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THE LINCOLN ELECTRIC COMPANY*

* Prepared by Arthur Sharplin, McNeese State University, Lake Charles, LA., 1989.

The Lincoln Electric Company is the world'slargest manufacturer of welding machinesand electrodes. Lincoln employs 2,400

workers in two U.S. factories near Clevelandand approximately 600 in three factorieslocated in other countries. This does notinclude the field sales force of more than200 persons. It has been estimated thatLincoln's market share (for arc weldingequipment and supplies) is more than 40percent.

The Lincoln incentive managementplan has been well known for many years.

Many college management texts refer to theLincoln plan as a model for achieving highworker productivity. Certainly, Lincoln hasbeen a successful company according to theusual measures of success.

James F. Lincoln died in 1965 andthere was some concern, even amongemployees, that the Lincoln system wouldfall into disarray, that profits would decline,and that year-end bonuses might be discon-

tinued. Quite the contrary, 15 years afterLincoln's death, the company appearsstronger than ever. Each year since 1965has seen higher profits and bonuses.Employee morale and productivity remainhigh. Employee turnover is almost nonexis-tent except for retirements. Lincoln's marketshare is stable.

A Historical Sketch

In 1895, after being "frozen out" outof the depression-ravaged Elliott-LincolnCompany, a maker of Lincoln-designedelectric motors, John C. Lincoln took out hissecond patent and began to manufacture hisimproved motor. He opened his new

business, unincorporated, with $200 he hadearned redesigning a motor for youngHerbert Henry Dow, who later founded The

Dow Chemical Company.

Started during an economic depres-sion and cursed by a major fire after onlyone year in business, Lincoln's companygrew, but hardly prospered, through its firstquarter century. In 1906, John C. Lincolnincorporated his company and moved fromhis one-room, fourth-floor factory to a newthree-story building he erected in EastCleveland. In his new factory, he expanded

his workforce to 30 and sales grew to over$50,000 a year. John Lincoln preferredbeing an engineer and inventor rather than amanager, though, and it was to be left toanother Lincoln to manage the companythrough its years of success.

In 1907, after a bout with typhoidforced him from Ohio State in his senioryear, James F. Lincoln, John's youngerbrother, joined the fledgling company. In

1914, with the company still small anddetermined to improve its financialcondition, he became the active head of thefirm, with the titles of General Manager andvice-president. John Lincoln, while heremained president of the company for someyears, became more involved in otherbusiness ventures and in his work as aninventor.

One of James Lincoln's early actions

as head of the firm was to ask the employeesto elect representatives to a committee thatwould advise him on company operations.The Advisory Board has met with the chief executive officer twice monthly since thattime. This was only the first of a series of



2 The Lincoln Electric Company

innovative personnel policies that have, overthe years, distinguished Lincoln Electricfrom its contemporaries.

The first year the Advisory Board

was in existence, working hours werereduced from 55 per week, then standard, to50 hours a week. In 1915, the companygave each employee a paid-up life insurancepolicy. A welding school, which continuestoday, was begun in 1917. In 1918, anemployee bonus plan was attempted. It wasnot continued, but the idea was to resurfaceand become the backbone of the LincolnManagement System.

The Lincoln Electric Employees'Association was formed in 1919 to providehealth benefits and social activities. Thisorganization continues today and hasassumed several additional functions overthe years. By 1923, a piecework pay systemwas in effect, employees got two-week paidvacations each year, and wages wereadjusted for changes in the Consumer PriceIndex. Approximately 30 percent of Lincoln's stock was set aside for keyemployees in 1914 when James F. Lincolnbecame General Manager and a stock purchase plan for all employees was begunin 1925.

The Board of Directors voted to starta suggestion system in 1929. The programis still in effect but cash awards, a part of theearly program, were discontinued severalyears ago. Now, additional "points" whichaffect year-end bonuses reward suggestions.

The legendary Lincoln bonus planwas proposed by the Advisory Board andaccepted on a trial basis by James Lincoln in1934. The first annual bonus amounted toabout 25 percent of wages. There has been abonus every year since then. The bonusplan has been a cornerstone of the Lincoln

Management System and recent bonuseshave approximated annual wages.

