Why Lincoln Electric May be the Model for Saving America’s Manufacturing Sector: A Review of Frank Koller’s Book “Spark”
Updated August 23, 2011
NOTE: After putting up this post I had the opportunity to meet Frank Koller, author of “Spark.” We had lunch at a restaurant near my home. For over an hour we talked about Frank’s involvement with Lincoln Electric, how he came to eventually persuade the CEO to allow Lincoln to be the subject of a book, and overall challenges facing the manufacturing sector in the United States. Frank has done extensive speaking across the United States, encompassing both senior business people and graduate university students.
Last year I posted a commentary on an incredible success American story, one of which I had been unaware. My post was How Mutual Commitment Leads to Excellence: The Lincoln Electric Story. Because of past policy-related work I was involved in on manufacturing I found this story fascinating, especially because it broke down some stereotypes, such as the use of piece-work production being a distasteful practice reminiscent of developing economies.
Spark, is a very clearly written and insightful book by a Canadian journalist with a Masters degree in engineering from MIT. Based in Ottawa, Canada, Frank Koller has shared an invaluable story of how a traditional manufacturing company can in fact thrive in North America, and in particular in a northern mid-west, Rust-Belt city–Cleveland.
Lincoln Electric, founded in 1895 by John C. Lincoln, operates on old-fashioned values: trust, flexibility, loyalty and being paid fairly. Sounds pretty common sense. There’s more. This is a company of some 3,000 employees, who can call the CEO when they have an idea or a suggestion or where management doesn’t have special perks–such as parking spaces or a special cafeteria. Hmmmm. Sounds suspicious. Doesn’t management deserve special perks? Or is that what has been ingrained our collective thinking in recent years? And what has happened to those companies that have enthusiastically embraced this mindset? From boom to bust for many of them. Witness the layoff rampage stemming from the Great Recession.
John Lincoln was only 29, with a wife and two young kids, when he was turfed from his job of building electric motors in Cleveland, Ohio. A financial panic in 1893 had pulled down the U.S. economy (sound familiar?) leaving millions of Americans out of work. Lincoln struck out on his own, taking the gamble to open the Lincoln Electric Company.
Through hard work, constant innovation and good-old American persistence, Lincoln built his company steadily. It was when the gasoline engine surpassed the electric car in the early 1900s that Lincoln realized that the technology he possessed had huge potential. As Frank Koller explains: “The powerful electrical current produced by his motor generator unit could do much more than charge a car battery–it could also create an arc of electricity hot enough to melt steel.”
James Lincoln, the younger brother, entered the scene around 1907, becoming general manger in 1914. The two brothers proved to be a dynamo in innovating and in advancing their belief that arc welding was vastly superior to banging rivets through steel. By 1929, Lincoln Electric held 30% of America’s welding market, which was rapidly displacing riveting.
Koller shares a powerful story from 1933, when Lincoln Electric had avoided layoffs in Cleveland (a city then with a 50% unemployment rate) by reducing hours and wages. One worker posed the question: “If we did more, tried harder and worked together as a real team, could the company pay is more?”
It so happened that James Lincoln had been tuning into President Roosevelt’s radio broadcasts, in which he spoke about American workers deserving a more “abundant life.” Although he wasn’t a FDR supporter Lincoln introduced a one-year trial on profit-sharing which was represented as a bonus.
James Lincoln first believed that because trust flowed both ways that the bonus was of secondary importance. However over time his view changed, in particular during the 1950s, when he realized that workers worked harder and more creatively. Indeed, the bonus was exceeding in some years 100% of employees’ base wages. He later stated: “Under conditions of maximum desire for efficiency, the bonus should average more than wages.”
I love the quotation that Koller provides from 1942 when James Lincoln appeared before a Congressional committee on accusations of tax evasion, because of misperceptions of how piece-rate compensation worked: “Here is something which is making it possible for those men to be home owners, to be self-respecting, to have the feeling that they are men among men, who have the feeling that they are going to send their children to college, that they are going to be just as good as anybody else, and what is more, they are.”
It took James Lincoln almost another 10 years to convince Congress that his company had not been illegally profiteering during World War II. In fact, one federal tax employee stated that “no man who worked with his hands should receive as much as $5,000 a year.” In the end, James Lincoln prevailed over the government.
Lincoln Electric’s approach to employee compensation remains controversial, perhaps in part because of a lack of understanding of what it entails, in part to stereotypes generated by organized labor, and in part to horror stories from countries such as India and China where piece-rate brings a new meaning to the abuse of workers.
Let’s look at a few facts: The first bonus was paid in 1934, with the range being from a low of 25% to 120% over the years, with the average being 77%. The average bonus paid in 2008 was $28,873. It’s not uncommon to see Lincoln employees earning between $80,000 and $90,000 a year in total income.
