Both President Clinton and House Speaker Newt Gingrich have referred to Lincoln Electric as an example of an American firm that is one of the best in the world. This statement may be bold, though holds truth in many respects and Lincoln managers like George Willis, who was the CEO in the late 1980s and early 1990s adds to this statement: “… I believe that we are the best manufacturing company in the world.
Lincoln Electric is best known for its productivity incentive program, which has been widely cited over the years, and has attracted thousands of managers to company”s headquarters in Cleveland, Ohio to learn about one of the country”s oldest and most radical pay-for-performance systems. Founded in 1895 by John Cromwell Lincoln to manufacture electric motors and generators, The Lincoln Electric Company shifted its resources into manufacturing arc-welding products in 1911.
Today, welding products account for more than 90 percent of net sales and range from basic units for light manufacturing to highly sophisticated machines used in robotics applications and high-production welding and fabrication. The remaining income is generated by electric motors and oxy-fuel and plasma cutting tools. The company is also the leading producer of self-shielded cored-wire electrodes and currently holds ninety percent of the world market in this area.
With its over a 100 year existence, Lincoln Electric has had a successful past with a few downtimes, like the one during the 1991 recession because of an ill-conceived foreign-acquisition spree. Even during this time, the company kept its promise to its U. S. workers to pay their bonuses and went to extremes such as borrowing $100 million in 1992 and 1993, even though it lost $84 million in those years.
The retired CEO Donald F. Hastings quoted saying: “We can”t break our trust with this group because of management mistakes and recessions elsewhere. From this unique example, we can understand the company”s genuine commitment to its compensation system. However, some argue that, after the 1995 sale of 40% of the company”s equity to public, this traditional close-knit relationship between management and the workers got affected.
Lincoln Electric employs 5,700 workers worldwide and operates 16 manufacturing sites and 17 distribution centers in 11 countries. In 1995, the company celebrated its centennial year by posting record sales of $1. 03 billion. With increasing sales every year after 1995 – $1. 09 in 1996, $1,159 in 1997, the company is holding its leadership position in the manufacture of arc welding equipment and consumables.
Lincoln”s longstanding commitments to linking pay to both individual productivity and the profitability of the corporation makes it an ideal case study for any business student. In this paper, I will explain the unique pay-for-performance compensation system of Lincoln Electric as well as investigating this system in our class context, also explaining the international expansion of the company.
Incentive Performance System: its strength and weaknesses It was James E. Lincoln, John Lincoln”s younger brother, whose philosophies and beliefs about workplace relations shaped Lincoln Electric”s unique culture during his long term as head of the company from 1914 to 1965. The firm has had only a handful of leaders in a century of operation, which are mostly promoted within the company. Likewise, jobs at Lincoln Electric plants are highly prized and employee turnover is low.
I think it is impressive that no one has been laid off since 1948, and the turnover rate is less than 4% among those with at least 180 days on the job. “There isn”t any other place to work like Lincoln Electric, they take care of you. ” says Kathleen Hoenigman, an 18-year veteran. In today”s competitive markets, it is important to have dependable highly skilled workers and Lincoln Electric clearly is a great employer according to some employees like Mrs. Hoenigman. Companies like Lincoln Electric can afford to provide consistent employment, no matter what, by working and managing better.
Thinking ahead and having creative solutions for when there is a downturn is what management is all about,” Hastings said. It really makes sense when one thinks about this statement: if no one worried about losing their job, then employees would create change instead and this kind of an ideology would definitely have a great impact on productivity. High wages, high productivity, and a high level of trust between management and workers characterize the laborer-employee relationship and this culture at Lincoln.
Policies such as the “open-door” policy helps build this trust and while encouraging the employees to bring suggestions for improvement also helps the management to have non edited, raw data from their workers. It is true that millions of American workers, from sales representatives to truckers, are paid on a commission basis or according to their output. Many others collect annual bonuses tied to their employers” profits and revenues. But Lincoln is nearly unique among large American companies, paying all shop-floor workers according to a formula based on how much they produce and how much the company earns.
Lincoln Electric”s compensation package for factory workers consists of a piecework system for base wages and a year-end bonus. The piecework system however is probably the major part of the total incentive system at Lincoln Electric. With this system, a worker can make more per day or per week or per month during the year with or without a bonus. The workers are paid on the quality of what they produce. Thus, in a way, Lincoln”s 3,400 U. S. employees are supposed to be self-managing entrepreneurs.
