LINCOLN ELECTRIC COMPANY
Between 1914 and 1965 James F. Lincoln authored an outstanding story of business ethics, productivity growth and industry leadership at the Lincoln Electric Company. The company’s success was so closely associated with Lincoln that when he died in 1965 there was some speculation that the Lincoln system would be replaced. It was then that the true magnitude of James Lincoln’s achievement began to be revealed. For successor management retained the system for the remainder of the twentieth century and the company’s performance continued to achieve high standards of excellence. Few great business leaders can realistically expect that the systems they create will survive and be effective for that long a period after the founder’s departure.
James Lincoln was born and raised in a family that stressed Christian values, including a strong work ethic. His father was a Congregational minister whose greatest accomplishment may have been to convince his son that Christian ethics have a place in the business world. If so, James’ mother should be given some credit for setting an example of Christian stewardship in the home ( Herbruck, p. 4).
At the age of 20 James entered Ohio State University to study electrical engineering. He paid his own way with a combination of personal saving and a loan from his older brother. He was an average student and a good athlete. He played on the Ohio State football team for four years and was captain of the team his senior year. That was a year when Ohio State did not give up a single touchdown. It is said that his football experiences instilled in him the view that it takes the entire team to get the job done. That view was to show up prominently in his later approach to management of the Lincoln Electric Company.
In the spring of 1907 James contracted typhoid fever and had to drop out of school. When he recovered he decided to go to work full time at the Lincoln Electric Company as the firm’s only salesman. He was paid $50 month plus a 2 percent commission.
James’ brother John had started Lincoln Electric in 1895.It was a small business which repaired and manufactured electric motors. It was also an entrepreneurial company which was an outlet for John Lincoln’s inventive genius. James had already worked at the company during the summers. Then and in his role as a full time employee he convinced John that he, James, had sufficient management talent to eventually run the company.
That prospect appealed to John because John was more interested in developing new and improved products and procedures. In addition, as Lincoln Electric began to evolve into a big business, John developed a concern about what he saw as a conflict between his temperament, character and sense of values and the life-style of the head of a large corporation ( Moley, p. 79). It was clear to John that brother James was more temperamentally fit to be the general manager of a large business. In 1914 John, therefore, made 31-year old James the company’s General Manager. John was 48 years old . John retained the title of President. He also kept a desk next to his brother’s desk at the company’s plant but he spent most of his time at a different location where he invented new products and procedures (His efforts resulted in 20 patents over the next fourteen years and most of those were signed over to the Lincoln Electric Company). The company’s common stock was divided into three equal portions – one for John, one for James and one to be held in reserve for key employees.
John Lincoln did not totally distance himself from the production side of the business. He regularly dropped by the plant to visit with the workers and officers. And he occasionally helped the company solve problems arising in the plants of Lincoln Electric customers (Moley, p.82). Nevertheless, from 1914 on it was James F. Lincoln who played the role of what would later be called the chief executive officer.
JAMES F. LINCOLN’S MANAGEMENT PHILOSOPHY
From the beginning James Lincoln operated with a simple yet effective management philosophy. As he put it late in his career (Lincoln, 1961, p.64):
“The Christian ethic should control our acts. If it did control
our acts, the savings in the cost of distribution would be
tremendous…Competition, then, would be in improving the
quality of products and increasing efficiency in producing and
distributing them; not in deception, as is now too customary.”
Lincoln turned this vision into a focused effort to continuously improve product quality while continuously reducing unit costs of production and distribution and passing the cost savings on to the customer.
Achieving that goal required a determined effort by all employees. Consequently, the early decades of James Lincoln’s stewardship consisted of a continual search for methods of encouraging employees to give their best efforts. Lincoln early concluded that best efforts would be encouraged by a combination of job security, open communication, mutual respect, a sense of ownership and pay based on performance. Over the years that followed various methods described below were developed to create that kind of environment.
While James Lincoln thoroughly understood the importance of earning a profit, he put customer and employee concerns ahead of the stockholder. He believed the in the long run that set of priorities would also be in the best interests of the stockholders.
Finally, James Lincoln believed that business success could be achieved by specializing in a narrow product and service niche and simply outperforming the competition. His elevation to leadership of the company coincided with his brother’s development of welding products and that became Lincoln Electric’s market niche. For the remainder of James’ Lincoln’s career the company focused on a narrow product line consisting of electric welding machines, metal electrodes and electric motors. And true to Lincoln’s expectations, the company achieved and maintained industry leadership in terms of market share, employee compensation and competitive prices.
EVOLUTION OF EMPLOYEE RELATIONS
Shortly after becoming General Manager, James Lincoln established an employee advisory committee. Committee members were elected by the employees and met with Lincoln twice a month to discuss employee relations, productivity improvements and product developments.
