Lincoln Electric Co.

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Lincoln Electric Co.

22801 St. Clair Avenue
Cleveland, Ohio 44117
U.S.A.
(216) 481-8100
Fax: (216) 486-1751

Public Company
Incorporated: 1906
Employees: 2,000
Sales: $906.6 million
Stock Exchanges: New York
SICs: 3548 Welding Apparatus; 3621 Motors & Generators

Lincoln Electric Co., a leading producer of industrial electric motors and high-tech cutting equipment, is the world’s largest manufacturer of arc-welding products. Although the majority of the company’s equity remained in the hands of Lincoln family members in the early 1990s, the firm commemorated its 1995 centenary with a $100-million public stock offering, the first such stock offering in the company’s history. The mid-1990s were also marked by a return to business profitability for the company. After suffering back-to-back net losses in 1992 and 1993, the company scored record sales and earnings in 1994. Many industry analysts attribute the company’s long-term success and resiliency to its methods of managing and rewarding its workers, who rank among the world’s highest-paid and most productive.

Lincoln Electric is perhaps best known for its unique strategy for handling employee relations, known as the Lincoln Incentive Management System. This program evolved during the first half of the twentieth century, and has remained virtually intact during the second half of the century. It focuses on six themes that are interwoven throughout the company’s history: people as assets, Christian ethics, principles, simplicity, competition, and customer satisfaction.

Although Lincoln Electric Co. was founded by John C. Lincoln in 1895, it is his younger brother, James, who is most identified with the firm and its unique management system. Both were sons of an unordained minister. James Finney Lincoln was born in 1883 in Painesville, Ohio, about 25 miles northeast of Cleveland. His middle name refers to Charles Grandison Finney, a well-known nineteenth-century revivalist who also served as president of Oberlin College.

Lincoln’s Congregationalist upbringing undoubtedly contributed one of the fundamental tenets of the Incentive Management System: Christian ethics. He based this precept on a simple exhortation from the Sermon on the Mount: “Do unto others as you would have them do unto you.” In his 1961 book, A New Approach to Industrial Economics, Lincoln called this “program” (widely known as the Golden Rule), “the complete answer to all problems that can arise between people.”

James grew up on a farm, then traced his elder brother’s footsteps to Ohio State University and the study of electrical engineering. In the preface to A New Approach, biographer Charles G. Herbruck noted Lincoln’s athletic prowess over his academic performance. “One of Ohio State’s outstanding fullbacks,” according to Herbruck, Lincoln led the school’s football team to an undefeated season in the fall of 1906. In 1907, however, Lincoln was struck with typhoid fever. The illness so debilitated him that he was compelled to drop out of school.

Rather than finish out the year and earn his degree, Lincoln elected to go to work for his older brother, John, who had founded the Lincoln Electric Company in 1895 to manufacture and repair electric motors. By the time he was joined by his younger sibling, John had expanded into the new field of rechargeable batteries for electric automobiles and begun research in arc welding.

James became the firm’s first and only salesman, working for $50 per month and a two percent commission on sales. John, who was more interested in new product development than corporate operations, soon abdicated the management of the company to his younger brother. James advanced to vice-president within four years, and became general manager of the entire operation in 1914 at the age of 31.

One of James Lincoln’s first moves as head of the company reflected his acknowledgement that he was relatively inexperienced, but eventually became a fundamental feature of the company’s Incentive Management System. He formed an advisory board comprised of elected representatives from each department within the firm. Although no authority was delegated to the group, its members could bring literally any issue, large or small, to the floor for discussion. This management technique was one practical outgrowth of Lincoln’s goal to treat people as assets deserving respect.

This body’s twice-monthly meetings became a permanent facet of Lincoln Electric’s management scheme. The board’s continued existence has also been cited as a factor in the company’s non-union and strike-free history. One longtime employee interviewed for Robert Levering and Milton Moskowitz’s 1993 book, The 100 Best Companies to Work for in America, commented that, “you tell them [the Advisory Board] everything you want to tell them. It’s just like if you had a union, but you tell it to the top management, the chairman and the president.”

Freed from the constraints of management to concentrate on his craft, John Lincoln developed the electric arc welding machine that would become his company’s primary product. Arc welding had originated in the late nineteenth century, but early methods resulted in brittle, unreliable joints. The introduction of a new electrode in 1907 resulted in stronger welds and convinced James Lincoln that the arc welder was the manufacturing tool of the future. Up to that time, welding was used primarily for repairs, but Lincoln envisioned its application at virtually all stages of manufacturing and construction. Still, he found it difficult to convince potential customers that welding was a viable—or even superior—method of joining materials. According to biographer Herbruck, one dubious observer told Lincoln that he would “kick off with his toe any weld Mr. Lincoln could make.”

