Lincoln Electric

Lincoln Electric

Through the years one of Lincoln Electrics competitive advantage has stemmed from its ability to keep costs low while maintaining high quality standards. The main reason for this advantage comes from Lincoln’s super productive work force. The company has used an incentive system that includes piece-rates in lieu of salaries or hourly wages, annual bonuses and guaranteed employment.

Historically speaking, this has worked very well for Lincoln in terms of keeping production costs at industry lows. They’ve had steady growth in net income for four decades. The relative productivity of their workers has far surpassed those in other related industries. And if keeping costs down wasn’t enough, their view as a high-quality producer in their limited product lines.

But what is it about Lincoln that makes these kinds of incentives, especially the piecework plan, effective? Other companies sell their shares to employees but wouldn’t dream of implementing a piece-rate system. Other companies promote heavily from within, but stick with salaries and hourly wages. What are the attributes of Lincoln that make piecework work?

1. Good Measurements

Lincoln’s Time Study Department sets the piecework base-rates at levels comparable to those for similar jobs in the area. Thus an employee working at a standard rate would make the base-rate. If employees found these base rates unfair, they are allowed to challenge them. The threat of rate-changes was mitigated by the trust cultivated by management.

Lincoln’s measurements were both observable and relatively immutable. Determining an employee’s productivity could be accomplished with a simple count of units produced. Measuring quantity was not enough. Quality must also be factored into the equation. All units produced were stenciled so that defective parts could be traced back to the employee, in which case they would be penalized. This enforcement ensured that workers would focus on quality as well as quantity, thus eliminating the problem of multi-tasking (i.e. worker focus only on number of units with little regard to quality).

2. Honest/open/fair culture

In addition to base-rates being pre-established and challengeable, Lincoln took additional steps to open the lines of communication with workers. None as apparent as the Advisory Board, which included elected employee representatives. This board, which met twice a month, gave employees a forum to voice concerns to the higher ups. The chairman and/or president of Lincoln were at every meeting. Meeting minutes, including action items, were kept and posted publicly.

The organization chart (if a formal one were ever drafted) would look very flat. An open-door policy existed, which allowed any employee to have a discussion with the president of the company or any member of upper-management. There was no executive cafeteria, nor any reserved parking. This egalitarian culture fostered trust and credibility in piecework rates as well as subjective bonuses.

“There is all the difference imaginable between the grudging, distrustful, half-forced cooperation and the eager, whole-hearted, vigorous, happy cooperation of men working together for a common purpose.” –James F. Lincoln

3. Guaranteed employment

After two years of service, employees were guaranteed employment (75% of a 40 work week). In other words, the worker is guaranteed that if he works properly, he will have continuous income. Lincoln thereby reduces the employees’ risk of unemployment to the employee. Not only does this strengthen loyalty to the company and cut turnover, but it also reduces the chance of a Ratchet Effect. There is no quota that must be met (although there is a target number of units), and thus no chance of a quota being increased.

In addition, Lincoln believes that slumps can be beneficial. Manufacturing can continue, likely at a lower cost. Processes can be refined or improved. Not to mention that the