By 1944, Lincoln employees enjoyeda pension plan, a policy of promotion from

within, and continuous employment. Basepay rates were determined by formal jobevaluation and a merit rating system was ineffect.

In the prologue to James F. Lincoln'slast book, Charles G. Herbruck writesregarding the foregoing personnel innova-tions:

They were not to buy good behavior.

They were not efforts to increase profits.They were not antidotes to labordifficulties. They did not constitute a"do gooder" program. They wereexpres-sions of mutual respect foreach person's importance to the job tobe done. All of them reflect theleadership of James Lincoln, underwhom they were nurtured andpropagated (Lincoln, 1961, p. 11).

By the start of World War U,Lincoln Electric was the world's largestmanufacturer of arc-welding products. Salesof about $4,000,000 in 1934 had grown to$24,000,000 by 1941. Productivity peremployee more than doubled during thesame period.

During the War, Lincoln Electricprospered as never before. Despitechallenges to Lincoln's profitability by theNavy's Price Review Board and the taxdeductibility of employee bonuses by theInternal Revenue Service, the companyincreased its profits and paid huge bonuses.

Certainly since 1935 and probablyfor several years before that, Lincolnproductivity has been well above the



The Lincoln Electric Company 3

average for similar companies. Lincolnclaims levels of productivity more thantwice those for other manufacturers from1945 onward. Information available fromsources other than the company tends to

support these claims.

Company Philosophy

James F. Lincoln was the son of aCongregational minister and Christianprinciples were at the center of his businessphilosophy. The confidence that he had inthe efficacy of Christ's teachings isillustrated by the following remark takenfrom one of his books:

The Christian ethic should control ouracts. If it did control our acts, thesavings in cost of distribution would betremendous. Advertising would be acontact of the expert consultant with thecustomer, in order to give the customerthe best product available when all of thecustomer's needs are considered. Com-petition then would be in improving thequality of products and increasing effici-

ency in producing and distributing them;not in deception, as is now too custom-ary. Pricing would reflect efficiency of production; it would not be selling adodge that the customer may well besorry he accepted. It would be properfor all concerned and rewarding for theability used in producing the product.1

There is no indication that Lincolnattempted to evangelize his employees or

customers – or the public for that matter.The current Board chairman, Mr. Irrgang,and the President, Mr. Willis, do not evenmention the Christian gospel in their recentspeeches and interviews. The company

1 James F. Lincoln, A New Approach to Industrial

Economics (New York: The Devin Adair Co., 1961),p. 64.

motto, "The actual is limited, the possible isimmense," is prominently displayed butthere is no display of religious slogans andthere is no company chapel.

Attitude toward the Customer. JamesLincoln saw the customer's needs as theraison d'etre for every company. "When anycompany has achieved success so that it isattractive as an investment," he wrote, "allmoney usually needed for expansion issupplied by the customer in retainedearnings. It is obvious that the customer'sinterests, not the stockholder's, should comefirst." In 1947 he said, "Care should be taken... not to rivet attention on profit. Between

'How much do I get?' and 'How do I makethis better, cheaper, more useful?' thedifference is fundamental and decisive." Mr.Willis still ranks the customer as Lincoln'smost important constituency. This is reflect-ed in Lincoln's policy to "at all times priceon the basis of cost and at all times keeppressure on our cost..." Lincoln's goal, oftenstated, is "to build a better and better productat a lower and lower price."' It is obvious,James Lincoln said, "that the customer'sinterests should be the first goal of industry."

Attitude toward Stockholders. Stockholdersare given last priority at Lincoln. This is acontinuation of James Lincoln's philosophy:"The last group to be considered is thestockholders who own stock because theythink it will be more profitable thaninvesting money in any other way."Concerning division of the largess producedby incentive management, Lincoln writes,"The absentee stockholders also will gettheir share, even if undeserved, out of thegreatly increased profit that the efficiencyproduces."

Attitude toward Unionism. There has neverbeen a serious effort to organize Lincoln




employees. While James Lincoln criticizedthe labor movement for "selfishly attemptingto better its position at the expense of thepeople it must serve" he still had kind wordsfor union members. He excused abuses of

union power as "the natural reactions of human beings to the abuses to which man-agement has subjected them." Lincoln's ideaof the correct relationship between workersand managers is shown by this comment:"Labor and management are properly notwarring camps; they are parts of one organi-zation in which they must and shouldcooperate fully and happily.”

