Scanlon plan

The Scanlon plan has been successfully used by a variety of public and private companies for many decades. These plans combine leadership, total workforce education, and widespread employee participation with a reward system linked to group and/or organization performance. The Scanlon plan is a gain sharing program in which employees share in pre-established cost savings, based upon employee effort. Formal employee participation is necessary with the Scanlon Plan, as well as periodic progress reporting and an incentive formula ^[1]

Origin

The first Scanlon plan was instituted by Joseph N.Scanlon(1899–1956) a steelworker, cost accountant, professional boxer, local union president, Acting Director of the Steelworkers Research Department, and Lecturer at the Massachusetts Institute of Technology (MIT). As the local union president of the steel mill in which he was employed, he witnessed the depressed economy of the 1930s. His employees wanted increased wages, his company had barely survived the depression. He was advised by the Steelworkers International to see if he could harness the energy and talents of the workers to save the company. Scanlon set up joint union/management committees to solve organizational problems. The committees became successful and Scanlon was soon asked to help other organizations in trouble. His success led him to become Acting Director of the Steelworker's Research Department. Scanlon became active in setting up many labor/management committees in support of War production for WWII.

Scanlon's work with joint union/management committees convinced him of the power of cooperation and he was an advocate of working with management in the Steelworkers. At the end of WWII the faction advocating a cooperative approach in labor/management was displaced by those advocating a return to traditional adversarial relations in the Steelworkers. Scanlon accepted an invitation by Douglas McGregor to become a Lecturer at MIT where he remained until his death.^[2]

At MIT, Scanlon continued to develop his ideas about labor/management cooperation and organizational improvement. It was at MIT that the term "Scanlon Plan" was coined by accident. There were two conferences going on at MIT and signs were needed to guide attendees. Thus those headed to Scanlon's event were directed to the Scanlon Plan and the name stuck.

The original labor/management teams that Scanlon created did not include a bonus. Early on they were created to save distressed companies or to encourage war production. Scanlon believed that much distrust existed between labor and management because there was a lack of information sharing. He believed that, given information about the company and a chance to participate in helping solve problems, the average worker would contribute to the success of the company. Scanlon did not believe in what he called "the economic man theory." Piece work systems and ideas about human motivation at the time reduced the worker to something that was thought to be only motivated by money. Scanlon believed that people were motivated by many things besides money—a chance to make a difference, pride, fellowship, etc.^[3] Eventually Scanlon included an organizational bonus system as part of the plan. Often these systems replaced piece work systems that were common at that time. Douglas McGregor would study Scanlon'd clients to develop his Theory Y vs Theory X. Scanlon Plans were considered one of the best ways to develop Theory Y.^[4]

Scanlon's work with the Admanson Company was featured in a Life Magazine article "Every man a Capitalist" by John Chamberlain, December 1946. His work with Lapointe was featured in a Fortune article "Enterprise for Everyman" by John Davenport, January 1950. Time Magazine wrote that Joe Scanlon was the most sought after consultant of his time in "Management: The Scanlon Plan, September 1955.

Two of Scanlon's colleagues carried on his work - Fred Lesieur who he had met at the Lapointe Tool Company and Dr. Carl F. Frost at MIT. Carl Frost would take the ideas west to Michigan State University which became a center for Scanlon thought and practice for many years. Frost would also create the Frost/Scanlon Principles of Identity, Participation, Equity and Competence.^[5] Frost's clients would create the Scanlon Plan Association which today is the Scanlon Leadership Network...a nonprofit Network of Organizations with Scanlon Plans. Frost worked with Herman Miller, Donnelly, Motorola, and Beth Israel Hospital all who were in the top 50 Best Places to Work while they were practicing Scanlon methods.

Fred Lesieur carried on the Scanlon Conferences at MIT until the 1980s. He consulted and implemented Scanlon Plans widely. Dana corporation was in the top 100 Best Places to work while they had their Lesieur Scanlon Plan.

