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Compensation Policies

Compensation policies were the key element of James F. Lincolns philosophy of incentive management. Lincoln Electrics compensation system had three components:

• wages based solely on piecework output for most factory jobs,

• a year-end bonus which could equal or exceed an individuals full annual regular

  pay, and

• guaranteed employment for all workers

  Almost all production workers at Lincoln were paid on a straight piecework plan. They had no base salary or hourly wage but were paid a set price for each item they produced. William Irrgang explained:

  Wherever practical, we use the piecework system. This system can be effective, and it can be destructive. The important part of the system is that it is completely fair to the worker. When we set a piecework price, that price cannot be changed just because, in managements opinion, the worker is making too much money. Whether he earns two times or three times his normal amount makes no difference. Piecework prices can only be changed when management has made a change in the method of doing that particular job and under no other conditions. If this is not carried out 100 percent, piecework cannot work.

  The Lincoln Electric Company

Today piecework is confined to production operations, although at one time we also used it for work done in our stenographic pool. Each typewriter was equipped with a counter that registered the number of times the typewriter keys were operated. This seemed to work all right for a time until it was noticed that one girl was earning much more than any of the others. This was looked into, and it was found that this young lady ate her lunch at her desk, using one hand for eating purposes and the other for punching the most convenient key on the typewriter as fast as she could; which simply goes to show that no matter how good a program you may have, it still needs careful supervision.6

A Time Study Department established piecework prices which were guaranteed company, until methods were changed or a new process introduced. Employees could challenge the price if they felt it was unfair. The Time Study Department would then retime the job and set a new rate. This could be higher or lower but was still open to challenge if an employee remained dissatisfied. Employees were expected to guarantee their own quality. They were not paid for defective work until it had been repaired on their own time.

Each job in the company was rated according to skill, required effort, responsibility, and so on, and a base wage rate for the job was assigned. Wage rates were comparable to those for similar jobs in the Cleveland area and were adjusted annually on the basis of Department of Labor statistics and quarterly to reflect changes in the cost of living. In this way, salaries or hourly wages were determined. For piecework jobs, the Time Study Department set piece prices so that an employee producing at a standard rate would earn the base rate for his or her job.

The second element of the compensation system was a year-end bonus, which had been paid each year since 1934. As explained in the Employees Handbook, The bonus, paid at the discretion of the company, is not a gift, but rather it is the sharing of the results of efficient operation on the basis of the contribution of each person to the success of the company for that year. In 1974, the bonus pool totaled $26 million, an average of approximately $10,700 per employee, or 90% of pre-bonus wages.

The total amount to be paid out in bonuses each year was determined by the board of directors. Lincolns concentration on cost reduction kept costs low enough that prices could generally be set (and not upset by competition) on the basis of costs at the beginning of the year to produce a target return for stockholders and to give employees a bonus of approximately 100% of wages. The variance from the planned profits was usually added to (or subtracted from) the bonus pool to be distributed at year end. Since 1945, the average bonus had varied from 78% to 129% of wages. In the past few years, it had been between 40% and 55% of pre tax, pre-bonus profit, or as high as twice the net income after taxes.

An individuals share of the bonus pool was determined by a semiannual merit rating which measured individual performance compared to that of other members of the department or work group. Ratings for all employees had to average out to 100 on this relative scale. If, because of some unusual contribution, an individual deserved a rating above 110, he or she could be rewarded from a special corporate pool of bonus points, without any penalty to co-workers. Ratings above 110 were thus reviewed by a corporate committee or vice presidents who evaluated the individuals contribution. Merit ratings varied widely, from as low as 45 to as high as 160.

In determining an employees merit rating, four factors were evaluated separately:

• dependability

• quality

• output

• ideas and cooperation

  Foremen were responsible for the rating of all factory workers. They could request help from assistant foremen (dependability), the Production Control Department (output), the Inspection Department (quality), and the Methods Department (ideas and cooperation). In the office, supervisors rated their people on the same items. At least one executive reviewed all ratings. All employees were urged to discuss their ratings with their department heads if they were dissatisfied or unclear about them.

  Lincoln complemented its rating and pay system with a Guaranteed Continuous Employment Plan. This plan provided security against layoffs and assured continuity of employment. Every full-time employee who had been with the company at least two years was guaranteed employment for at least 75% of the standard 40-hour week. In fact, the company had not had any layoffs since 1951 when initial trials for the plan were put into effect. It was formally established in 1958.

  The guarantee of employment was seen by the company as an essential element in the incentive plan. Without such a guarantee, it was believed that employees would be more likely to resist improved production and efficiency for fear of losing their jobs. In accepting the guaranteed continuous employment plan, employees agreed to perform any job that was assigned as conditions required, and to work overtime during periods of high activity.

  The philosophy and procedures regarding the incentive plan were the same for management and workers, except that William Irrgang and George Willis did not share in the bonus.

5. Describe Lincoln Electric's Incentive Plan for employees? LE Objective - Amplify what?? How does LE pay Base Wages? How is the bonus/Incentive determined? Financial Incentive Role Base Pay Performance Metric (KPI) Wage / Draw 11 based on - Units / Incentive Plan Ladders - Y/N? Per Unlt? Description Profits? 1 Welder/Employee 5. Describe Lincoln Electric's Incentive Plan for employees? LE Objective - Amplify what?? How does LE pay Base Wages? How is the bonus/Incentive determined? Financial Incentive Role Base Pay Performance Metric (KPI) Wage / Draw 11 based on - Units / Incentive Plan Ladders - Y/N? Per Unlt? Description Profits? 1 Welder/Employee