In order to promote the concept, Lincoln started a welding school (which would become America’s oldest and most reputable), sponsored design competitions, published books, conducted seminars, and wrote articles in trade journals. He also began applying the techniques to his own products. The use of arc welding during the manufacturing process helped Lincoln Electric gain up to 50 percent cost reductions on the production of electric motors and the welding machines themselves. His efforts finally paid off. During the period between the two world wars, Lincoln was able to convince an engineering and construction firm—the Austin Company—to use welding techniques on a building. Although expensive, the resulting structure helped launch a new era in commercial construction.

In the meantime, Lincoln had begun implementation of some of the practical aspects of the Incentive Management System. The piecework pay system was adopted in 1915. Under this system, periodic evaluations of the time required, difficulty of, and “going rate” for each job set the per-piece rate. Some have criticized piecework as a high-pressure method of recognizing a worker’s contribution, but supporters claim that studies have shown that Lincoln’s workers are often twice as productive as their counterparts in competitors’ shops. They also argue that Lincoln workers earn more than their counterparts elsewhere, with some workers’ annual pay exceeding $100,000.

Lincoln added employee benefits during this period as well. The company added an employee stock option plan in 1925 (workers owned an estimated 30 percent of the company in the early 1990s), offered life insurance in 1915, and started the company’s suggestion system in 1929.

The hardships of the Great Depression precipitated Lincoln Electric’s famous “bonus plan.” In 1934 Lincoln employees responded to depression-era cuts in hours and pay by offering— through their advisory board—to work longer hours in exchange for a share of the company’s profits. That first year’s payout, which was distributed from profits after taxes and dividends had been paid, averaged 30 percent of each worker’s regular annual pay. Although a discretionary item, the annual bonus (with some modification) has remained in place throughout the rest of the company’s history.

The addition of the bonus plan necessitated the implementation of a merit evaluation program that assigned equal weight to four areas: production, quality, cooperation and ideas, and supervision required. In the Lincoln evaluation program, each employee starts the year with 100 points. Points are added or subtracted in the course of semi-annual reviews. For the most part, its a zero-sum game: workers compete for a limited number of points in all areas but quality. If one loses a point, another has a chance to earn it. Moskowitz and Levering contend in The 100 Best Companies to Work for in America, however, that “Lincoln’s competitive incentive system has not fostered a dog-eat-dog environment, but rather one where people seem to be working harmoniously.” The bonus system and evaluation process embodied two of Lincoln’s cherished precepts: decision-making based on unwavering principles and “the universal benefits of competition.” The institution of these and other programs supported continued growth for Lincoln. By the mid-19308 James Lincoln had turned his company into what a 1993 Compensation and Benefits Review article called “one of the first companies in the United States to install a successful productivity-based incentive system for all employees.”

By the early 1940s Lincoln had grown to become the world’s largest manufacturer of arc welding equipment, with subsidiaries in Canada, the United Kingdom, and Australia, and licensees in Mexico, Brazil, and Argentina. By 1944 Lincoln Electric’s benefits package included a company-funded pension plan. An internal promotion program that bolstered already-strong company loyalty was also launched.

Lincoln experimented with a “guaranteed employment” policy in the post-World War II era. This arrangement was designed to preserve a skilled work force and encourage employee suggestions for increased efficiency. According to the policy, anyone who worked at the company for two years—later increased to three years—would not be laid off (although the work week could be shortened to 30 hours and workers could be reassigned, possibly to lower-paying jobs). The program was made permanent in 1958, but management retained the right to institute a layoff as long as it gave workers six months’ notice.

Unlike many companies in other manufacturing sectors, Lincoln staved off foreign competitors by maintaining high productivity and quality, yet offering their goods at low prices. Although material costs multiplied in the postwar era, James Lincoln set a goal of reducing costs by ten percent annually. With money- and time-saving ideas from the employee suggestion plan, the company was able to hold prices at 1933 levels until runaway inflation in the 1970s compelled price hikes.

Lincoln was able to incorporate his management theories into the 1951 design and construction of a new 30-acre plant in Euclid. The building, which did not include windows, carpeting, or executive quarters, embodied his belief that simplicity in design contributes to organization management.

