers should ensure that the goals are realistic, so the possibility of reward is not too remote. But Schuster and other experts caution against setting goals that are too easy to achieve. If the money comes too easily, employees can come to view the goalsharing bonus as an entitlement, rather than something that must be earned.

Defining the work unit within which the goals and, later, the goalsharing bonuses apply also is important. Altmansberger, who has helped set up dozens of goalsharing programs, says goalsharing could be appropriate for a wide range of companies of varied sizes and business lines. But regardless of company size or type, defining what constitutes a goalsharing “unit” in a company can make or break a plan. If the unit is too large, the employee feels disconnected from the results. If the unit is too small, the result can be inappropriate competition.

“You don’t want teams competing against each other,” such as one shift trying to do better than another, Altmansberger warns. Competition negates the point of goalsharing, which is to encourage employee cooperation. Competition can shift team focus from the big picture to piecework as employees try to get ahead of their counterparts, he notes.

Another key to success is to make achievement of goals measurable in ways employees can understand, such as by assigning points for achieving levels of customer satisfaction or efficiency, experts say. “Keeping a scorecard in front of the employee” helps focus efforts, Altmansberger says.

Zingheim says employers also must involve unit employees early in the goal-setting process so that they understand, accept and commit to the goals. If employees end up asking, “Why are we picking these measures?” the plan may not work, Zingheim says.

The goalsharing program can assign greater weight to some goals than to others, to emphasize specific business priorities. For example, at Corning, some units base a larger percentage of the bonus payout on achievement of goals relating to financial performance, customer responsiveness and quality, Altmansberger says. These goals are weighted more heavily than goals related to process effectiveness and business effectiveness.

Many companies with goalsharing plans re-evaluate goals at least annually and then modify the goals, building in the concept of continuous improvement, says Altmansberger. “Every year you raise the bar.”

Paying Out

When employees accomplish the goals set out in the plan, they earn a bonus. While some goalsharing plans pay bonuses periodically during a year, many firms pay goalsharing bonuses annually. Corning pays at the end of the year with checks that are separate from paychecks. Paying the bonus separately maximizes the impression it makes on employees, Altmansberger says.

Typically, the total goalsharing bonus represents a percentage of the employee’s base salary, including overtime. Altmansberger says that at one Corning unit, for example, the top payment for achievement of all goals when he worked there was 6 percent. So, an employee earning $25,000 a year received an annual goalsharing bonus of $1,500.

Other employers occasionally use a “flat-dollar” approach. Margaret Coil, a partner with the Northbrook, Ill.-based consulting firm Center for Workforce Effectiveness, said employers use a flat-dollar system, such as making a $100 bonus available to all eligible employees, when they want to send the message to the workforce that “We’re all in this together.” But Coil noted that employers should be aware of potential complications caused by requirements of the Fair Labor Standards Act, which can force employers to recalculate employee pay rates to include the bonus.

Measurable Results

Sears, Roebuck and Co., headquartered in Hoffman Estates, Ill., has used goalsharing at more than a dozen stores across the country. The goalsharing unit in most cases is a specific store. The goals are set by “a diagonal slice” of personnel at the store, including management, sales associates and hourly workers, says Jane Floyd, Sears’ director of strategic initiatives. An employee education program often accompanies the goal-setting process to ensure the workforce understands the business reasons for the goalsharing program.

Goals can vary widely depending on the type of business, but they must relate to business priorities and be measurable. At Sears, individual stores set their own goals, Floyd says, but there are some common threads shared by most participating stores. Typically, some goals relate to customer service and satisfaction because these factors clearly lead to repeat business. To keep employees focused on measurable results, customer service scores compiled from on-site surveys are available to employees weekly, Floyd says.

Retail businesses like Sears and service-oriented businesses like hotels often focus on goals related to customer satisfaction, while some firms like information technology businesses may build goals around employee completion of specific training. Manufacturing businesses tend to include goals that focus on product quality and efficiency.

A Midwestern pet food manufacturer uses a product-based, two-tiered goalsharing system for its canning plants, according to an HR manager who asked that the company not be identified. One set of goals focuses on the quality of the pet food and the quality of operations. Plant performance is assessed for sanitation, which is independently audited; workplace safety, which is measured against the number of recorded injuries as defined by the Occupational Safety and Health Administration; and product measurements such as moisture and temperature. The plants also are assessed on a second set of measures directly related to efficiency and financial performance, such as cost per pound of the product, the HR manager says.

How Do Employers Benefit?

The effects of goalsharing on the employer often are harder to measure than the effects of gainsharing because some of the results are less tangible. But companies with successful plans say the benefits are clear. Sears’ Floyd cites data she has gathered comparing the performance of goalsharing stores to a set of stores without a similar program. For almost two years, turnover rates of sales associates at goalsharing stores are 10 percent lower than turnover rates at the stores without goalsharing, Floyd says. The data indicate similar differences—in the goalsharing stores’ favor—in areas relating to customer service and sales performance.

Although goalsharing focuses on actions not immediately related to the bottom line, Corning has found a way to attach a dollar value to its goalsharing program, which Altmansberger says has been a financial success. The company devised a “payback ratio” to measure goalsharing’s success. The ratio measures the change in net profit over the past year divided by the total annual bonus payout. In 1993, Corning calculated it received $3.60 for each goalsharing bonus dollar it paid; in 1998, the payback rose to $7.87 per goalsharing dollar.

Goalsharing is not for every company. “Changing pay is a dicey process,” Schuster says. In some cases where goalsharing flops, “the company has not really built a business case for the plan,” and, in other cases, management “didn’t have the grit” to stick it out. Altmansberger says his experience with various plans has been that goalsharing takes one to two years to settle in and be accepted.

“People are looking for a quick fix” to motivate employees, but goalsharing is a long-term process, Sears’ Floyd says. Floyd notes that some Sears stores evaluated the goalsharing program but ultimately chose not to use it, in some cases because the program lacked support of middle managers or a significant percentage of the sales workforce. Goalsharing plans do not work if employees are participating just because the boss has told them to do so, she says.

Floyd has found that some of the benefits of goalsharing are not measurable but are compelling nonetheless. “You see ownership, people growing in ways they never would,” if goalsharing were not in place, Floyd says. “It’s been difficult, but it’s been worth it.”

Charlotte Garvey is a freelance writer, based in the Washington, D.C., area, who reports on business and environmental issues.