Lincoln Electric Company Employment Policy Case Study

Lincoln Electric Company Employment Policy

1. What are the feature of the firm’s strategy?

Lincoln Electric did not invent a unique system for managing it employees; many other welfare-capitalist companies offered similar financial incentives to their employees, and some offered much more generous non-financial benefits. What makes Lincoln Electric’s approach stand apart is its long history of treating its employees better than those of nearly any other U.S. industrial company. In an era in which most manufacturing companies have moved their operations overseas in the name of cost savings, Lincoln Electric understands that by holding onto its experienced U.S. workforce, it retains the human capital it has helped develop and train, saving it from having to spend thousands of worker-hours bringing a new workforce up to speed. For its employees, the company provides an amazing level of pay and additional benefits, not to mention unparalleled job security. The system includes a no-layoff guarantee that the company has never violated. Production workers are provided with security against layoffs due to lack of work when the economy slows down. Employees are guaranteed at least 30 hours of work per week, in exchange for working overtime when the product is in demand. To deliver on the promise of guaranteed employment, workers agree to be moved to different tasks, even to lower paying ones when time are down. But the system is also brutally demanding, forcing workers into constant competition with each other to produce more with fewer mistakes. Lincoln’s manufacturing workers are not paid by the hour, week, or seniority. Instead, managers and workers perform on a piecemeal system by which employees are compensated based on their actual productive output—the more they produce, the more they make. There is no upper limit on how much Lincoln workers can earn, and they are completely self-managing and free to organize their own production methods. The company also realized that the merit-based bonus system is an extraordinarily powerful incentive that drives employees to work both harder and more creatively. The bonus system incorporates a sophisticated merit-rating evaluation for every employee. Several times a year, every employee on piecework is evaluated by his or her supervisors on many different performance attributes: overall productivity, overall quality of the work effort, the extent to which the employee demonstrates flexibility and adaptability, and the dependability and teamwork of the employee. Overall, there are three key elements that make up Lincoln unique management system: the use of piecemeal system, the merit-based bonuses, and the no-layoff policy. These elements powerfully reinforce each other and create a sustainable competitive advantage for Lincoln.

2. What are the differences between the firm’s strategy and those of its competitors?

While Lincoln adopts the no-layoff policy, most companies take advantage of the default U.S legal rule of employment at will, which allow employers to terminate employees at any time for any reason - a good reason, a bad reason, or no reason at all - as long as they don't discriminate in doing so. Employment at Will sounds like a great thing for employers, because they aren't saddled with cumbersome restrictions on hiring and firing that would hamper the management team in their ability to staff their departments, but it’s not. When times are tough in the industry, common sense suggests that that is exactly the time to recruit and build your work force. Competition for talented staff will obviously be less, and salaries need not be bid up in attempts to lure people from their existing jobs. By hiring when times are poor and developing a set of policies, including assurance that people will be retained, Lincoln can become an employer of choice, and the organization will not have to enter the labor market at its very peak to acquire the necessary work force. Instead, many firms do exactly the opposite. They lay people off in cyclical downturns and then, when the entire industry is booming and staff is scarce, they engage in often fruitless bidding contests to rehire the skills that they not that long ago sent packing. A guarantee of employment security can help the firm avoid making a costly decision to lay people off that has short-term benefits and long-term costs. Many additional benefits follow from employment assurances such as workers' free contribution of knowledge and their efforts to enhance productivity. Employment at Will keeps employees focused on pleasing their direct supervisor rather than thinking up and promoting good ideas that could help their businesses in radical ways. Critical cultural and business issues don't get raised because if an employee raised those issues, they could get terminated for doing so because nobody wants to anger the boss and potentially lose their job. When it's easier and safer to keep quiet than to talk to your boss about problems, naturally employees will choose the safer path.

3. How did the strategy benefit the firm?

Even though Lincoln’s employment system seems challenging (even the CEO said himself that it is barbaric), they received approximately seventy five applications for every position, and turnover has been incredibly low compared with other companies in the same industry. One-third of all employees have over twenty years of service with the firm and many employees report over fifty years of continuous employment. There are many elements that contribute to the success of Lincoln.

Firstly, the use of piecework as a compensation system has remained an incendiary