11/9/1997
The Washington Post
By David Osborne

In the late 1990s , the 304 county employees who clean up greater Seattle’s wastewater scrimped and saved every dime they could. Some cut back on the use of chemicals in the process of “decaking” the waste. Machinists made spare parts rather than purchase new ones. A facilities team recycled lumber.

“We have people who wash their own gloves because they don’t want to spend the money on new gloves,” says John Kruse, a senior operator in one treatment facility.

At year’s end, the wastewater division returned more than $513,000 to King County. It was the fourth year in a row it had given money back, without reducing service levels or effluent quality. Total savings so far: $2.4 million.

If this sounds like unusual behavior for a government organization, it is. Until a few years ago, the division acted like most public agencies: It spent every dollar in its budget. If it didn’t, managers feared, they would get less the following year.

What changed? Management agreed to let employees take home half the savings they generated for the department. It’s called “gainsharing,” and like profit-sharing in the private sector, it has an enormous impact on employees’ behavior.

Before they could pocket a share of the savings, employees had no reason to improve their efficiency. Performance had no impact on pay. “We were `command stupid,’ ” says Kruse. “We did what we were told, no more, no less. Our initiative was not valued.”

But several years ago, management and labor began to focus on performance. Like private firms, they wanted to boost quality and reduce costs. First they cooperated to give employees better training and more authority to make improvements. Then, in 1993, they adopted gainsharing.

Attitude Change

“We wanted a way to compensate workers for continuously improving things,” says Kruse, then president of Service Employees International Union Local 6. There was no guarantee it would pay off, but the union agreed to substitute gainsharing for an automatic 50-cents-an-hour pay increase. One mechanic, skeptical that he’d ever see a nickel, sold the right to his first gainsharing check to a co-worker for $50.

But once financial incentives were introduced, workers had no trouble rooting out waste. “There was a lot of fat in the budget to cut,” says Kruse. “So the first check” — for $732 apiece — “was easy to achieve.” Once employees saw those checks, “everyone started talking about how to save money here and there.”

Bill Burwell, a division operations manager, saw a rapid change in employees’ attitudes. Suddenly, he says, they were thinking, “It’s my money out there. How can I save it?”

Last March, when the fourth-year gainsharing checks went out, the average check for yearlong, full-time employees was $1,061. (Shares of new and retiring employees are pro-rated by how many hours they worked.) Over four years, workers have pocketed an average of $4,100 apiece — more than $1.2 million in all.

That’s about 9 cents per hour better, according to Burwell, than the 50-cents-an-hour raise the union left at the bargaining table. And employees gained in other ways, says Kruse. “The people here are very proud of the work they do. We can point to what we did to earn the extra money.”

The Practice Spreads

King County is not alone, according to a U.S. Department of Labor task force on labor-management cooperation in the public sector.

In Indianapolis, garbage collectors saved more than $2.1 million in 1995, taking home gainsharing checks of $1,750 each. As word spread, other union locals hustled to negotiate similar deals. Last year the workers who maintain the city’s vehicle fleet split $75,659, 25 percent of what they saved. They took home checks averaging $810.

Now workers “are looking to save every dime,” says Steve Fantauzzo, the union leader who helped set up the gainsharing agreements. “They figure a piece of the pie is going into their pocket.”

In Portland, Maine, public works department employees get $100 each if they reduce a construction project’s cost by 10 percent, $250 for a 25 percent cut.

In Michigan, the state has used gainsharing to reduce the cost of employee health care benefits. It calculated the average cost of health benefits in the preceding seven years, then offered to give employees half of the savings if they drove costs below that average.

In the last fiscal year the state saved about $40 million. Half of it went to 36,000 employees, whose checks averaged $555. “By working with employee groups, we cut costs and increased wages,” says Mark Murray, the state budget director.

Gainsharing Guidelines

Gainsharing is a team sport; since everyone shares in the gains, it promotes employee collaboration. It also uses an objective measurement of performance — dollars and cents saved — so it is much less controversial with employees than incentives based on subjective performance appraisals made by their managers.

Gainsharing is also flexible: It can be tailored to fit most public organizations. But it can be done wrong. Experience suggests a few simple guidelines:

• Specify the service levels and quality that must be achieved even as costs are being cut. This prevents corner-cutting to boost financial gains. King County’s wastewater workers had to meet the same requirements for effluents that existed before gainsharing, says Kruse.
• Guarantee that employees will not lose their jobs because they improve productivity. When organizations make their work processes more efficient, they usually need fewer workers. But employees won’t make changes that will cost them their jobs. So it’s best to adopt a no-layoff policy and use natural attrition to downsize, or move employees into other government jobs when theirs become obsolete. Neither King County nor Indianapolis put its policy in writing, but both adopted a no-layoff approach.
• Be flexible about which costs are targeted for gains. Gainsharing should apply only to costs that are under the employees’ control. In King County, for instance, a supplier’s cut in the cost of chemicals for wastewater treatment did not count as savings, since it was not due to employee efforts. When a problem on a construction site that was not caused by employees boosted costs, the increase was not counted against the employees.
• Once employees embrace financial incentives, look for ways to reward more than efficiency. Kruse says his colleagues are beginning to worry that they’ll run out of new, big cost reductions. “In some things, you get as efficient as you can,” he says.

That may look like a problem, but it’s actually an opportunity. Once employees buy into the rewards-for-performance concept, why limit them to efficiency? Indianapolis Mayor Stephen Goldsmith is exploring ways to create separate performance bonuses, so workers gain not only by cutting costs but also by improving quality and effectiveness.

After all, the whole point is to motivate every employee to commit to improving performance. Gainsharing is probably the single fastest way to create a culture of continuous improvement, and bonuses based on quality are the logical next step. Once employees realize it’s in their self-interest to better their organization’s performance, the battle is half won.