The Lincoln Electric Company

The Lincoln Electric Company, 1996

Background

The Lincoln Electric Company is a leading manufacturer of arc-welding and cutting products. Founded by John C. Lincoln in 1895, Lincoln Electric began its business with the design of electric motors. John's younger brother, James, joined the company in 1909 as a salesman.

Almost twenty years after founding the company, John C. Lincoln decided to concentrate on being an engineer and inventor, and turned the duties of running the company to his brother. During this time, James introduced piecework pay and established the Employee Advisory Board, which included elected representatives and met every two weeks. Furthermore, Lincoln employees were covered by group life insurance, a progressive effort for its time.

Issues

There are several issues that face Lincoln Electric.

1. Is the incentive program in place at Lincoln Electric the best way to motivate employees?

2. Lincoln Electric tried to expand internationally but failed. Should the company try to expand again with a new strategy?

Incentive Program

The incentive management system has been in place at Lincoln Electric since the early twentieth century. Lincoln Electric operates on the belief that two key elements - responsibility and recognition - must be present for people to be productive.

Employees have three major responsibilities:

 Attendance - If employees do not come to work, they are not paid and they are penalized.

 Earning Power - Production workers are paid on a piecework basis. They must guarantee the quality of each piece they produce. If the piece is not good, they are not paid for it.

 Self-management - The production supervisor to worker ratio at Lincoln Electric is one to between sixty and one hundred. The company feels that all workers must manage and all managers must work.

Recognition includes several items diligently attended to by the company. Promotion from within is combined with an open door policy. Employees who have performed outstanding work are invited to meet with the chairman and president of the company and participate on an employee advisory board. The board meets with the president and chairman on a bi-monthly basis to discuss topics that can help improve the company's operations and performance. The minutes of the meetings are published and posted so employees are well informed about company affairs. Lincoln Electric also has a quarter century club for employees who have been with the company for 25 years or more.

The Incentive Management System in place at Lincoln Electric features the following:

 An elected advisory board for direct and open communications with senior management. This advisory board has been in existence since 1914.

 Piecework incentive rewards for all productive work. Pay is directly based on output. Employees are merit rated every six months; they are rated on the quality of their work, dependability, output, and ideas and cooperation. Employees are paid the average rate for a worker of that skill type in the Cleveland, Ohio area; but with the yearly incentive, they can potentially earn in excess of $100,000 a year.

 A profit-sharing bonus plan for employees paid annually at the discretion of the Board of Directors.

 Guaranteed employment after three years of service. The company has not laid off an employee since 1958.

 A 401(k) plan offering employees a variety of pre-tax investment options.

 Competitive compensation and other benefits.

Through this well-defined group of incentives, Lincoln Electric encourages and compensates individual initiative and responsibility, motivating employees to work together to reduce costs and improve quality. These individual and cooperative efforts create a more profitable company, where each person shares in its success according to his or her own contribution and ownership.

International Expansion

The unforeseen recession in Europe is clearly one reason for the poor performance of some of the international projects, but there are other reasons for the failure of Lincoln's expansion. At the root of Lincoln's problem internationally was a unique corporate strategy, the same strategy that made Lincoln so strong in the U.S. Lincoln's competitive advantage was based in its unique culture and incentive system. A corporate culture that stressed open communication and trust began with its top management. Since the beginning, Lincoln approached management with the idea that a company should never be too large for one person to administer or manage. Lincoln's leaders used a stripped-down approach that encouraged all employees to share their ideas not only with their managers but with the CEO as well. This corporate wide approach to management, bolstered by the company's incentive system, created an extremely dedicated and skilled workforce. Lincoln believed that its management style and incentive system would work to revitalize the foreign operations performance by energizing and committing its workers. What Lincoln forgot was that its corporate culture had been created and confirmed for over almost a hundred years, not overnight.

In 1992 and 1993, Hastings realized the mistakes the company had made. The culture that existed in the European countries and in the plants themselves would not support Lincoln's programs. German workers were extremely skilled, but they worked fewer hours a week than Lincoln's American workers did. The U.S. workers often work overtime on short notice, which helped to make the incentive system work. Similar practices that occurred on a daily basis in Lincoln's domestic factories had never occurred in most of the newly purchased projects. Preceding Lincoln's aggressive expansion in the late 1980s, Lincoln had very few upper managers or board members with any international experience. This was mainly a result of the company's practice of promoting from within. When the company began its expansion, it assumed that its superior manufacturing operations would increase efficiency and reduce costs no matter where it went. Lincoln failed to realize the importance of the culture it was working in and the difficulties it would experience