Differentiate between bonuses and gainsharing plans.
Bonuses represent a pay plan that rewards employees for recent performance rather than historical performance. An annual bonus is a significant component of total compensation for many jobs, and many companies routinely reward production employees with bonuses in the thousands of dollars when profits improve. However, when times are bad, firms cut bonuses to reduce compensation costs. Thus, using bonuses as a variable pay program makes employees' pay more vulnerable to cuts, and this is even more problematic when bonuses are a large percentage of total pay.
Gainsharing is a formula-based group incentive plan that uses improvements in group productivity from one period to another to determine the total amount of money allocated. Gainsharing ties rewards to productivity gains rather than profits, so employees can receive incentive awards even when the organization isn't profitable. Unlike bonuses, gainsharing incentives do not vary with changes in company profits.