Beliefs and Assumptions about Employees.

If fulfilling customer needs is the desiredgoal of business, then employee perform-ance and productivity are the means bywhich this goal can best be achieved. It isthe Lincoln attitude toward employees,reflected in the following quotations, whichis credited by many with creating the recordof success the company has experienced:

The greatest fear of the worker, which isthe same as the greatest fear of theindustrialist in operating a company, isthe lack of income... The industrialmanager is very conscious of his com-pany's need of uninterrupted income. Heis completely oblivious, evidently, of thefact that the worker has the same need.

He is just as eager as any manager is tobe part of a team that is properly organ-ized and working for the advancement of our economy... He has no desire to makeprofits for those who do not hold up theirend in production, as is true of absenteestockholders and inactive people in thecompany.

If money is to be used as an incentive,the program must provide that what ispaid to the worker is what he has earned.

The earnings of each must be inaccordance with accomplishments.

Status is of great importance in allhuman relationships. The greatest

incentive that money has, usually, is thatit is a symbol of success... The resultingstatus is the real incentive... Moneyalone can be an incentive to the miseronly. There must be complete honestyand understanding between the hourlyworker and management if highefficiency is to be obtained.

Lincoln's Business

Arc welding has been the standardjoining method in the shipbuilding industryfor decades. It is the predominant way of joining steel in the construction industry.Most industrial plants have their ownwelding shops for maintenance and con-struction. Manufacturers of tractors and allkinds of heavy equipment use arc weldingextensively in the manufacturing process.Many hobbyists have their own weldingmachines and use them for making metal

items such as patio furniture and barbecuepits. The popularity of welded sculpture asan art form is growing.

While advances in welding tech-nology have been frequent, arc-weldingproducts, in the main, have hardly changedexcept for Lincoln's Innershield process.This process utilizing a self-shielded, fluxcored electrode, has established new costsaving opportunities for construction and

equipment fabrication. The most popularLincoln electrode, the Fleetweld 5P, hasbeen virtually the same since the 1930s.The most popular engine-driven welder inthe world, the Lincoln SA-200, has been agray-colored assembly including a four-cylinder Continental "Red Seal" engine anda 200 ampere direct-current generator with




two current-control knobs for at least threedecades. A 1980 model SA-200 evenweighs almost the same as the 1950 modeland it certainly is little changed inappearance.

Lincoln and its competitors nowmarket a wide range of general purpose andspecialty electrodes for welding mild steel,aluminum, cast iron, and stainless andspecial steels. Most of these electrodes aredesigned to meet the standards of theAmerican Welding Society, a trade associa-tion. They are thus essentially the same asto size and composition from one manu-facturer to any other. Every electrode manu-

facturer has a limited number of uniqueproducts, but these typically constitute onlya small percentage of total sales.

Lincoln's research and developmentexpenditures have recently been less thanone and one half percent of sales. There isevidence that others spend several times asmuch as a percentage of sales.

Lincoln's share of the market hasbeen thirty and forty percent for many yearsand the welding products market has grownsomewhat faster than the level of industry ingeneral. The market is highly price-competitive, with variations in prices of standard products normally amounting toonly a percent or two. Lincoln's productsare sold directly by its engineering-orientedsales force and indirectly through itsdistributor organization. Advertising expen-ditures amount to less than one-fourth of onepercent of sales, one-third as much as amajor Lincoln competitor with whom thecase writer checked.

The other major welding process,flame welding, has not been competitivewith arc welding since the 1930s. However,plasma-arc-welding, a relatively new

process which uses a conducting stream of super heated gas (plasma) to confine thewelding current to a small area, has madesome inroads, especially in metal tubingmanufacturing, in recent years. Major

advances in technology that will produce analternative superior to arc welding within thenext decade or so appear unlikely. Also, itseems likely that changes in the machinesand techniques used in arc welding will beevolutionary rather than revolutionary.

