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Category: Miscellaneous
Volume: 21
Issue: 5
Article No.: 3011

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FINANCIALLY $PEAKING: Thinking About Improving Your Company?

Then think about this. A few years ago I was planning a trip to Cleveland to evaluate a possible acquisition for a client. In the process I remembered reading about a company also in Cleveland that, for years, had paid bonuses, on average, of 95% of base pay! The company is Lincoln Electric.

Over the years, some people I knew tried to rationalize that to afford such a big bonus as a percent of base pay, the base pay must be pretty low. As part of my trip planning I thought I'd find out for myself how they did it and called Lincoln Electric. "Sure we'll tell you about our incentive system" said their Human Resources department. "Stop by when you're in town," they said.

And that I did. I was met at 7:00 a.m. in the company cafeteria by the VP of Human Resources who took me on a tour and began to describe the company and bonus plan.

Begun 104 years ago, the company manufactures welding products, electric motors and environmental systems with about 6,300 employees and with sales over $1.1 billion per year. Registered on the NASDAQ, over 90% of their stock is owned by employees and Lincoln family members.

As our tour began one couldn't help notice that the facility and furnishings were quite old. "Why spend money on upgrades when what we have still works pretty well", I was told. In different sections of the large cafeteria were about 5 groups of employees, some with small blackboards or paper tablets on easels. "What are they doing?" I asked. "Well we don't believe in spending money for conference rooms so, when someone wants to meet, we use the cafeteria when it's not busy" was the response.

The factory was a beehive of activity and no one was standing around talking. "Where are the foremen or managers", I asked, "or are they doing work too?" "We don't believe in a lot of management" was his reply. "The foreman-to-worker ratio is one to 100".

"What's your employment turnover" I. asked. "Well he said, if a person can make it through the first year, chances are they'll be here quite a long time." "After three years of work we have guaranteed employment." "We currently have a two year waiting list just to be an employee here" he said.

Following our plant tour, I began to learn about their administration.

-Production workers are paid on a production basis.

-Since 1913, there has been an elected advisory board of employees to insure direct and open communication with senior management.

-Employees receive a merit rating every six months in a variety of factors. At the start of each year, each employee receives ten cards, each one for a different work characteristic such as attendance, production quality, dependability, cooperation, ideas etc. Each card is worth 100 points. Each employee then starts off on the same basis. Employees loose points if they exhibit less than top performance in each of the work characteristics. Then, each employee's total points for all ten cards are added together. Each employee's total points are then divided by the total points of all employees. That fraction times the total bonus pool equals an employee's share of the bonus.

-Lincoln's average hourly earnings are comparable to similar jobs in the Cleveland area. But, with incentive bonuses averaging 95% of base pay, employees can earn in excess of $100,000 per year!

What lessons can be learned from Lincoln Electric?

Knowing the effect of profits on bonuses, employees are highly self-motivated and cost conscious. They also have an exceptional entrepreneurial spirit. These factors, coupled with a high level of reward not only motivates each employee but allows the company to have less supervision. A ratio of one foreman per 100 employees is only dreamed of at other companies. The Human Resources department plays an important role in good communications between employees and management and administers the incentive system.

Before leaving Lincoln Electric I was given a book written by the founder, John Lincoln. In it he describes his philosophy about business. "What motivates the high school athlete?" he writes. He or she realizes they will not go on to play professional sports and will not make the large salaries the pros receive. Then why do they do it? Why go through all the training? Why endure all the bumps and bruises? Why spend countless hours on the athletic field? Why...for the recognition that comes with success; the trophy, the applause, the pat on the back and the thanks they receive.

Maybe cost reduction and profitability are more than numbers, consultants and accountants. Maybe its involving our Human Resource people more often. Maybe its paying an incentive bonus based on performance and recognition for work performed. Maybe its thanking your employees for a job well done. Remember, accounting and taxes are more than just numbers; its knowing what the numbers mean.

For more information, click on the Authors Biography at the top of this page.

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