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July/August 1988 - By Andrew W. Singer

How a DownTurn Put One Rust Belt Company’s Principles To The Test

“Studying ways to improve your company’s productivity?” asked Forbes in a July 1982 article. “Cancel that plane ticket to Japan. Go to Cleveland instead.”

The company is the Lincoln Electric Company, the world’s largest manufacturer of arc-welding equipment. Its factory workers are among the most productive and best paid in America—a few have earned as much as $80,000 a year. It has had employee profit-sharing since the 1930s and a guaranteed employment policy since the 1950s. The concern has been analyzed in Harvard Business School’s casebooks; General Motors executives have visited and studied its management incentive policies. Problems in the Rust Belt notwithstanding, the company has turned a profit every year for 54 years.

Yet, ironically, when the Forbes profile appeared (“Here’s a company that puts workers ahead of stockholders and yet earns 19 percent on equity capital,” editor James W. Michaels marveled) Lincoln Electric was mired in its worst downturn since the Great Depression.

“Energy, farm implements, automotive”—all customer segments—“went down at the same time,” recalls Donald F. Hastings, Lincoln Electric’s President. “We never had anything like it.” The company’s domestic sales plunged 40 percent, from about $370 million to a low of $220 million in the period from 1981-1983.

The company faced a wrenching decision. Since 1958, Lincoln Electric had a written guaranteed-employment policy of 30 hours a week for workers with at least two years service. Was it time to abandon that policy?

A conscious decision

“Yes, we looked at it. But we made a conscious decision not even to lay off people with less than two years with the company,” recounts Hastings, in an interview in his Cleveland office, a stone’s throw from Lake Erie.

Instead, the company went to a 30-hour work week. Jobs were eliminated, employees transferred. A mill mechanic who had been earning $15 an hour became a chemicals shelver earning $8 an hour. Workers were taken off the factory floor and put into sales. Others, who could type, were transferred to public relations. The company increased its advertising budget. Offices were painted, walls scrubbed.

The downturn “put the company’s principles to the test in a way never imagined,” says one employee who has been with Lincoln for 27 years. People thrust into sales were dubbed the SWAT Team—“Salespeople Without Adequate Training.” Many went right into cold calling over the telephone. Others were sent out on the road, the company reimbursing them for their car and fuel expenses at the rate of 18.5 cents per mile.

It was a “traumatic” time, recalls Hastings. People transferred within the company often “felt they had lost their jobs. It took a lot of counseling.”

Why didn’t the company lay off even recent hires? “We thought not to do so would really make an impact on employees,” explains Hastings. And also, “Many were related to veteran employees.”

Impressively, the company didn’t fail to pay its workers bonus payments during the slump period. For 54 years now, Lincoln’s workers have been reaping year-end bonuses, anywhere from 55 percent to 126 percent of annual salary, based on profits. In 1982, Forbes reported the average (non-unionized) worker earned about $44,000 annually. Last year, wages averaged about $22 an hour (including bonuses), way above the industry norm.

Business returned. In 1987, worldwide revenues were $450 million, and the company remains the world’s largest manufacturer of arc welding equipment.

But “I don’t want to ever see another one like that one,” says Hastings.

Security breeds efficiency

Founded by the son of a Congregationalist minister in 1895, Lincoln Electric has long marched to a different drummer. When James F. Lincoln, brother of the founder, died in 1965, after running the company for 51 years, he was earning a salary of $200 a month. (He had, however, substantial income from stock dividends.) Lincoln wrote a book in 1961 titled A New Approach to Industrial Economics in which he articulated his management philosophy. Quite simply, James Lincoln believed that workers would have no incentive to become more efficient if they believed that by so doing they would work themselves out of a job. “It is obvious that higher efficiency in any operation means that it will take fewer man-hours to do it,” he wrote. “If as a result the worker loses his job more quickly (as he does now) there is no doubt that he will oppose any plan that will produce greater efficiency.” Hence the continuous employment policy.

Lincoln also believed that workers had enormous reserves of underutilized talent. So he let them organize their own workplaces, paid them by the piece, and shared profits with them at year’s end. As a consequence, Lincoln workers became among the best paid in corporate America. Indeed, the U.S. government sued the company during World War II for overpaying its employees. Through bonuses and stock options, many retired in Cleveland as multimillionaires. Stories abound. Richard S. Sabo, Manager and Assistant to the Chairman, tells of one factory worker who recently purchased a $132,000 sailboat. Another collects antique cars, etc.

Under-pricing the competition

Of course, all this had a broader business purpose. Lincoln pays its workers more because they are more efficient—two to three times more productive than the average U.S. electromechanical worker, according to one industry study. This translates into lower prices for customers and increased sales and market share for the company.