Products. The company is primarily engag-ed in the manufacture and sale of arc-welding products – electric welding ma-chines and metal electrodes. Lincoln also

produces electric motors ranging from half horsepower to 200 horsepower. Motorsconstitute about eight to ten percent of totalsales.

The electric welding machines, someconsisting of a transformer or motor andgenerator arrangement powered bycommercial electricity and others consistingof an internal combustion engine andgenerator, are designed to produce from 30to 1,000 amperes of electrical power. Thiselectrical current is used to melt aconsumable metal electrode with the moltenmetal being transferred in a super hot sprayto the metal joint being welded. Very hightemperatures and hot sparks are producedand operators usually must wear special eyeand face protection and leather gloves, oftenalong with leather aprons and sleeves.

Welding electrodes are of two basictypes: (1) Coated "stick" electrodes, usuallyfourteen inches long and smaller than apencil in diameter, which are held in aspecial insulated holder by the operator, whomust manipulate the electrode in order tomaintain a proper arc-width and pattern of deposition of the metal being transferred.Stick electrodes are packaged in six to fifty-




pound boxes. (2) Coiled wire, ranging indiameter from 0.035" to 0.219", which isdesigned to be fed continuously to thewelding arc through a "gun" held by theoperator or positioned by automatic

positioning equipment. The wire is pack-aged in coils, reels and drums weighingfrom fourteen to 1,000 pounds.

Manufacturing Operations

Plant Locations. The main plant is inEuclid, Ohio, a suburb on Cleveland's EastSide. In the plant, there are no warehouses.Materials flow from the half-mile long dock on the north side of the plant throughout the

production lines to a very limited storageand loading area on the south. Materialsused at each workstation are stored as closeas possible to the workstation. The adminis-trative offices, near the center of the factory,are entirely functional. Not even thePresident's office is carpeted. A corridorbelow the main level provides access to thefactory floor from the main entrance nearthe center of the plant.

A new plant, just opened in Mentor,Ohio, houses some of the electrodeproduction operations, which were movedfrom the main plant. The main plant is cur-rently being enlarged by 100,000 square feetand several innovative changes are beingmade in the manufacturing layout.

Manufacturing Processes. The electrodemanufacturing process is highly capitalintensive. Metal rod purchased from steel

producers is drawn or extruded down tosmaller diameters and cut to length andcoated with pressed-powder "flux" for stick electrodes or plated with copper (forconductivity) and spun into coils or spoolsfor wire. Some of Lincoln's wire, called"Innershield," is hollow and filled with amaterial similar to that used to coat stick

electrodes. Lincoln is highly secretive aboutits electrode production processes and thecase writer was not given access to thedetails of those processes.

Welding machines and electricmotors are made on a series of assemblylines. Gasoline and diesel engines arepurchased partially assembled butpractically all other components are madefrom basic industrial products, e.g., steelbars and sheets and bare copper conductorwire, in the Lincoln factory. Individualcomponents, such as gasoline tanks forengine-driven welders and steel shafts formotors and generators are made by numer-

ous small "factories within a factory." Theshaft for a certain generator, for example, ismade from raw steel bar by one operatorwho uses five large machines, all runningcontinuously. A saw cuts the bar to length,a digital lathe machines different sections tovarying diameters, a special milling machinecuts a slot for a keyway, and so forth, until afinished shaft is produced. The operatormoves the shafts from machine to machineand makes necessary adjustments. Anotheroperator punches, shapes and paints sheetmetal cowling parts. One assembles steellaminations on a rotor shaft, then winds,insulates and tests the rotors. Crane opera-tors move finished components to the nearbyassembly lines.

Worker Performance and Attitudes. Ex-ceptional worker performance at Lincoln is amatter of record. The typical Lincolnemployee earns about twice as much asother factory workers in the Cleveland area.Yet the labor cost per sales dollar at Lincoln,about 23.5 cents, is well below industryaverages.

Sales per Lincoln factory employeecurrently exceed $157,000 in 1981. Anobserver at the factory quickly sees why this




figure is so high. Each worker is proceedingbusily and thoughtfully about his task.There is no idle chatter. Most workers takeno coffee breaks. Many operate severalmachines and made a substantial component

unaided. The supervisors, some with asmany as 1 00 subordinates, are busy withplanning and record-keeping duties andhardly glance at the people they supervise.The manufacturing procedures appearefficient - no unnecessary steps, no wastedmotions, and no wasted materials. Finishedcomponents move smoothly to subsequentworkstations.