Because the Scanlon plan was originated during the crisis of depression, it was initially presumed that it was for failing companies. However it later got instituted in Adamson Company to improve a healthy situation. Scanlon Plans have been successfully installed in Manufacturing, Retail, Health care, Financial Services and Telecommunications. There is no central registry of Scanlon Plans and the Scanlon Plan was not copyrighted or trademarked. Scanlon Plans were implemented in at least the following organizations: Adamson, Advanced Business Graphics, Atlantic Automotive, ARaymond, Atwood, American Tape, Beth Israel Hospital, Bradford, Bridgestone-Firestone, Briggs & Stratton, Canon, Dana, ELGA, Fairchild-Burns, Ferro, Harley Davidson,Herman Miller, Hitachi Magnetics, Hron Signs, ITT, Kysor-Cadillac, Lapointe, Landscape Forms, Limerick Veterinary Hospital, Lorin, Magna-Donnelly, Martin-Marietta, Meier, Michigan Bell, Motorola, National Manufacturing, Neelon Castings, Nicholas Plastics, Pacific Cast, Parker Pen, Pohlman, Quality Container, Raynor, S & L Plastics, Sara Lee, Sears, SGS Tool Company, Sligh, Spring, Thermatron, Thomson-Shore, TG Fluids, Trans-Matic, United Building Centers, US Vision, Watermark Credit Union, Wescast, Westling, Wolverine Worldwide, and Xaloy. Thus Scanlon plans have been utilized both as a means of saving firms from economic collapse as well as a mechanism for reducing labor and production costs and to provide increased worker participation in organization whose immediate economic situation is not bad. They have been installed in union and nonunion organizations, for profit and not for profits and large as well as small organizations.

Participation and Committees

The philosophy of the plan is to promote group co-operation and solving of organizational problems. Cooperation and involvement start in the creation of the plan with a Design Team and continue once the Plan is implemented with Production and Screening Teams.

Design Team

Scanlon Plans, unlike most other gainsharing systems, are installed using a high engagement process. The process was labelled the Roadmap by Carl Frost. It begins with an exploration of Scanlon by the top leader of the organization considering a Scanlon Plan. If the leader feels the Scanlon Plan makes sense for his/her organization a "mandate" is drafted. The mandate explains why change is necessary. The top leader then brings together the top leadership team and explains the mandate and asks the following questions. 1) Is there a compelling need to change? 2) Are we able, willing and ready? 3)Can the Scanlon Plan help us to meet the mandate? The top leader asks for a secret ballot vote to proceed. Usually unless the vote is unanimous the Scanlon Roadmap does not proceed further. If the top team is ready, willing and able, they explain the mandate and Scanlon Roadmap to the organization's Middle Managers and Supervisors. They asks the entire management team to support the mandate and the Scanlon Roadmap. Usually unless 80% of the entire management team supports Scanlon by secret ballot the roadmap does not go any further. The Managers and Supervisors along with the top Leadership Team then explain the mandate and Scanlon Roadmap to the entire workforce. Again a secret ballot is taken and unless 80–90% of the workforce support the Mandate and the roadmap the process stops. This top down approach coupled with multiple secret ballots assures the following: 1) Top level commitment and support 2) A reason for Scanlon and change 3) Alignment of the entire management team including front line supervisors 4) Understanding and commitment by the entire work force

Assuming the organization supports the Scanlon Roadmap a Design Team is created. The Design Team is made up of both elected and appointed members. The Design Team takes the theory of Scanlon and creates a written Plan for how Scanlon will be practiced in the organization. Often today, the Design Team will break into four subcommittees based on the Frost/Scanlon Principles of Identity, Participation, Equity and Competence. While the plan is being drafted minutes are shared throughout the Organization so that everyone is aware of the progress of the Design Team. When the Design Team feels it has done its best work they vote on taking the plan to the Organization. Unless the Design Team is unanimous in their decision to proceed they continue working on the plan. The plan is then taken to the Board of Directors for final approval. The Design Team then takes the Plan to the entire Organization and asks for a vote to try the Plan for a trial period of a year or two. Most Organizations will require an 80–90% vote of approval. If the vote passes the plan is put into effect and the Design Team will monitor the plan and make adjustments during the trial period. At the end of the trial period the Plan is voted on one more time and made a permanent part of culture of the Organization. (Some organizations will renew the plan after a number of years by recreating a Design Team. Others will only vote or change the plan if there is a major change to the bonus formula or other aspects of the Plan).

Production Committee

Historically it was found that employee ideas were often not heard. This resulted in a two tiered system of committees. The first often called "Production Committees" were made up of employees and managers closest to the work. A second committee often called the "Screening or Scanlon Committees" were made up of representatives from throughout the Company or Organization. This committee is distributed throughout the organization including the clerical and office positions. Their jurisdictions generally correspond to departmental and shift responsibilities. This committee is usually composed of one management representative and one or more non-elected non-supervisory employees. The committees' job was to identify problems which interfered with increasing productivity, reduce costs and increase output. Small expenditure suggestions could be put into effect immediately, while large expenditure items or suggestions that involved multiple departments were sent to the second committee, which was the screening committee.

