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BusinessWeek: January 22, 1996 |
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Workplace: COMPENSATION
A MODEL INCENTIVE PLAN GETS CAUGHT IN A VISE Lincoln Electric's remake forces a shift toward traditional pay
Unfortunately, the Lincoln model isn't quite the smashing success it once was. After management stumbles forced the family-controlled manufacturer of welding equipment and supplies to sell more shares to the public last year, Lincoln increasingly resembles a typical public company. With institutional shareholders and new, independent board members in place, worker bonuses are getting more of a gimlet eye. At the same time, management is readying itself for an expansion drive to remain globally competitive, putting more pressure on the balance sheet. All that has crimped bonuses, even though Lincoln is posting record sales and earnings. For workers who expect high bonuses if they deliver in output, the shift has hurt morale. So Lincoln is taking its one-of-a-kind pay system in for an overhaul. The company is by no means ready to ditch the incentive plan, which once paid employees up to 100% of their wages in annual performance-linked bonuses. But executives are now considering ways to move toward a more traditional pay scheme and away from the flat percentage-bonus formula. "The bonus is a good program, and it has worked well, but it's got to be modified some," says Director David C. Lincoln, whose father John C. Lincoln founded the company in 1895. Adds Edward E. Lawler, who heads the University of Southern California's Center for Effective Organizations: "One of the issues with Lincoln is how [its pay plan] can survive rapid growth and globalization." Plans such as Lincoln's may be getting a lot of attention these days, but they date back to the 19th-century piecework system. Each of Lincoln's 3,400 U.S. employees is supposed to be a self-managing entrepreneur. There's minimal supervision. They get paid when they work--no sick or holiday pay. "How much money you make is in your own hands," says Thomas Gadomski, a painting-crew leader. Each employee is accountable for the quality of his or her own work and is rated twice a year on quality, output, dependability, cooperation, and ideas. The ratings determine how much of the total corporate bonus pool each worker will get, which comes on top of his or her hourly wage. WIDE RANGE. The average Lincoln factory hand earns $16.54 an hour, vs. the $14.25 average manufacturing wage in the Cleveland area. With a 56% average bonus in 1995--the lowest in years--production employees came out ahead of workers elsewhere even after paying for health-care benefits employers typically pick up. But unlike at other companies, Lincoln has huge variations in production-worker pay: from roughly $32,000 to more than $100,000 for the most hard-driving. There's tremendous pressure to produce, but an employee advisory board meets regularly with top management to air workers' concerns. And Lincoln guarantees work to employees with three years' experience. No one has been laid off since 1948, and turnover is less than 4% among those with at least 180 days on the job. "There isn't any other place to work like Lincoln Electric," says Kathleen Hoenigman, an 18-year veteran. "They take care of you." Indeed, Lincoln went so far as to borrow more than $100 million in 1992 and 1993 to pay U.S. bonuses, even though it lost a total of $84 million in those years, in part because of an ill-conceived foreign-acquisition spree. Says CEO Donald F. Hastings: "I had to go to the board and say: `We can't break our trust with this group because of management mistakes and recession elsewhere."' Still, it gets harder and harder to live up to the old deal. Even though the company has come roaring back after stumbling abroad, the red ink it spewed left Lincoln financially weakened. To make better acquisitions and expand further, Lincoln made its first public offering last July, pushing outsiders' stake to 40%. It also slashed total debt by nearly 40%, to $130 million, and paid a lower bonus per person, though the total bonus kitty was a record $64 million. PROTESTS. The slimmer bonuses represent a sea change for employees. It didn't help that last year, Lincoln's centennial, was its first with $1 billion in sales. In November, some employees protested outside headquarters after they learned of the bonus size. "Everyone was upset," says one worker. Blue-collar workers had already been disgruntled with management when it set up a lower wage scale in 1993, at 75% of pay, for 700 new employees hired to meet demand and staff an expanded motor operation. Turnover among the new hires was high, and the disparate pay disturbed veterans. "If an individual shows he can handle the workload, he should be rewarded" with full pay, says Joseph Tuck, an inspector with 18 years at Lincoln. Because of the protests, Hastings eliminated the two-tier wage on Dec. 1. To revamp the pay scheme without stirring up resentment, the company has set up a committee to study the bonus program. It has told employees that a new formula is in the works, and it has hired Price Waterhouse to study productivity. Although Hastings pledges that the incentive system will remain, over time, he wants employees to focus more on their overall earnings, not just the percentage bonus they receive. Already, he has started raising base pay--with a likely reduction of bonuses later--for engineering, sales, and other office staff. Even after the charges, Lincoln's pay system is likely to remain more innovative than most. But as it tries to hire more outsiders, expand further abroad, and modernize, "we're getting to be a more normal company," says Director Frank L. Steingass. That may not be quite what eager visitors expect to hear. But if Lincoln can adapt to new times without sacrificing employee good will, another model pay plan may yet emerge. Return to top | |
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