Worker turnover at Lincoln is

practically nonexistent except for retire-ments and departures by new employees.Appendix A includes summaries of interviews with Lincoln employees.

Organization Structure

Lincoln has never had a formal organizationchart. The objective of this policy is toinsure maximum flexibility. An open doorpolicy is practiced throughout the company

and personnel are encouraged to takeproblems to the persons most capable of resolving them. Perhaps because of thequality and enthusiasm of the Lincolnworkforce routine supervision is almostnonexistent. A typical production foreman,for example, supervises as many as 100workers, a span-of-control, which does notallow more than infrequent worker-supervisor interaction. Position titles andtraditional flows of authority do imply

something of a organizational structure,however. For example, the Vice-President,Sales, and the Vice-President, ElectrodeDivision, report to the President, as dovarious staff assistants such as the PersonnelDirector and the Director of Purchasing.Using such implied relationships it has beendetermined that production workers have

two or, at most, three levels of supervisionbetween themselves and the President.

Personnel Policies

Recruitment and Selection. Every jobopening at Lincoln is advertised internallyon company bulletin boards and anyemployee can apply for any job soadvertised. External hiring is done only forentry-level positions. Selection for thesejobs are done on the basis of personalinterviews-there is no aptitude or psycho-logical testing. Not even a high schooldiploma is required except for engineeringand sales positions, which are filled by

graduate engineers. A committee consistingof vice-presidents and superintendentsinterviews candidates initially cleared by thePersonnel Department. The supervisor whohas a job opening makes final selection. In1979, out of 3,500 applicants interviewed bythe Personnel Department fewer than 300were hired.

Job Security. After one year, eachemployee is guaranteed that he will not be

discharged except for misconduct and he isguaranteed at least 30 hours of work eachweek. There has been no layoff at Lincolnsince 1949.

Performance Evaluations. Each supervisorformally evaluates his subordinates twice ayear using the cards shown in Exhibit 1. Theemployee performance criteria, 11 quality,""dependability ideas and cooperation," and"output," are considered to be independent

of each other. Marks on the cards areconverted to numerical scores, which areforced to average 100 for each evaluatingsupervisor. Individual merit rating scoresnormally range from 80 to 100. Any scoreover 110 requires a special letter to topmanagement. These scores (over 110) arenot considered in computing the required




Exhibit 1: Merit Rating Cards

→→ Increasing Quality→→

This card rates the QUALITY of work you do. It also reflectsyour success in eliminating errors and in reducing scrap andwaste.

Qual i t y

T h i s r

a t i ng h a s b e e n

d one j oi nt l y b y your

d e pa r t me nt h e a d a nd

t h e i ns pe c t i on

d e pa r t me nt i n t h e s h op

a nd w

i t h ot h e r

d e pa r t me nt h e a d s i n

t h e of

f i c e a nd

e ngi ne e r i ng.

→→ Increasing Dependability→→

This card rates how well your supervisors have been able todepend on you to do those things that have been expected of

you without supervision. It also reflects your ability tosupervise yourself, including your work safety performance,your orderliness, care of equipment, and the effective use youmake of your skills.

De pe n

d ab i l i t y

T h i s r a t i ng

h a s b e e n

d one b y yo

ur d e pa r t -

me nt h e a d .

→→ Increasing Ideas & Cooperation→→

This card rates your cooperation, ideas and initiative. Thiscard credits you for your ideas and initiative used to help inthis direction. It also rates your cooperation - how much youwork with others as a team. Such factors as your attitude

towards supervision, coworkers, and the company, yourefforts to share knowledge with others, and your cooperationin installing new methods smoothly are considered here.

I d e as & Coope r at i on

T h i s r a t i ng h a s b e e n


d e pa r t me nt h e a

d a nd

t h e t i me s t ud y d e pa r t -

me nt i n t h e s h o

p a nd

wi t h ot h e r d e pa

r t me nt

h e a d s i n t h e of f

i c e a nd

e ngi ne e r i ng.

