Harvard Business School 9-398-095 Rev. April 22, 1998

Research Associate Jamie O’Connell prepared this case under the supervision of Professor Christopher A. Bartlett as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 1998 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.


Lincoln Electric: Venturing Abroad

Returning late to his half-finished lunch of rice and stir-fried vegetables, Michael Gillespie, president for the Asia region of The Lincoln Electric Company, reviewed his plans to expand the company’s production base in his area. Although this venerable U.S.-based manufacturer of welding machinery and consumables had sold products throughout Asia for decades, these had been produced at plants in Australia, the United States, and Europe. Anthony Massaro, Lincoln’s new CEO and—like Gillespie—a newcomer to the company, had encouraged the Asia president to develop plans to open welding consumables factories in several Asian countries. Such facilities would enable Lincoln to take advantage of low labor costs and avoid trade barriers.

Specifically, Gillespie now turned his attention to plans for Indonesia. He faced several sets of choices. The first concerned whether to build a factory in Indonesia at all, given the particular political and economic conditions in that country, the nature of the market for welding products, and the competitive situation. If he decided this in the affirmative, he would need to choose whether to enter the market through a wholly-owned factory or a joint venture. Finally, Gillespie wondered whether the planned operation should adopt Lincoln Electric’s famous incentive system, credited with rapid, steady increases in productivity in the company’s flagship plant in Cleveland, Ohio. Although no immediate deadline loomed for these decisions, he would be asked to discuss his plans at the September 1996 meeting between Massaro and the presidents of Lincoln’s five worldwide regions, scheduled for the following Monday in Cleveland.

Lincoln in the United States 1

Founded by John C. Lincoln in 1895 in Cleveland to manufacture electric motors and generators, Lincoln Electric introduced its first machine for arc welding in 1911. The company eventually became the world leader in sales of welding equipment and supplies (such as welding electrodes). (Exhibit 1 gives more detail on welding technology and Lincoln’s products.) James F. Lincoln, John’s younger brother, joined in 1907 and complemented his older brother’s flair for technical innovation with a proficiency in management and administration. The company remained closely held by the family and employees until 1995, when a new share issue put 40% of its equity into the hands of the general public. These new shares acquired voting rights in the year 2005.

1 This section draws on The Lincoln Electric Company (HBS No. 376-028) by Professor Norman Berg.

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398-095 Lincoln Electric: Venturing Abroad


Founding philosophy

James F. Lincoln’s independent ideas about human motivation formed the basis of Lincoln Electric’s management methods and incentive compensation system. At the foundation of his philosophy was an unbounded faith in the individual and a belief in the equality of management and workers. He also believed that everyone could develop to his or her fullest potential through a system of proper incentives designed to encourage both competition and teamwork. In 1951 he wrote in his company-published monograph, Incentive Management:

There will always be greater growth of man under continued proper incentive. The profit that will result from such efficiency will be enormous… How, then, should the enormous extra profit resulting from incentive management be split? … If the worker does not get a proper share, he does not desire to develop himself or his skill… If the customer does not have part of the savings in lower prices, he will not buy the increased output… Management and ownership must get a part of the savings in larger savings and perhaps larger dividends… All those involved must be satisfied that they are properly recognized or they will not cooperate—and cooperation is essential to any and all successful application of incentives.

Incentive system

James F. Lincoln implemented his philosophy of “incentive management” through an unusual structure of compensation and benefits. He wrote, “There never will be enthusiasm for greater efficiency if the resulting profits are not properly distributed. If we continue to give it to the average stockholder, the worker will not cooperate.” The system had four key components: wages for most factory jobs based solely on piecework output; a year-end bonus that could equal or exceed an individual’s regular pay; guaranteed employment; and limited benefits.

Piecework Nearly all production workers—about half of Lincoln’s total U.S. workforce—received no base salary but were paid on the basis of the number of pieces they produced. A Time Study Department established piecework prices that stayed constant until production methods were changed. The prices enabled an employee working at what was judged to be a “normal” rate to earn, each hour, the average wage for manufacturing workers in the Cleveland area. (Rates were adjusted annually for local wage inflation.) Each worker also had to ensure his or her own quality, however, repairing any defects identified by quality control inspectors before being paid for the piece in question. But there was no limit on how much could be earned by those who worked faster or harder than the normal rate.

