Gainsharing and the British Royal Navy

The British Royal Navy in the age of Admiral Lord Nelson (1758-1805) knew a thing or two about incentivizing employees. According to John Steele Gordon writing in yesterday’s Wall Street Journal (“Incentives vs. Government Waste,” May 14, 2010, A19), the British Royal Navy was extremely good at capturing enemy warships and sweeping enemy commerce from the seas. And there was a good reason why.

The Royal Navy’s success, says Gordon, was due to the enormous incentives that it offered its officers and men. The entire value of the spoils was shared by the Navy officers and their men according to a rule of eights. One-eight went to admiral; two-eights went to the captain of the ship; one-eighth each to the commissioned officers, senior warrant officers, petty officers, and midshipmen; and two-eights to the crew.

These were not insignificant amounts of loot. They could make captains rich by the standards of the mid-18th century. The crew could receive many times a year’s pay. Gordon asserts, correctly I believe, that incentives are the reasons why private profit-seeking corporations like Google or Goldman Sachs are so much more efficient than public institutions like the Department of Motor Vehicles or courts. Harnessing the self-interest that fuels the engine behind capitalism’s success, Gordon writes, would save money and increase innovation in a bureaucracy, just as the Royal Navy used it to capture enemy ships.

Gordon, the author of Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt, out in a recently revised edition by Walker & Company, believes it is quite possible to incentivize public employees to find ways to save money, and to find better ways of doing things, using the Royal Navy’s rule of eighths.

Gordon may not have heard of “gainsharing,” a type of profit-sharing system used by local governments and at least one court, which I have advocated in previous blogs (see Gainsharing in the Courts, January 21, 2007); and Project Gainshare, May 3, 2007). Like the British Royal Navy’s rule of eights, gainsharing is a system whereby units of government share in the gains employees make in their bottom line or that of the state, county or city, without losses in quality of services and programs. Employees receive bonuses or payments based upon the improved productivity or efficiency as reflected in "gains" in costs savings or revenue increases. Gainsharing is, of course, consistent with widely accepted management principles that encourage employee initiative in continuous improvement of program and services to meet the needs of customers and citizens.

The promise of gainsharing for courts, I argued back in 2007, is that gainsharing may help courts achieve sustained increases in productivity and efficiency, that employees may become more involved in the gains made by the court as they share in the benefits of employee-initiated improvements, that it enhances commitment to organizational goals, and that it leads to improvements in other measures of court performance.

The United States Bankruptcy Court for the Eastern District of California demonstrated “over a period of five years that gainsharing could work, and work well, in a court environment,” said Richard Heltzel, Chief Executive Officer, when I spoke to him in 2007 about Project Gainshare, as the pilot project was called. The project returned “over $2.5 million in unspent funds in five short years, an ability to operate to operate in a very lean, but effective fashion, and with enthusiastic staff support at the grass roots level,” said Heltzel. He was optimistic about the likely success of gainsharing in court environments. “I am here to tell you,” he said in 2007, “that a gainsharing program can work in a court environment when coupled with an organizational performance management system that relies on statistically based measures and customer satisfaction surveys to ensure that the job is getting done in timely and quality fashion.”

Unfortunately, Hetzel’s gainsharing program met an untimely demise because, unlike corporate employees who are highly incentivized to increase efficiency and innovate, public employees are highly disincentivized. Whereas in business a penny saved is a penny earned, the penny saved by Hetzel was apparently a penny cut from his budget. Well, good luck with that!

With their backs to the wall in the current fiscal crisis, maybe it’s time for court leaders and managers to go out on a limb (gangplank?) and give gainsharing a real try. Just maybe, state and local courts who are out of options for cutting costs might be willing to innovate with something that worked exceedingly for the British Royal Navy in 1765.

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