→→ Increasing Output→→

This card rates HOW MUCH PRODUCTIVE WORK youactually turn out. It also reflects your willingness not to holdback and recognizes your attendance record. New ideas andnew methods are important to your company in our continu-ing effort to reduce costs, increase output, improve qualityand work safety, and improve our relationship with our cus-tomers.

Out put

T h i s r a t i ng h a s b e e n


d e pa r t me nt h e a d a nd

t h e pr od uc t i on c ont r

ol

d e pa r t me nt i n t h e s h

op

a nd wi t h ot h e r d e pa r t -

me nt h e a d s i n t h e

of f i c e a nd e ngi ne e r -

i ng.

100-point average for each evaluating super-visor. Suggestions for improvements oftenresult in recommendations for exceptionallyhigh performance scores. Supervisors

discuss individual performance marks withthe employees concerned.

Compensation. Basic wage levels for jobsat Lincoln are determined by a wage survey




of similar jobs in the Cleveland area. Theserates are adjusted quarterly in accordancewith changes in the Cleveland AreaConsumer Price Index. Insofar as possible,base wage rates are translated into piece

rates. Practically all production workers andmany others – for example, some fork truck drivers-are paid by piece rate. Once estab-lished, piece rates are never changed unlessa substantive change in the way a job isdone results from a source other than theworker doing the job. In December of eachyear, a portion of annual profits is dis-tributed to employees as bonuses. Incentivebonuses since 1934 have averaged about thesame as annual wages and somewhat more

than after-tax profits. The average bonus for1980 was about $17,500. Individualbonuses are exactly proportional to merit-rating scores. For example, a person with ascore of 110 would receive 110 percent of the standard bonus as applied to his regularearnings.

Work Assignment. Management hasauthority to transfer workers and to switchbetween overtime and short time as re-quired. Supervisors have undisputed author-ity to assign specific parts to individualworkmen, who may have their ownpreferences due to variations in piece rates.

Employee Participation in Decision-

Making. When a manager speaks of par-ticipative management, he usually thinks of a relaxed, non-authoritarian atmosphere.This is not the case at Lincoln. Formalauthority is quite strong. "We're veryauthoritarian around here," says Mr. Willis.James F. Lincoln placed a good deal of stress on protecting management's authority."Management in all successful departmentsof industry must have complete power," hesaid "...Management is the coach who mustbe obeyed. The men, however, are theplayers who alone can win the games."

Despite this attitude, employees participatein management at Lincoln in several ways.

Richard Sabo, Manager of PublicRelations, relates job-enlargement to

participation. "The most important partici-pative technique that we use is giving moreresponsibility to employees." Mr. Sabo says,"We give a high school graduate moreresponsibility than other companies givetheir foremen." Lincoln puts limits on thedegree of participation that is allowed,however. In Mr. Sabo's words,

When you use "participation," put quotesaround it. Because we believe that each

person should participate only in thosedecisions he is most knowledgeableabout. I don't think production employ-ees should control the decisions of BillIrrgang. They don't know as much as hedoes about the decisions he is involvedin.

The Advisory Board, elected by theworkers, meets with the Chairman and thePresident every two weeks to discuss waysof improving operations. This board hasbeen in existence since 1914 and hascontributed to many innovations. Thiscommittee, for example, first recommendedthe incentive bonuses. Every Lincoln em-ployee has access to Advisory Boardmembers and answers to all Advisory Boardsuggestions are promised by the followingmeeting. Both Mr. Irrgang and Mr. Willisare quick to point out, though, that theAdvisory Board only recommends actions."They do not have direct authority," Mr.Irrgang says, "and when they bring upsomething that management thinks is not tothe benefit to the company, it will berejected."

A suggestion program was institutedin 1929. At first, employees were awarded




one-half of the first year's savings attri-butable to their suggestions. Now, however,the value of suggestions is reflected inperformance evaluation scores, which deter-mine individual incentive bonus amounts.

Training and Education. Productionworkers are given a short period of on-the-job training and then placed on a piecework pay system. Lincoln does not pay for off-site education. The idea behind this latterpolicy is that everyone cannot take advant-age of such a program and it is unfair toexpend company funds for an advantage towhich there is unequal access. Salespersonnel are given on-the-job training in

the plant followed by a period of work andtraining at one of the regional sales offices.