Because of my past work for many years in the areas of leadership development and team learning, I was intrigued to read about how Lincoln Electric’s employees function in a piece-rate work environment, especially when it comes to ensuring consistent quality of the products manufactured. In contrast to the typical corporate approach where quality control inspectors check the work of others, at Lincoln the responsibility is pushed down to the employee level, resulting in cost savings. Each worker is responsible for verifying that his or her work meets the necessary standards.
Furthermore, rather than the manufacturing sector average of one supervisor for roughly ten workers, Lincoln has a flatter and more cost-efficient structure of one supervisor to 60-70 employees. This is remarkable, and in my view very progressive and forward-thinking. Governments could learn a lesson here.
When it comes to teamwork in a piece-work system the perennial challenge is how to make it actually work. The stereo-typed view is “Why should I care, when I’m paid for what I personally produce?” Koller clarifies this challenge. For example, if your co-worker hands-off to you inferior parts as part of the production process, you’re then unable to produce the required quality for your part.
It’s in the interest of all Lincoln employees to play an active role in solving production problems, however small. As one production engineer expressed to Koller: “It’s a competitive environment, definitely, where the more you make, the more money’s in your pocket. But each guy knows that the other guys depend on him to make good-quality products, so when challenges come up, they know they need to work in a Team environment. There is a natural incentive.”
Lincoln Electric’s guaranteed employment policy, introduced in 1958, has garnered international attention. However, some clarification is in order. Nothing is ever quite as it seems, although it is indeed an extraordinary policy. In effect, this is a contract that precisely explains the obligations of workers and managers AND the penalties when obligations aren’t fulfilled. As the president of the Cleveland’s operations explains: “People misunderstand guaranteed employment as a job for life, and it doesn’t say that. What it means is that we won’t lay people off for economic reasons, but when the economic climate changes, we will eliminate people based on performance standards.”
Yes, the incomes of employees are very high, as noted, but they come with a price: mandatory overtime. If you’re called to work on a weekend when client orders are flooding in, saying no thanks because you want to do fishing with your son is not an option. There’s always a price to be paid if you desire more money. By the same token, Lincoln’s approach has worked for a century as America’s manufacturing has been decimated by global competition and offshoring.
The Great Recession presented particular challenges for Lincoln Electric. When times got tough in the past the company tightened up operations and maintained strict fiscal management. In the first half of 2009, Lincoln terminated employment somewhere between 100 and 200 employees (Koller notes that exact data were not forthcoming from management). A voluntary retirement offer added another 200 departures.
Koller provides a powerful juxtaposition of Lincoln Electric against the follies of corporate America over the past few years when he states:
Lincoln Electric has always operated under the assumption that an energetic pursuit of corporate profits is not inhibited by an equally determined commitment to raise the fortunes of its employees; in fact, the two are interdependent. As proof that Lincoln Electric’s business model can survive the rough-and-tumble of Wall Street, consider the company’s financial track record: an average growth rate of 19 percent per year from 2005 through 2009, an average annual return on investment of 16 percent during those years, a long-term debt-to-equity ratio of only 9 percent, a bank balance of $406 million in cash, and a larger global market share than any of its competitors.
I’ve worked for three decades on issues relating to labor markets, global competition, firm innovation, and leadership and management. As much as that many of my economist peers have argued that manufacturing is dying in America and Canada, and that resource-based industries need to make way for “knowledge industries” (however one defines them in the reflexive group think), it is so reinvigorating to read about a success story.
Read Spark; it will open your eyes to possibilities and break down stereotypes to employee remuneration and engagement. The following videos are also very informative: ABC News on Lincoln Electric and PBS on Lincoln.
There’s a ton of literature out there on leadership and management and case studies from business. However, Lincoln Electric has been the most popular case study at the Harvard Business School of all time. In reading Spark, I came away with the hope that manufacturing could experience a resurgence in America (and I would hope Canada). Furthermore, I realized that a piece-work approach to employee compensation is not the Devil’s work, but rather a motivational way in which to provide workers with superior incomes, accompanied by job security. To put it another way, Lincoln Electric employees retain their self-respect working in a piece-rate work setting.
Of course, there’s a vital leadership component to this. Lincoln Electric appears to have learned this and is steadily evolving in how it engages employees in a competitive global environment where technology is ever-advancing. How many other North American companies can brag about this?
Please share your thoughts and experiences.
You know you’re laying down a good arc weld when it sounds like bacon frying in a pan.
– Mark Bowen (welding instructor, Ottawa, Canada–from Spark)
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