“When I started in this business, GE was our biggest competitor,” recalls Hastings. “Now they’re out of the business. They couldn’t compete on price.” Nor have the Japanese or other foreign competitors been able to make any significant dent in Lincoln’s U.S. market. The company believes that efficiency, not lower wages or protective barriers, is the answer to foreign competition.

“It’s a most unusual company,” says Robert Zager, Vice President for Policy Studies at the Work in America Institute, a non-profit organization based in White Plains, New York. “It’s as nearly a Calvinist company as any I have ever encountered. They work, work, work. The atmosphere is austere, but clean, and productivity is very high.” Indeed, company President Hastings acknowledges that “We operate in the best of times like we’re operating in a depression.”

Practicing the Golden Rule

This is also one company that isn’t afraid to speak openly about its “ethical” precepts. James Lincoln, whose minister father was a fervent Abolitionist, wrote: “The program that Christ announced, ‘As ye would that others would do to you do ye even so to them’ is the complete answer to all problems that can arise between people.” He sought to extend that to business, observing, “Perhaps the greatest handicap to development of abilities latent in all Americans is the industrialists’ lack of understanding and belief in the possibilities of the wage earner.”

“Our philosophy is based on the Golden Rule,” acknowledges Hastings. “We would feel really concerned about people being put out on the street. We feel responsible for the people we hire.”

The company has a view that idleness, not hard work, debilitates. Manager Sabo, who started at Lincoln 23 years ago working on the factory floor, recalls: “My father worked as a coal miner. When they shut the mines, I couldn’t believe how fast he changed.” Lincoln workers currently average 55 hours a week, much of it in mandatory overtime.

“Layoffs is definitely an ethics issue,” says Hastings. Other companies may preach a ‘lean and mean’ organizational structure and insist that lay-offs are necessary for greater productivity, “but many companies still don’t like to do it.” Lincoln will fire people—for stealing equipment or altering time cards —but it won’t let anyone go for lack of work.

Eliminating jobs, not people

“The whole system is based on trust,” notes Sabo. “We’ve not laid anyone off for 30 years. But in return we ask them to do any job we ask of them. We will get rid of jobs. We don’t get rid of people.”

During the downturn, Sabo recalls, “We had factory workers washing my walls. If someone on the floor had some college education and could type, we had him doing publicity releases. We spent more money on advertising.

“We did many things contrary to what people do when they cut back. We trained our distributors to sell our products better.”

The company took 55 volunteers off the factory floor and reassigned them to sales, selling a new product the company had developed. “We generated $10 million in new sales to people we didn’t know existed,” recalls Sabo. “And we kept 55 people profitably employed and probably another 55 people supporting them.” In fact, “nine were so good we later put them into regular sales training.”

The company strives for an egalitarian atmosphere. The cafeteria is a no-frills, cinder-block room patronized by both workers and managers. The president of the company dines shoulder to shoulder with line workers. Purchasing agents meet with vendors out in the open at tables at the top of a stairwell in company headquarters. All job openings are posted throughout the company, and senior management is hired from within. In its 93 years, Lincoln Electric has had only four chairmen.

Telling its story

According to Sabo, the company was “shocked when we lost our largest supplier” back in the early 1980s. A local steel maker that had supplied Lincoln with the high-grade steel that accounts “for about 90 percent of our product” went out of business, even though Lincoln had given the company a 10-year commitment to purchase 25 percent of its total output. “That brought us to reality very quickly.” The company realized “there is no benefit to Lincoln if we have no customers to sell to or suppliers to buy from.”

In effect, the company decided to make the revitalization of U.S. industry part of its corporate mission. Thus, for the last five years the company has held annual management conferences to explain its management incentive system. Although Lincoln believes it can handle foreign competition in its own market—it has made the U.S. a net exporter of arc-welding equipment—its customers—John Deere and Caterpillar are two—have experienced slumps. “We want other businesses to flourish,” says Sabo.

More than 3,000 executives have visited Lincoln Electric in the last five years, including dozens of managers from General Motors—GM is reportedly incorporating incentive management concepts in its new Saturn plant—Ford, Union Carbide, McDonnell Douglas Electronics, John Deere Harvester, 3M, and others.

Sabo observes that other companies now have incentive management systems similar to Lincoln’s—he cites Nucor and Motorola. Lincoln’s system, though, predates the others. And “the big difference is piecework. Very few people want to go to piecework” which is still associated in the minds of some with sweatshops. About 1,300 of the company’s 2,400 workers are on piecework, and the company has 70,000 different piecework rates.

Underutilized abilities

Lincoln gets its extraordinary productivity with equipment that is far from state-of-the-art. Much of it has been repaired or rebuilt by workers on the line. “It’s not the most modern factory in the world,” acknowledges Sabo. “We can run it competitively because of our people.”