Each employee is accountable for the quality of his or her own works and is rated twice a year on quality, output, dependability, cooperation and ideas. The ratings determine how much of the total corporate bonus pool each worker will get, which comes on top of his or her hourly wage. There”s minimal supervision and employers only get paid when they work, and there is no sick or holiday pay, which created some problems for Lincoln Electric in their foreign subsidiaries. “How much money you make is in your own hands,” says Thomas Gadomski, a painting-crew leader.
All 3,400 Lincoln Electric shop-floor workers do well, with wages averaging $58,000 in 1995 (the last year for which company would provide data), not counting the value of their decent package of medical, vacation and retirement benefits. On the other hand, the programs developed 40 years ago at Lincoln to boost the production are helping contain workers compensation costs. Gil Frey, director of employee benefits and relations, said the company saves about $44,000 per month as a result of its return-to-work strategies.
Despite all the incentives and high salaries, the company, which is publicly traded in NYSE, hardly operates as a charity. 1997″s net income of $85 million represented a 20 percent return on shareholder equity in a very competitive industry. Donald Hastings who is strong defender of the piecework system argues against the people, who consider the piecework system as a type of 19th Century pay system that was designed to take advantage of the worker, and he adds that it is what killed the piecework system in the U. S. Thus, he believes that the piecework system at Lincoln has fairly set rates.
However, very few manufacturers have taken the pay-for-performance route, and the reasons are not actually hard to comprehend. For one thing, it is difficult to sustain large differences in pay for the same job category also measuring individual productivity in industrial settings can be a challenge all by itself, unless if you have a well established system like Lincoln. Yet I am sure that, at times inevitably there is ambiguity at Lincoln too, but clearly it is very minimum.
These are some of the reasons why it would be difficult to replicate Lincoln”s success, because it also requires highly disciplined and motivated labor. Moreover, in addition to piecework bonus system, guaranteed employment up to 30 hours and the annual bonus system where employees are paid once a year up to an average of 50% to 60% -recent years” average- of the base pay created a sense of ownership among the employees. Lastly, as a result of all these incentive systems, the high productivity and high output rate with less defects, and innovation gives Lincoln Electric the competitive edge in the market.
One manufacturing manager explained it perfectly: “We strive for high productivity based on employee effort, continuous improvement in production processes, and a seven-day-a-week utilization of equipment. By passing on cost savings to our customers, we generate very high demand that allows you to send everything you make straight out the door. ” These are the main strengths of Lincoln Electric, but just like any other organization, Lincoln Electric have some weaknesses too. Unfortunately, the Lincoln incentive model is not quite the smashing success it once was.
Problems started with the recession in 1991, and in 1995, after management stumbles forced the family-controlled manufacturer to sell more shares to the public. From that point on, Lincoln started looking more like a public company. With new shareholders, and new board members came new ideas, which had impacts on some of the core values of the company, and the worker bonuses has started getting smaller. At the same time, management was readying itself for an expansion to remain globally competitive, putting even more pressure on the balance sheet.
Even though that very same year, the company celebrated its centennial year by posting record sales of over $1 billion and record earnings, this was a year of change for the workers. All those factors I listed above crimped bonuses. For workers who expect high bonuses if they deliver in output, this shift must have hurt their morale. As new global markets are emerging for Lincoln”s business, the company has started questioning and reviewing their one-of-a-kind pay system.
The company is by no means ready to completely change or get rid of the incentive plan, which once paid employees 100% of their annual wages in annual performance linked bonuses. But now with the new markets that the company is in too, the executives are considering ways to move toward a more traditional pay scheme and away from the regular percentage-bonus formula, or may be a mixture of the two. “The bonus program is a good program, and it has worked well, but it”s got to be modified some,” says director David C. Lincoln, whose father John C. Lincoln founded Lincoln Electric.
So, the question is for how long more Lincoln”s pay plan can survive rapid growth of the company and globalization? Also the wide range of wages cause some problems within the company. The average Lincoln factory worker earns $16. 54 an hour, vs. the $14. 25 average manufacturing wage in the Cleveland area. With a 56% average bonus in 1995 – the lowest in years – production employees came out ahead of workers elsewhere even after paying for health-care benefits.
