Lincoln Electric in China

1. How do you explain Lincoln Electric's success? In particular, consider how the reward structure supports the long term strategy.

Lincoln Electric's success is highly due to its efficient human resource management mechanism, which includes its creative Incentive Management System, Stock Purchase Plan and Guaranteed Employment Policy. Brief elaboration is as follows:

1) Incentive Management System

• Piecework base wage:

A competitive base rate wage with the piece rate set by time-study department and confirmed by employees. The compensation system encourages employees to focus not only on quantity but also on quality, for the workers must rework on the faulty ones.

• Year-end bonus:

Production employees are rated annually on output, quality, dependability, ideas and cooperation to reward bonus. In 1997, an average piecework employee at Lincoln received approximately $51000, while the very top received double.

 2) Stock Purchase Plan

Employees who have been worked in Lincoln for more than one year can take part in the stock purchase plan, which reinforces the bonding between employees and company both financially and emotionally, leading to a bilateral growth for the individual and company's value.

3) Guaranteed Employment Policy

Through this policy at least 30 hours of full-time work is secured for employees with three or more years of tenure. In return, employees must willing to perform any assignment and work overtime when needed.

4) Open-door Policy and Promoting from within

By adopting open-door policy and internally announcement management method, employees gain a sense of security and belonging towards the company.

The reward structure supports the long term strategy in a way that it helps to cultivate a group of responsible and self-discipline employees to lower the cost of management, turnover rate while to elevate the production efficiency and employee's satisfaction.

2. What are the disadvantages of individual pay for performance plans? And why does Lincoln's incentive system( main component is individual pay for performance) work very well, at least in the US factories?

Disadvantages of individual pay for performance plan lie in:

1) The subjective evaluation criteria may cause concerns of fairness.

2) Quality control may become difficult as worker tend to maximize their piecework volumes.

3) Over-competitive working atmosphere may create tension among employees and even between employees and employers.

4) Incomes of employees are greatly affected by market factor.  

Lincoln's incentive system tries to establish complementary mechanism to ensure the application of the incentive system respectively, namely:

a) Employees may challenge piecework standards set by the company's time-study department if they think they are unfair. Once the standards are settled, the rates would be firmly fixed.

b) Workers must rework faulty pieces in their own time, an d most products can be traced back to the individuals who produced them. Additionally, quality is one of the ingredients in the merit rating system that determines individual's annual bonus.