Annual bonus Since 1934 Lincoln had paid each worker a bonus at the end of each year based on his or her contribution to the company’s total performance. The U.S. Employee’s Handbook explained, “The bonus is not a gift and it does not happen automatically. The bonus is paid at the discretion of the Board of Directors of the Company. It is a sharing of the results of efficient operation and is based upon the contribution of each person to the overall success of the Company for that year.” Until the 1980s, the annual bonus averaged nearly as much as the total wages of those eligible: the average worker in an average year received a bonus that almost doubled his or her base pay. In the 1980s and 1990s higher base wages and competitive pressures reduced bonuses to 50% to 60% of base pay.

Nearly all Lincoln employees were eligible for a bonus, including office workers and managers whose regular compensation was not based on piecework. Each individual’s share of the bonus pool was determined by a semiannual “merit rating” that measured his or her performance compared to those of others in the same department or work group. The rating depended on four factors: output, ideas and cooperation, dependability, and quality. (Exhibit 2 explains these factors in further detail.) Each department received a pool of points for each factor that would allow employees

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This document is authorized for use only by Guohua Wu in Competitive and Strategic Analysis-1 taught by JERAYR HALEBLIAN, University of California – Riverside from Jan 2019 to Jul 2019.

Lincoln Electric: Venturing Abroad 398-095


in each department to average 25 points on each factor. Supervisors then allocated the points among individuals according to their relative performance. Merit ratings varied widely, with some workers receiving total ratings as low as 50 and some as high as 150. Each individual’s share of the bonus pool was determined entirely by the ratio of his or her points to the total awarded.

The combination of piecework and the annual bonus enabled Lincoln’s best employees to earn much more than their counterparts at other manufacturing companies. In 1995 the highest paid production worker at Lincoln’s U.S. operations received $131,000 in base pay and bonus, while the average employee received $51,911 in pay and bonus—82.8% above the Cleveland average for manufacturing workers.

Guaranteed employment James F. Lincoln saw guaranteed employment as an essential part of his system, writing: “Higher efficiency means fewer man-hours to do a job. If the worker loses his job more quickly, he will oppose higher efficiency.” He also believed that the costs of recruiting and training the highly motivated, creative workers who thrived in his system would outweigh any savings achieved by cutting the payroll during downturns. In 1958 he introduced the Guaranteed Continuous Employment Plan, which assured employment for at least 75% of the standard 40-hour week to every full-time employee who had been with the company at least three years. 2

James F. Lincoln’s successors agreed broadly with these views. When orders dropped, the company took advantage of falling materials prices to produce for inventory. If demand still did not pick up, management could cut hours to 30 per week and redeploy workers to maintenance and other tasks. During the deep recession of 1982, for example, production workers were retrained and sent out as salespeople, selling $10 million-worth of a new product in their first year alone. Such techniques had enabled Lincoln to avoid laying off a single employee in the United States, even one with less than three years’ experience, since 1948.

Limited benefits James F. Lincoln’s radical individualism also led him to minimize company-paid benefits under the rationale that fewer benefits enhanced profits and, thereby bonuses and worker compensation. While Lincoln employees received paid vacation, they had no paid holidays off, even Christmas. (They could, however, stay home on recognized holidays without their merit rating suffering.) Taking a day off for sickness also meant giving up a day’s pay. The company did not oppose benefits as such—it provided employees with access to a group health insurance policy if they paid the full premium—but it preferred to pay employees with higher cash wages and bonuses, rather than fixed benefits, to give them maximum choice.

Management style and culture

James Lincoln strove to erase hierarchical distinctions, and management’s approachable style combined with the system of rational incentives to build a spirit of cooperation between management and employees. The mutual respect was reinforced by the workers’ recognition that management worked as hard as they did, often putting in 60- to 70-hour weeks. Through its constant monitoring of the incentives and other work systems, Lincoln managers strove to build a sense of trust with the workforce. There were no reserved parking places in the company parking lot and executives ate in the same institutional cafeteria as janitors.

Open communication was regarded as essential, and management from the CEO down historically had spent hours of each work day on the shop floor. Furthermore, executives followed James Lincoln’s “open-door” policy toward all employees, encouraging them to bring suggestions for

2 Although there was very high turnover in the first three years of employment—and particularly in the first 12 months—overall, Lincoln’s turnover rate had historically been less than 1% compared to 4—5% for all manufacturing companies.

For the exclusive use of G. Wu, 2019.

This document is authorized for use only by Guohua Wu in Competitive and Strategic Analysis-1 taught by JERAYR HALEBLIAN, University of California – Riverside from Jan 2019 to Jul 2019.

398-095 Lincoln Electric: Venturing Abroad

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