Screening Committee

Oversight capability is contained within the screening committee. The screening committee holds representatives of senior management and an equal or greater number of elected non-supervisory representatives. In Organizations with a Union, they also may have a representative on the screening committee. This Committee has four main responsibilities. First it oversees the operation of the production committee. Secondly, all suggestions rejected by the production committee are reviewed by the screening committee. Third, it considers current business problems and internal and environmental issues and communicates them down throughout the organization. The final responsibility it the administration of the bonus plan. This often means communicating organizational performance.

The committee problem solving and communication structure in turn contribute to the achievement of a bonus. These benefits are shared by the entire workforce.^[6]

Participation and High Involvement Today

Today there are many different ways that Scanlon Systems involve employees in Organizational problem solving. At Donnelly the Donnelly Committee approved all changes in Personnel Policies and adjudicated issues of fairness and equity. They even recommended pay increases. Six Sigma and Lean Practices are often used in Scanlon Organizations as part of their improvement plans.^[7]

Calculation of Scanlon Plan Bonus

One of the greatest misconceptions of the Scanlon Plan is that it can be defined by the way the bonus is calculated. Historically, the Scanlon plan bonus was calculated on the historical ratio of labor cost to sales value of production. Scanlon believed that it was very important that employees understand how the bonus is calculated and this method was easy for employees to understand. He felt that profit sharing as a way to create a bonus was fine as long as everyone understood "profits." He concluded that most don't understand how profits are calculated. Today Scanlon Plans have been created that use only financial measures (like profits), operational measures (like quality) Combinations of financial measures and operational measures and no bonus at all.

Financial incentives under the Scanlon Plan are ordinarily offered to all employees including managers and sometimes executives. In several small Scanlon organizations the bonus was even offered to key suppliers.

Examples of actual Scanlon Plans, including how bonuses are constructed can be downloaded at www.epic-organizations.com Scanlon plans available for download

Advantages

A great deal of research has been conducted on the Scanlon Plan. Scanlon research was conducted at MIT, Michigan State University, The American Productivity Center, and The Scanlon Leadership Network. Dr. Mike Schuster, and Dr. Dow Scott have published many papers and chapters on the results of the Scanlon Plan. The Scanlon Plan has also been featured in The Compensation Handbook and many articles and chapters by the World of Work (American Compensation Association). In earlier studies the Scanlon Plan could be compared to the two other "named" gainsharing plans and the Scanlon Plan was found to produce higher levels of employee involvement. Scanlon Plans increase job satisfaction, financial literacy, engagement, financial performance, quality, and on time delivery. In studies of the Sears Scanlon Goalsharing plans, Scanlon Units were found to have higher levels of customer satisfaction, employee satisfaction and higher financial performance than control units. Most research today lumps Scanlon Plans into research on gainsharing as almost all plans are now customized.

A 1986 General Accounting Office Report on Gainsharing noted that Organizational-based gainsharing programs are achieving high success ....

All the gainsharing efforts in the DOD report cost savings (ranging from $7,000 to over $1 Million). Some of the installations also report indirect benefits, including decreased sick leave usage and reductions in work backlogs and overtime costs. In addition, some installations report that the gainsharing efforts, by focusing attention on organizational barriers to productivity improvements, help provide mechanisms and incentive for solving these problems.

A 1981 General Accounting Office Report on gainsharing concluded that the use of gainsharing programs in private industry had resulted in significant productivity improvements. Many of the firms in their review attributed significant work force savings to their gainsharing plans. "Savings averaged 17.3 percent at the 13 firms with annual sales of less than $100 million. At the other 11 firms annual sales were $110 million or greater, and savings averaged 16.4 percent." Of the 24 firms providing financial data, those with a gainsharing system "in effect the longest showed the best performance. Firms that had plans in operation over 5 years averaged almost 29 percent savings in work force cost for the most recent 5 year period, with individual firms' average savings ranging from 13.5 to 77.4 percent. Those firms with plans in operation less than 5 years averaged savings of 8.5 percent." These data support the contention that gainsharing systems continue to grow in terms of the benefits they provide and are an effective long term strategy to improve organizational performance. Regarding non-monetary benefits of gainsharing systems as reported in the 1981 GAO study, 80.6% reported improved labor-management relations, 47.2% reported fewer grievances, and 36.1% reported less absenteeism and reduced turnover.

In general, the vast majority of the firms in this study "expressed satisfaction with their plans," and believed "that the benefits originally anticipated were realized." They expressed belief "that their plans gave them a competitive advantage in marketing their products or services."

A 1982 New York Stock Exchange study reported that gainsharing programs were one of the six fastest growing human resource activities in companies with 500 or more employees.

