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Lincoln Electric's unconventional approach to employee relations pays off

Spark

By Frank Koller,

Public Affairs, 249 pages, $32.95

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In May, 1942, James Lincoln, president of the Lincoln Electric Co., the world's largest maker of arc welding equipment, found himself under tough interrogation by a U.S. congressional committee. The accusation by the chief counsel of the House of Representatives naval committee was that Mr. Lincoln's company had devised a devious scam to avoid taxes and grab extra profits from the war.

At issue was the company's practice of sharing each year's profits with employees through a bonus. The counsel wanted Mr. Lincoln to admit that it was unscrupulous to be paying his factory workers an annual bonus worth 100 per cent or more of their wages. "It just looks to the average man as if something is wrong somewhere. … It is just a reckless expenditure."

That incident is recounted in CBC journalist Frank Koller's new book Spark, about Lincoln Electric's unusual approach to employee relations. Nearly 70 years after that episode, Lincoln Electric remains healthy and its employees highly productive, while many people outside the company - notably business executives at other firms - remain astounded at what they see as the company's reckless approach.

It traces back to 1914, when Mr. Lincoln took the helm of the company that his inventor brother, John, had founded two decades earlier. The new general manager was intrigued by the question of why individuals work, and how they might be inspired to work harder. "I knew that if I could get the people in the company to want the company to succeed as badly as I did, there would be no problem we could not solve together," he said.

He also knew that he was no expert on arc welding or manufacturing, and would need to rely on his workers' advice. So he convened an advisory board, made up of representatives elected from the various divisions of the factory. They were to meet every two weeks to discuss matters of mutual interest to employees and management - and that practice has continued to this day.

It was not democratic - management ultimately ruled - but in 1946, Mr. Lincoln commented that he had never used his veto to overrule an advisory board recommendation. And Mr. Koller suggests that hasn't changed much since. Right from the start, the advisory board nudged the company into many progressive policies, such as creating group life insurance in 1915 and paid vacations in 1923. It also helped to keep Lincoln Electric union-free by the voice it gave to workers and the policies it inspired.

A second key element of the Lincoln Electric formula, started in 1915, doesn't seem too progressive: piecework. It has, after all, been used in many sweatshops to force more for less from employees, with companies reducing rates and expecting employees to work harder to maintain their living standard.

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But Mr. Lincoln promised to hold rates consistent; when output increased, employees got more money. The one exception, continued through today, is when technological change makes workers more productive, in which case the company alters the rate - but workers can challenge it.

The third element of the Lincoln Electric formula is the merit-based bonus that so riled the congressional committee. It began in 1933, as the company was struggling through the Great Depression, cutting wages and hours. At the advisory council, an employee asked: "If we did more, tried harder and worked together as a real team, could the company pay us more?"

Mr. Lincoln agreed to a one-year experiment, promising that any increase in profits would be shared with everyone at the company. But he was skeptical. He told the congressional committee that later grilled him that, when he agreed to the experiment, he had no idea it would lead to paying his workers nearly 100 per cent of their wages in bonuses while watching the cost of his commodity sink because of enhanced productivity.

But the incentive spurred his workers on, leading to nearly a tripling of sales after the price reduction to customers. Today, the practice remains. In 2008, the average employee's bonus was $28,873 (U.S.). Since 1955, the bonus has averaged 77 per cent of employee wages.

It's not shared equally, however. Individual amounts are determined through a merit system. Employees doing piecework are rated by supervisors on five different performance factors, each worth a maximum of 20 points: overall productivity; overall quality of work; the extent to which the employee demonstrates adaptability and flexibility on the job; dependability; and compliance with the company's environmental, health and safety priorities. Rating employees on the quality of their work neatly counters any tendency to reduce that quality in an effort to make more from piecework, since a reduction in quality would threaten their bonus.

The final element of the Lincoln formula is perhaps the most startling: a pledge by the company to do its utmost to avoid layoffs, something it has so far kept through a number of tough recessions for manufacturing companies. But just as the other policies are more market-driven than might initially be expected, this one has some significant caveats.

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For one, it only applies to people who have been with the company for three years or longer. And while Lincoln Electric avoids layoffs, it does reduce employees' hours. Indeed, in good times, it keeps its labour force lean, demanding lots of gruelling overtime that employees accept as compensation for bad times, when their working time will be reduced to perhaps 30 hours a week, as in the recent downturn. So behind the pledge is a more elastic approach to work hours by everyone in the company to avoid long-term employees finding themselves with no work in bad times.

Lincoln Electric's story is little-known, despite its success as an industry leader. Oddly, a Harvard Business School case study of the company is the school's best-selling case, but most MBA students seem to give the company's approach little thought moments after they finish discussing it, moving back to more conventional, if perhaps less effective, approaches that fit better with prevailing business school ideology.

Spark is not only an engrossing look at a different corporate model - better balanced, it turned out, than the auto companies' largesse to workers - but also a useful public policy book, as Mr. Koller explores what societal lessons might be learned from the company to dampen the effects of recession, and why they have not spread further.















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About the Author
Management columnist

Harvey Schachter is a Kingston, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online column, Power Points. More

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