Right from the Start
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.
How well do employees do? In a good year, a top performer can more than double earnings with the bonus. And even in bad years, the bonus often exceeds 50% of an individual's other pay. The average bonus in 1987 was $18,773, or about 70% of other earnings. Over the past decade, Lincoln has handed out checks totaling about $421 million -- more than 12% of revenues. Why so much? Because, thanks to the system, there's more money to play with, Hastings says -- and because the system's future depends on it. "Our goal is to make the bonus checks significant enough to make a difference to people.'
Clearly, money can be a great motivator. But the managers doubt that employees would be so dedicated if it weren't for the company's long-standing commitment to maintaining employment. Anyone who's been working at Lincoln for more than two years is virtually guaranteed a job somewhere in the company. The guarantee does two things: it assures the employees that they won't be done in by their own efficiency, and it protects them in downturns. Technically, the company pledges that it will give workers at least six months' notice before laying anyone off, but the last layoff was at least 30 years ago.
Job guarantees can be dangerous, but Lincoln's commitment has weathered even serious downturns. Back in 1982, for example, revenues fell by 40%, from $450 million to $220 million, when Lincoln's major customers -- especially those in the steel industry -- hit hard times.
Hastings admits that it was a frightening period. "We had never seen anything like it," he says. "Every market we were in went down." The company trained some production people to sell, and put others on maintenance crews, rebuilding machines and painting fences. Hourly workers went on a shorter, 30-hour week and their earnings were cut in half -- an average of $22,000 versus $44,000. But nobody lost a job. Since the company made a profit and paid dividends to shareholders, management went ahead and paid bonuses that year, an average 55% of earnings. "To skip a bonus would have been devastating," Sabo says.
Since then, business has picked up. Lincoln is today a $370-million company with no debt. What's more, it's a leader in its market, something that Hastings and his management colleagues -- nearly all of whom are Lincoln veterans -- doubt could have happened under another kind of system.
To be sure, Lincoln's work environment is not modeled after a company picnic. During busy periods people are expected to work extra shifts and weekends, and, unlike a lot of companies of its kind, there's no seniority. People are producing all day long, and competing with their peers for bonus money. Tough as it is, it seems to work. Turnover rates are high -- around 25% -- during the first three months or so, as people learn that nothing is given away. But after that, most employees stay longer than 30 years.
"An employee has to want to be in a system like this," Hastings explained one afternoon, sitting in his windowless office. And the same might be said of managers as well. Clearly, it's not for owners who find competition among employees distasteful or who need to be totally in charge of the show. At Lincoln, says Hastings, "if workers see waste -- or a new vice-president they don't think we need -- they question it." And those at the top have to be willing to talk about it, or the system breaks down. Ultimately, says Hastings, it depends on trust. "If all an owner wants to do is make more money, my feeling is that he'd be very disappointed with this system. It's not going to work unless people feel they're being treated fairly.'* * *
LINCOLN ELECTRIC'S PAY FORMULA
A combination of earnings and bonuses
Even in slack periods, Lincoln Electric pays hefty bonuses. Since 1983, bonuses have averaged 66% of other earnings.
1983 $18,476 $10,347
1984 22,097 15,026
1985 23,486 17,380
1986 24,690 16,049
1987 26,442 18,773
(All figures averaged by Inc. )
SEE FOR YOURSELF
Want to know more? Lincoln Electric will be happy to show you
Since 1983, The Lincoln Electric Co. has been sharing the inner workings of its incentive management system with managers from all over the world. Most months, the company sponsors a four-hour seminar for outsiders at its plant in Cleveland. The sessions, which are free, include a plant tour, lunch in the cafeteria, and a question-and-answer period. To date, they've attracted more than 2,500 managers, and that doesn't take into account special tours organized for the likes of Ford and General Motors.
The purpose of Lincoln's sessions was -- and still is -- at least partly altruistic, insists Richard Sabo, assistant to the chief executive officer and organizer of the seminars. "We wanted other companies to see that it's possible to remain profitable during difficult times." Lincoln has never worried much about giving away information to its competitors, he says, and there may, in fact, be a benefit to the exposure. "If other companies are profitable," Sabo says, "some of them may end up buying our products."