James Lincoln acted as the company’s president until 1954, when he advanced to chairman of the board. He was succeeded as president by William Irrgang, a German engineer with 26 years of experience at Lincoln Electric. Irrgang, who advanced to chairman in 1965 and assumed the new title of CEO in 1972, essentially carried on the conservative policies of his mentor throughout his 14-year tenure. For example, Lincoln had a capital investment policy that prohibited spending on projects with a payback of over one year. Although this policy was effective for the essentially domestic business of James Lincoln’s era, it did not account for the increasingly global economy that emerged in later decades.

George “Ted” Willis, a graduate of Harvard Business School, became president in 1972. He had first heard James Lincoln speak about the Incentive Management System in the 1940s, and decided to join the company in 1947 upon earning an MBA. During the early 1980s, Willis was constrained from aggressively expanding the company’s interests by Irrgang’s conservatism and an overall economic recession. Lincoln Electric’s revenues dropped 40 percent, from $450 million in 1981 to $220 million in 1982, as all of the company’s traditional markets declined. The economic crisis put the manufacturer’s no-layoff policy to the test. About 15 percent of Lincoln’s employees were reassigned; production workers did plant maintenance, took clerical assignments, and even went on the road as salesmen. Average pay was halved, from $44,000 to $22,000. The salaries of top executives were trimmed as well, although not as severely. George Willis’ pay dropped 20 percent, and Donald Hastings’ compensation was cut by over 11 percent.

Still, no one was laid off, and the company (which remained profitable) even managed to pay a bonus. In order to boost sales, Lincoln introduced the industry’s first five-year warranty on motors, expanded its distributor network by 71 percent, and guaranteed cost savings to its customers.

Lincoln emerged from the early 1980s downturn debt-free and profitable. It also retained its leadership of the welding industry. It was poised for growth, and when ultimate leadership of the company passed to Willis upon Irrgang’s death in 1986, Willis wasted no time in expanding the company, both in terms of product offerings and geography. New welding and cutting products, including flux wire, robotic, and gas-based welding systems, helped expand Lincoln’s product offerings to a full line of welding equipment.

The company maintained solid relationships with its employees in the 1980s and early 1990s. Employee turnover at the company in the first 90 days ran high, at 25 percent, but remained remarkably low (three percent) overall. A rewarding retirement plan (called “the best ... in the land,” by Moskowitz and Levering) probably contributed to this outstanding statistic as well. After 40 years’ service, employees receive an annuity that allows them to retire at age 65 with full pay. Lincoln has no mandatory retirement age, though, so if an employee continued to work after age 65, he would receive his regular earnings in addition to the pension.

A total of 19 acquisitions from 1986 to 1991 helped boost annual sales by 87.3 percent, from $445.31 million to $833.89 million. The first of these was close to home; in 1986 Lincoln acquired Cleveland’s Aireo Electrode plant from BOC Group. A second transfer of property from the United Kingdom’s BOC to Lincoln Electric, a Montreal electrode plant, occurred that same year. In 1987 Lincoln purchased an Australian electrode plant from France’s Air Liquide. A 1988 joint venture with Norweld Holding A.A., a Norwegian company with $100 million in annual sales, quadrupled Lincoln’s business in Northern Europe to $135 million annually. That same year saw the acquisition of two welding factories in Mexico and two more in Brazil.

Upon his 1992 retirement, Willis was praised for doubling Lincoln Electric’s sales, expanding its international presence from four to 15 countries, and securing a spot for the company on the “Forbes 500.” That dramatic growth, however, came at a cost. The repercussions were felt during Donald Hastings’ term as CEO and chairman. The fast-paced expansion had increased long-term debt from $17.5 million in 1988 to $221.5 million in 1993. Unanticipated difficulties in transplanting the incentive system to operations in such countries as Brazil, Mexico, and Germany, coupled with a 40 percent drop in the European market, contributed to a $46 million loss in 1992. Although orders in the United States were so high that Lincoln stayed open through its usual summer shutdown in 1993, the company still suffered its worst quarter ever. The company saw an overall loss of $38 million in 1993.

Early in 1994, the company closed factories in Europe, Latin America, and South America, thereby eliminating 770 jobs. In the United States, however, where demand continued to run high, the company added 600 jobs. The company’s decision to shed itself of those international operations resulted in a complete turnaround: 1994 sales and earnings reached record levels of $907 million and $48 million, respectively. The company hoped to mark its centenary year, 1995, by surpassing $1 billion in annual sales.

Principal Subsidiaries: Lincoln Electric Co. Seal-Seat Co.; Lincoln Big-Three, Inc.; Lincoln Electric Co. Harris Calorific.