James F. Lincoln believed that “We all have latent abilities that are underutilized.” He attempted to promote those talents on the factory floor. Workers are encouraged to organize their own workplaces. The company tells them, “‘It’s your workplace. Here’s what you have to build. Here are the standards.’ Then we step back,” says Sabo. If a worker can design a better tool for performing his work or find a more efficient way of stacking washers, he will reap the benefits directly in a higher piecework rate.

The employee bonus plan has yielded extraordinary dividends for workers. Workers are given merit ratings every six months based on four categories: ideas and cooperation; output; dependability; and quality. If a worker makes a suggestion that saves the company $10,000, say, that will be reflected in the merit rating for that period. At the end of each year, workers receive an overall merit rating. This typically falls between 80 and 120 points.

To calculate a worker’s year-end bonus, the company takes the year’s wages, including piecework and overtime—$30,000 say—and multiplies it by the merit rating (e.g., 105). This sum, divided by 100 ($31,500 so far) is then multiplied by the “bonus factor.” The bonus factor is based on company profits. It has varied through the years from as high as 126 percent in 1965 to as low as 55 percent (last year it was about 71 percent), with an average of about 90 percent over the years. If the bonus factor is 71 percent, this would yield a bonus of $22,365. The worker’s total compensation with wages and bonus would then be $52,365.

Factory closes for Christmas

Through good times and bad the company has had an impressively low turnover and accident rate. Absenteeism is less than 1.5 percent. “In essence, we make absenteeism a real bear,” says Sabo. Workers aren’t paid for sick days. And if an employee calls in sick, workers on the earlier shift and latter shifts have to make up the work. “They’ll do it willingly if they think you’re really sick,” explains Sabo. “But not if you’ve got a hangover.” The company has no paid holidays. “If you’re paid for doing nothing, what’s the incentive to work?” The entire plant closes for two weeks around Christmas and in August. Workers take their vacations then.

The company loses about 25-30 percent of its new hires in the first 60-90 days, since many aren’t prepared for the hard work. “Either they don’t like us or we don’t like them,” notes Hastings. But if they stick with it, they are likely to remain with the company for a long time. Turnover is very low—2.5 percent annually not including retirement—and the average employee has been with Lincoln for 18 years.
Despite the piecework, workplace safety standards are maintained. Indeed, the company’s accident rate is so low “that we’re now self-insured,” Sabo says. He insists that in the Lincoln system “there’s no incentive to being hurt” since workers lose pay.

The company also has an interesting grievance procedure. Any of its 2,400 employees can meet with the company’s chairman or president on a matter of concern. “The chairman has said, ‘If anyone singles you out for punishment, you come to me,’” Sabo says.

“Workers with grievances can go to the [workers] advisory board,” notes Hastings, “since some people are afraid to come in here.” Nonetheless, “I probably get six to eight visitors a week,” most of whom are usually complaining about their merit rating. “We have an open door policy. We don’t screen them, although they have to go through my secretary.” Meetings are conducted behind shut doors. “No one ever sees them.” The company has never had a written ethics policy, Hastings adds, since its principles are embedded in practice, going back to earlier in the century.

‘You can get trapped’

The system is not without its downside. “You’re well compensated but you pay for it,” says one former line worker who later went into sales. After the 55-hour work weeks, “You don’t feel like cutting the grass, reading a book, doing anything.”

Also, “You can get trapped,” acknowledges Sabo. “Because you may have to take a cut in income to advance to somewhere-else.”

After 10 years as a school teacher, football coach, insurance agent, etc., Sabo went to work on the Lincoln factory floor 23 years ago operating a lathe. When he earned his first bonus, his total annual compensation exceeded anything he had made before by two and a half times. He was told when he signed on that he would probably never leave the factory floor.

“I set my sights for assistant foreman. I thought I could do that in five years.”

One day he saw a job posting for a marketing job. He applied, and was among the final three candidates. At the interview, he was asked, “Do you really want this job?” Sabo soon understood why. The marketing job required him to take a $2,600 pay cut.

A non-union company

The company has always been non-union, and no serious attempt has ever been made to unionize the work force. A workers advisory board has been meeting regularly with senior management since 1914. They have been responsible for initiating a wide range of actions through the years: Recommending the bonus system in 1934; investigating the compensation of the CEO (they decided he was underpaid); analyzing “why competitor A is underselling us by 10 percent,” etc., Sabo reports.

Asked about unions, Hastings’ answer reflects the views of James F. Lincoln who once characterized collective bargaining as “civil war”: “Unionism in this country has grown from bad management; grown from management exploiting people,” says Hastings. “We always tried to look at people as individuals.”

What advice would he give to a company thinking of establishing a similar management incentive program? “You must ask yourself, ‘What are your motives?’ If it’s just to make more money, forget it. But if it’s to treat people as human beings, as individuals, copy everything we do.”

Andrew W. Singer is publisher and co-editor of ethikos.
Reprinted from the July/August 1988 issue of ethikos
© 2005 Ethikos, Inc. All rights reserved.

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