Right from the Start

Lincoln Electric Co. compensates employees based on individual productivity.

Tweet

Some of the best ideas in incentive compensation have been in place for half a century at Lincoln Electric

With all the talk about motivating people these days, it's easy to think that you're asking for trouble if you're not always looking for a brand-new incentive system. Many experts argue that, given the pressures in today's economy, compensation plans quickly lose their punch. So a lot of managers are continually tinkering -- a bonus for teamwork, say, one year and for quality the next. Consultants love it -- it keeps them employed. But the irony is that some of the best incentive plans haven't been touched in decades. Just ask the folks at The Lincoln Electric Co.

Lincoln Electric, in Cleveland, is a 93-year-old manufacturer of welding machines and motors -- a company that might seem to be an unlikely candidate for survival, let alone success. Its biggest customers have been in such cyclical markets as oil, steel, and construction, and during the downturns, Lincoln, like other machinery-makers, has taken some licks. But, its managers argue, it has remained solvent -- and keeps bouncing back -- because of its approach to managing and rewarding people.

Lincoln Electric's system has been in place since 1934, and the basic idea is as straightforward as can be: the company pays individuals on the basis of what they produce. Nearly all of Lincoln's 1,800 production employees -- all nonunion -- receive no base salary at all. Their earnings are based on their individual output and on bonuses from the company's profits. (Lincoln's professional people, such as engineers, are on salary, although most also participate in the bonus plan.) The original idea, described in Incentive Management, by James F. Lincoln, brother of the founder, was to give nonmanagement employees direct and powerful incentives to manage their work as efficiently as possible and to be on the lookout for opportunities to do more. That's still the philosophy. And lest employees worry about working themselves right out of a job, the company has a long-standing policy of no layoffs.

For more than 50 years, the combination of pay by output, bonus, and job security has worked like a charm. Lincoln's employees produce an average of two to three times what their counterparts produce at competitive plants, including those in Japan. Hard workers who don't mind overtime have been known in a good year to gross more than $80,000, with bonus. Not everyone does that well, says Donald F. Hastings, a 35-year company veteran who is now president, but the philosophy has always been that top performers should not be constrained. "We think it's very important to give people the fruits of their efforts," Hastings says.

Overall, Lincoln is a no-frills company: there is no dental insurance, no paid holidays -- not even sick days. (Employees do get paid vacations.) The main facility looks as though it's out of the 1950s, with two-tone green walls, no windows, and no air-conditioning. Still, the company has gathered an almost cultlike following. For years, it has been a subject of business-school case studies. Recently, in response to inquiries from managers, Lincoln began hosting seminars for people interested in the company's compensation system (see "See for Yourself," page 3). Though designed for a production-oriented environment, the Lincoln system has been adapted to businesses as diverse as fast-food outlets and financial institutions.

The basic element is paying people for their output, known as piecework. It requires understanding -- and, so far as possible, measuring -- every production sequence. Lincoln itself has documented thousands of discrete functions that go into making its line of products. Different jobs have different piecework ratings (and pay scales), based on such qualities as degree of skill and responsibility required. But no matter where employees are working, the incentive is clear. The more they produce, the more they get, with one caveat: quality problems get corrected on employees' own time.

The piecework method doesn't guarantee that everyone produces as much as is humanly possible. Not everybody arrives at 5 a.m., for example, to get things organized for the day. But some do; the beauty of the system is that people have a choice. To maintain credibility, management resists the temptation to revise ratings every time an employee does well. In fact, the only time piecework ratings are adjusted, says Richard Sabo, assistant to the CEO, is when there's a bona fide change in technology. And even then, employees have the right to challenge the new rates.

Piecework sets the overall tone. It also reduces the need for constant supervision, Sabo says. But it's really just the beginning of the Lincoln system. For more than 50 years, everyone, except the top three managers, has taken part in Lincoln's bonus plan, with payments based on the performance of both the company and the individual. Technically, whether to pay an annual bonus is left to the discretion of the board of directors, but the fact is that Lincoln has never missed a year.

The company goes to great lengths to see that the bonuses aren't arbitrary. Every six months, each person in the company, including those on salary, is evaluated in four distinct areas: output; quality; dependability; and idea generation and cooperation. Supervisors are required to rank employees and to grade them. The average score is set at 100, with some scores as low as 60 and others as high as 140. Each score is reviewed by three or four layers of management before it's final.

 1 | 2  NEXT 

Read more:

Sign-up for our Leadership and Managing Newsletter

Email Address: