Lincoln Electric

Case 1-2 Lincoln Electric: Venturing Abroad

Returning late to his half-finished lunch of rice and stir-fried vegetables, Michael Gillespie, president f or 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 Aus¬tralia, 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 in-creases 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 Lin¬coln's five worldwide regions, scheduled for the following Monday in Cleveland.

Lincoln in the United States1

Founded by John C. Lincoln in 1895 in Cleveland to manufacture electric motor s and generator s, 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 Lin¬coln'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.

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 designated 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 in¬centive 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 individua¾s 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