Scanlon plan

In business, the Scanlon plan is an employee-incentive plan in which the workforce shares any cost savings resulting from increased productivity. The concept was first developed during the Great Depression (1929–1939) to save struggling businesses during the economic hard times. The plan evolved into a means of encouraging employee involvement and fostering cooperation with management. Under the Scanlon plan, employees meet in committees to share their ideas and expertise on improving productivity. They communicate these ideas to management, which implements the employees' suggestions. Any money saved in the process is redistributed among the entire workforce. Corporate identity, participation, equity, and competence are all important principles in the Scanlon plan.

Background

The Scanlon plan was developed in 1935 by Joseph N. Scanlon, a prizefighter, former steelworker, and union official. Scanlon was president of the union at his steel mill and saw how the economic conditions of the Great Depression had taken a toll on the American workforce. Millions of people were unemployed, and companies nationwide were fighting to survive. At a time when labor and management were often adversaries, Scanlon tried to find a balance between the workers' desire for higher wages and management's goal of keeping the mill financially stable. He proposed a system where both sides formed committees to discuss problems at the mill and offer solutions. The committees opened lines of communication between labor and management to find ways to reduce costs and increase productivity. If the suggestions yielded cost savings, the extra money was shared among the company and the workforce. Scanlon's plan was a success, and he was soon asked to advise other struggling companies on his methods. Scanlon became a sought-after business advisor and went on to lecture at the Massachusetts Institute of Technology (MIT).

The Scanlon plan is an example of a profit-sharing method called gainsharing. The Scanlon plan is the most popular type of gainsharing. Other traditional gainsharing methods include the Rucker plan and Improshare. The Rucker plan is similar to the Scanlon method, except that it factors in the cost of labor before paying out employee bonuses. The savings are determined by taking the total sales figures and subtracting the cost of raw materials, supplies, and services. Improshare savings are based solely on the amount of time needed to reach certain production goals. It is not affected by factors such as sales or labor costs. After a production baseline is set, any reduction in the number of hours needed to produce the same output is rewarded with a bonus.

Overview

Unlike many standard profit-sharing plans, the Scanlon plan spreads the cost-saving bonus across the entire workforce, rather than to just the department or group that made the original suggestion. The bonus is usually paid monthly or quarterly and is proportional to an employee's base pay. Productivity is determined by the ratio of payroll costs to the net sales of the business. An evaluation is first performed to set baseline figures to determine this ratio. If the monthly labor costs compared to net sales are less than the base ratio, the surplus money is put into a pool. Some funds are saved for months that run at a deficit, while another percentage is reserved for year-end bonuses. Typically, employees share 75 percent of the total savings.

For example, if a company's baseline payroll costs were $400,000 and its net sales were $800,000, its payroll-to-sales ratio would be 50 percent. If the company implemented cost-saving suggestions that resulted in monthly net sales of $750,000 and payroll costs of $350,000, then the ratio would be lower than 50 percent, or $375,000. The $25,000 difference would be placed in a pool, and 25 percent would be reserved for administrative purposes and company expenditures. The remaining 75 percent—or $18,750—would be divided up between the employees, with each employee receiving a bonus based on a percentage of their wages.

One of the signature features of the Scanlon plan is the formation of employee committees to develop and maintain a level of cooperation between management and the workforce. Production-level committees are usually made up of a department supervisor and several selected workers. The members of these committees interact with employees, listening to and recording their suggestions to improve the company. The committees discuss all employee proposals and decide whether to accept or reject the ideas. If a suggestion is rejected, the committee must offer a written statement explaining the decision.

Any suggestions not unanimously rejected by the production-level committees are then sent to a plant-wide screening committee. The plant-wide committee also hears matters concerning interdepartmental changes. The committee discusses the proposals and researches their effect on the company. When the decision is made to incorporate an idea, the plant-wide committee delegates the task to the specific department within the company or hires an outside consultant for the job. Once changes have been made, the production-level committees are responsible for implementing those changes and reporting their effectiveness to a plant-wide committee.

While the Scanlon plan can help increase employee morale and improve communication within a company, implementing the method is a time-consuming process. Establishing payroll-to-sales baselines, researching suggestions, and organizing the bonus system are complicated endeavors that can take up to a year. It also requires a business to be open with its financial data, something it may be reluctant to do because of privacy concerns. The plan is also only effective if it is run efficiently and is catered to businesses with low employee turnover. Among the businesses that have implemented a Scanlon plan at some point in their history are the retail chain Sears, the timber company Weyerhaeuser, and the motorcycle company Harley-Davidson.

In the twenty-first century, the Scanlon plan has adapted to the evolving nature of business. It is often combined with other management approaches such as lean systems, Six Sigma, and quality management. Although traditionally used in manufacturing, the Scanlon plan is also used in service industries, retail, and financial services. Innovation and the evolving use of technology for performance tracking have also modified the use of the Scanlon plan. 

Bibliography

Blinder, Alan S., editor. Paying for Productivity: A Look at the Evidence. The Brookings Institution, 1990.

Frost, Carl F., et al. The Scanlon Plan for Organization Development: Identity, Participation, and Equity. Michigan State University Press, 1996.

"Gainsharing Links Performance Management Processes." US Office of Personnel Management, www.opm.gov/policy-data-oversight/performance-management/reference-materials/historical/gainsharing-links-performance-management-processes/. Accessed 14 Nov. 2024.

Hanson, Gregory. "What Is the Scanlon Plan?" SmartCapitalMind, 16 May 2024, www.smartcapitalmind.com/what-is-the-scanlon-plan.htm. Accessed 14 Nov. 2024.

“Impact of Scanlon Bonus Plan on Retail Store Performance.” E-reward, 17 Jan. 2003, www.e-reward.co.uk/news/impact-of-scanlon-bonus-plan-on-retail-store-performance. Accessed 14 Nov. 2024.

Kruse, Douglas L., Richard B. Freeman, and Joseph R. Blasi, editors. Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-Based Stock Options. U of Chicago P, 2010.

Raschi, Claudine. “5 Examples of Group Incentive Programs And Their Benefits.” Level 6 Incentives, 7 July 2023, www.level6.com/examples-group-incentive-programs. Accessed 14 Nov. 2024.