A 1984 study of 33 documented case studies of gainsharing programs reported that "eighty percent of the companies reported measurable improvements in some hard measure of productivity, cost savings, or quality. Many of these gains were remarkable, ranging from 20 to 30 percent with some even larger. About three-quarters reported that some index of quality of work life improved, such as a decline in grievances, improvement in satisfaction or morale, or an enhanced work climate. Almost all of the cases found outstanding improvements in employee generated ideas for saving money and improving productivity and quality. More than half the gainsharing plans revealed improvements in every dimension studied, indicating that where gainsharing plans work, they work in a variety of areas. The gainsharing plans went beyond wage incentive plans by focusing on several key factors, including communication, cooperation between workers and management and problem-solving teams to improve product quality. Despite the need for a significant investment in development and implementation, the results were often dramatic and across the board. Bullock, R. J. (1984). Gainsharing – A Successful Track Record, World of Work Report, 9

In 1994 the Consortium for Alternative Reward Strategies (CARS) conducted an exhaustive benchmark study of Organization Performance & Rewards. The study is available for purchase from the World of Work (American Compensation Association). Among their findings: These Plans lead organization change as often as they lag it. Plans are installed to improve business performance through people rather than to attract and retain. Payouts are modest about 3% of base pay. Median organizations earned $2.34 for every dollar spent on payouts. Net return on plan investment is 134 percent! Rewards themselves were just one part of a total strategy to improve performance. Communications, employee involvement, feedback and financial justification of the plans were also important.

Scanlon Plans that follow the Frost Roadmap process find the process develops employees and allows them to manage, and change their plans with little need for outside expertise or consulting expenses. Also since the Scanlon Plan is an open-source system there is no cost to use the process, name or ideas. The main cost is the cost of employee time in the development and maintenance of the Plan. Most Plan bonuses are self funded from the gains that are created. This allows an organization to increase employee engagement and organizational performance and pay a bonus while generating over a 125% percent return.

Disadvantages

The Scanlon Plan especially as practiced by Carl Frost with the Scanlon Roadmap installation process takes time to implement. It is not unusual for an organization of 200–300 people to spend a year involving, researching, and creating a plan. The Scanlon Plan is leader dependent. It requires top level involvement in creating the mandate and building commitment. It requires a servant-leader—someone who is willing to develop others. Since Scanlon Plans are relatively rare it can become difficult to find leaders with experience in knowing how to lead in a Scanlon organization. The Scanlon Plan requires Theory Y assumptions among most of the managers to be successful. (Workers want to work, the average employee has great creativity and ingenuity if given a chance to express them, etc.) Once a plan is installed it requires time and energy to maintain. A Scanlon Plan also requires a great deal of training and development of employees. In Organizations with large part-time staff and/or turnover it can become difficult to develop employees sufficiently. The Scanlon Plan requires a great deal of sharing of information. Most Scanlon organizations are "open-book" organizations. This can be a disadvantage for organizations that prefer or require greater secrecy. While the Scanlon Plan can lead organizational change once a plan is installed and becomes a way of life for an organization it is difficult to go back. Employees like the information sharing, high involvement, equitable culture Scanlon creates. This can make it difficult in Scanlon organizations to acquire or merge with non Scanlon organizations. Some Scanlon organizations have become rigid especially in regard to how the bonus is calculated and have resisted needed change. The Scanlon Plan is an organizational wide system. It requires an organizational unit that makes sense to employees. For example, a plant, or a self-sufficient unit, or a store, could develop a Scanlon Plan. An individual, team or department could not. While Scanlon plans have been installed in small and large organizations, very small organizations (30 or less employees) tend to not need the structure that Scanlon provides. Very large organizations may find it difficult to create the collaboration that Scanlon requires.

See also

• Profit sharing

References

1. Scanlon plan.
2. Daniel Wren, (2009) "Joseph N. Scanlon: the man and the plan", Journal of Management History, Vol. 15 Iss: 1, pp.20 – 37
3. "Gainsharing and the Scanlon Plan" by Paul Davis, The Journal of Employee Ownership Law and Finance, Volume 9. No 1 Winter 1997
4. Scanlon EPIC Leadership: Where the Best Ideas Come Together, edited by Paul Davis and Larry Spears, 2008 Scanlon Foundation
5. Changing Forever: The well kept secret of America's Leading Companies, Carl F. Frost, 1996 Michigan State University Press
6. Shuster, Michael (1983), Forty Years of Scanlon Research.
7. The Leadership Roadmap: People, Lean and Innovation by Dwane Baumgardner and Russ Scaffede, 2008, The North River Press