The advisory committee’s first major accomplishment was a reduction in working hours from 55 to 50 per week in 1914. A year later its recommendations led to the company to offer life insurance policies to all employees. And in 1919 the committee’s efforts resulted in the formation of the Lincoln Electric Employees’ Association which offered health benefits and provided social programs.
But the major issue addressed by the advisory committee was how to boost employee productivity. By 1923 the committee and James Lincoln had agreed on a compensation system which paid workers according to their actual output. That system was backed by a policy of adjusting pay rates for changes in the consumer price index.
Pay based on productivity or piece work was part of the Lincoln Electric solution to the challenge of eliciting the employees’ best efforts. A second part of the solution was the establishment of a bonus plan. This was proposed by the advisory board and introduced on a trial basis in 1935. The trial was successful and a bonus plan became a permanent fixture at the company. The plan consisted of setting aside a significant portion of each year’s profit for distribution as a bonus to the employees. The amount involved represented 25 percent of wages in 1935. Over the following years there were times when the bonus came close to equaling the annual wages.
A third component of the solution to the productivity challenge was job security. James Lincoln was convinced that workers would only make a determined effort to improve productivity if they were assured that in doing so they would not work themselves out of a job. Lincoln’s solution was to guarantee job security while establishing a policy of job change and job enlargement whenever productivity gains made that possible. In addition, the company adopted a policy of guaranteeing every employee at least 30 hours of work a week after a one year probationary period.
Reinforcing the message that job security was a management commitment was the introduction of a policy of hiring from within. The company evolved a practice of posting all job openings at the plant and inviting applications from existing employees.
Further reinforcing the emphasis on collective responsibility for productivity gains was a deliberate attempt to remove traditional signs of special status. This applied particularly to management. Managers’ offices were very modestly furnished and managers were expected to join the workers for lunch in a common lunch room.
Finally, employee commitment was encouraged through the adoption of an employee stock purchase plan. When James Lincoln became general manager in 1914 he and his brother had agreed to set aside one-third of the company stock to be made available to management personnel. Then in 1925 the company adopted a stock purchase plan available to all employees. Years later James Lincoln gave the following reasons why he considered a stock purchase plan important (Lincoln, 1951, pp. 217 ff):
1. It strengthens team spirit.
2. It motivates concern for company profitability
3. It educates employees regarding company profitability
4. It reduces the gulf between the worker and the boss
By 1980 approximately fifty percent of Lincoln’s stock was owned by employees.
A FEW DETAILS OF THE LINCOLN INCENTIVE PAY SYSTEM
By the late 1950s the Lincoln Electric incentive pay program worked as follows. All jobs were assigned pay rates based on a survey of wages paid for similar jobs in the Cleveland, Ohio area. The rates are then adjusted quarterly to keep up with inflation as measured by the Cleveland Area Consumer Price Index. Wage rates are then translated into piece rates. Piece rates are set so that the average worker will earn a wage equal to the average for the Cleveland area. But since pay is on a piece rate basis, all workers have the opportunity to earn more.
In addition, each worker is evaluated formally by his or her supervisor twice a year. The ratings are translated into numbers which make all worker ratings comparable. Those scores are then used to determine each worker’s share of the annual profit sharing bonus at the end of the year.
On those rare occasions when revenues dropped significantly the system responded by reduce the work week and cutting the base pay. Many years after James F. Lincoln’s death the viability of this approach was dramatically illustrated. The double dip American recession of 1980-82 caused serious financial difficulties for most of Lincoln’s industrial customers. As a result, in 1982 Lincoln’s revenues fell by 40 percent. The company nevertheless managed to honor its pledge of guaranteeing 30 hours of work. Hourly employees went on a 30 hour hour week and had their earnings cut in half (from an average of $44,000 down to $22,000 on a yearly basis). The company made a profit and workers received an average bonus equal to 55 percent of their earnings ,bringing the total pay up from $22,000 to $34,000 ( Posner, 1985).
James F. Lincoln belongs to a select company of American businesspersons who seriously applied their Christian faith to the daily operation of their business. One does not have to be a Christian to apply many of the principles discovered and applied by Lincoln. A devotion to management excellence alone would justify Lincoln’s practices. But Lincoln’s success was clearly grounded in his moral orientation. This is clearly an example supporting the argument that a high standard of excellence and high ethical standards are compatible.
This article was written by Dr. Richard Hattwick.
Lincoln, James F. Incentive Management. Cleveland, Ohio: The Lincoln Electric Company, 1951.
Lincoln, James F. A New Approach to Industrial Economics. New York: The Devin-Adair Company, 1961.
Moley, Raymond. The American Century of John C. Lincoln. New York: Duell, Sloan and Pearce, 1962.
Posner, Bruce G., “ Right from the Start,” INC, August, 1985.
Sharplin, Arthur D. The Lincoln Electric Company. Northeast Louisiana University, 1981.