But unlike at other companies, Lincoln has huge variations in production-worker pay: from roughly $32,000 to more than $100,000 for the most hard-driving. There is also a tremendous pressure to produce, but an employee board meets regularly with the top management to report workers” concerns. And Lincoln guarantees work to employees with three years” experience. Still, it gets harder and harder everyday to live up to the old deal. Even though, the company has bounced back from stumbling overseas, it has yet more problems to overcome.
During this period, Lincoln had financially weakened. To make better acquisitions and expand further, Lincoln made its first public offering in July 1995, pushing outsiders” stake to 40%. It also slashed total debt by 40% to $130 million, and paid a lower bonus per person, though the total bonus pool was a record $64 million. Naturally, slimmer bonuses somewhat changed employees” attitude towards the system and the company. In November of 1995, some employees protested outside headquarters after they learned of the bonus size.
Also again during this period, the turnover among the new hires was high, and the disparate pay upset the veteran Lincoln employees. “If an individual shows he can handle the workload, he should be rewarded with full pay” commented Joseph Tuck, an inspector with 18 years at Lincoln. Because of the protests, CEO Hastings eliminated the two-tier wage on December 1, 1995. This was a dilemma for both the company and the workers, both of which had never experienced this kind of a situation before.
To edit the pay system without causing any resentment, the company set up a committee to study the bonus program and had even hired Price Waterhouse to study productivity. Even though, Hastings pledged at the time that the incentive system would remain the same, over time, he wants employees to focus on the overall earnings, not just the percentage bonus they receive. And that should be a tough job to do, to implement this kind of an ideology in employees” mind, who has worked so many number of years in a fixed, particular system.
Lincoln Electric”s International Expansion On other hand, as I have mentioned earlier in the paper, because of both legal and cultural issues, Lincoln”s basic systems like the incentive system and annual bonus pay system did not work in many of the overseas operations in the long run, even though at the beginning it was successful. And, I think Lincoln Electric had especially a hard time understanding that operating and international business calls for a lot more than just technological skill. Also, I believe that the company didn”t truly understand the cultures of those countries where it expanded.
The general assumptions made, such as the belief that everybody in the world would be willing to work a little harder to enhance their lives and their families and their homes didn”t turn out to be true for everyone. It was an inaccurate assumption and this was one of the main reasons why the company had to pull out of Germany. The underlying reason for this was mainly because Lincoln Electric executives didn”t know how to manage an international operation, nor did they have the international experience. Furthermore, the way Lincoln had gone about expanding internationally was too rapid an unstructured.
Also, there were other barriers such as high tariffs, high manufacturing costs, highly unionization and misconception of Lincoln Electric”s incentive system. After closing down plants in Germany, Brazil, Japan and Venezuela, and reporting losses from these operations in 1992 and 1993, I am sure Lincoln Electric is going to be very careful about not starting another acquisition spree. During these losses however, the company expanded the number of employees in the United States, but I am sure that the firm will be going back to overseas in the future.
This time though, they want to be very careful in selecting the region for the new facility, as well as the managers and the workers. One of these new markets that Lincoln has interest in is the Asia-Pacific area, including mainland China, and the company is already in the process of getting some alliances in Indonesia and Malaysia. These new interest regions may shape the future of Lincoln Electric. If we were to make a cost-benefit analysis for Lincoln Electric, we would find out that the company has a lot of pluses.
Even after all these charges against it, Lincoln”s pay system is likely to remain innovative than most. But as it tries to hire more outsiders, expand further abroad and modernize, “we”re getting to be a more normal company,” says Director Frank L. Steingass. That may not be quite what eager visitors to the headquarters in Cleveland, who want to learn the secret of incentive system expect to hear. But if Lincoln can adapt to new times without sacrificing employee good will, another model pay plan may yet emerge out of this company.
The over century long history and tradition, along with great organizational and pay systems, Lincoln Electric has a very strong organizational culture, especially in the United States. However, with the new emerging markets around the world today, Lincoln Electric can not afford to stay out of the global competition. Finally, I believe that its employees will always move Lincoln Electric to greater heights, no matter what. The former CEO Donald Hastings states this idea in a very profound way: “It”s a two-way street at Lincoln. We look after our people and they look after us. ”
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