Lincoln Electric

Background and Motivation

Lincoln Electric was founded in 1895 by a technical genius, John C.Lincoln, in order to manufacture electric motors and generators. At its beginnings, the company focused on producing arc welding machines and became by World War II the leader in its domain. In 1955, after the government’s request to add capacity to the market, Lincoln outperformed its rivals and soon became the world’s largest manufacturer in the industry. This company’s competitive advantage allowed it to concentrate on two winning strategies which remained unchanged for decades: 1) to produce a gradually better product at a lower and lower price for a growing base of customers and 2) to have the employees' earnings and promotion in direct proportion of their individual contributions to the company in order to increase productivity (in 1975, approximately 48% of employees were shareholders). The company's philosophy, based on James F.Lincoln's theory , was reflected into its personnel policy, whose essence was to recognize every employee's work and reward him through financial compensation and job security. In addition, Lincoln’s incentive performance system - which we are going to discuss - was seen as a “cornerstone” of the company’s culture and has certainly contributed to its success.

Lincoln Electric's compensation plan and personnel policy

Here are the three components of Lincoln’s compensation plan and personnel policy:

Wages based on piecework output: workers are paid a fixed piece rate for each item produced; this system guarantees the fairness for the workers. As we will see later, workers are also responsible for the quality they produce.

Year-end bonuses: this is the way of sharing the results of the company’s operations on the basis of the workers' individual contributions. The amount given is according to the semi-annually employee’s "merit rating", a measure of four factors (dependability, quality, output and ideas & cooperation), compared to...