Fringe Benefits and Executive Perquisites.A medical plan and a company-paidretirement program have been in effect formany years. A plant cafeteria, operated on abreak-even basis, serves meals at about 60percent of usual costs. An employee assoc-iation, to which the company does notcontribute, provides disability insurance andsocial and athletic activities. An employeestock ownership program, instituted in about1925, and regular stock purchases haveresulted in employee ownership of about 50percent of Lincoln's stock.

As to executive perquisites, there arenone – crowded, austere offices, noexecutive washrooms or lunchrooms and noreserved parking spaces. Even the companypresident pays for his own meals and eats inthe cafeteria.

Financial Policies

James F. Lincoln felt strongly that financingfor company growth should come fromwithin the company – through initial cashinvestment by the founders, through

retention of earnings, and through stock purchases by those who work in thebusiness. He saw the following advantagesof this approach.1. Ownership of stock by employees

strengthens team spirit. "If they aremutually anxious to make it succeed,the future of the company is bright."

2. Ownership of stock provides individualincentive because employees feel thatthey will benefit from companyprofitability.

3. "Ownership is educational." Owner-employees "will know how profits aremade and lost; how success is won andlost ... There are few socialists in the list

of stockholders of the nation'sindustries."4. "Capital available from within controls

expansion." Unwarranted expansionwill not occur, Lincoln believed, underhis financing plan.

5. "The greatest advantage would be thedevelopment of the individual worker.Under the incentive of ownership, hewould become a greater man."

6. "Stock ownership is one of the stepsthat can be taken that will make theworker feel that there is less of a gulf between him and the boss.... Stock ownership will help the worker torecognize his responsibility in the gameand the importance of victory.”

Lincoln Electric Company uses aminimum of debt in its capital structure.Until 1983, there was no borrowing at all,with the debt being limited to currentpayables. Even the new $20 million plant inMentor, Ohio, was financed totally fromearnings.

The unusual pricing policy atLincoln is succinctly stated by PresidentWillis: "at all times price on the basis of costand at all times keep pressure on our cost."




This policy resulted in Lincoln's price forthe most popular welding electrode then inuse going from 16 cents a pound in 1929 to4.7 cents in 1938. More recently, the SA-200 Welder, Lincoln's largest selling

portable machine, decreased in price from1958 through 1965. According to Dr. C.Jackson Grayson of the American Pro-ductivity Center in Houston, Texas,Lincoln's prices in general have increasedonly one-fifth as fast as the Consumer PriceIndex since 1934. This has resulted in awelding products market in which Lincoln isthe undisputed price leader for the productsit manufactures. Not even the majorJapanese manufacturers, such as Nippon

Steel for welding electrodes and AsakaTransformer for welding machines, havebeen able to penetrate this market.

Huge cash balances are accumulatedeach year preparatory to paying the year-endbonuses. The bonuses totaled $46,500,000for 1979. This money is invested in short-term U.S. government securities untilneeded. Financial information is shown inExhibit 2.

How Well Does Lincoln Serve Its

Public?

Lincoln Electric differs from mostother companies in the importance it assignsto each of the groups it serves. Mr. Willisidentifies these groups, in the order of priority as (1) customers, (2) employees, and(3) stockholders.

Certainly Lincoln customers havefared well over the years. Lincoln prices forwelding machines and welding electrodesare acknowledged the lowest in the market-

place. Lincoln quality has consistently beenso high that Lincoln "Fleetweld" electrodesand Lincoln SA-200 welders have been thestandard in the pipeline and refineryconstruction industry, where price is hardlya criterion, for decades. The cost of fieldfailures for Lincoln products was anamazing four one-hundredths of one percentin 1979. A Lincoln distributor in Monroe,Louisiana says that he has sold severalhundred of the popular AC-225 welders and,

though the machine is warranted for oneyear, he has never handled a warranty claim.

Perhaps best served of all Lincolnconstituencies have been the employees.Not the least of their benefits, of course, isthe year-end bonuses, which effectivelydouble an already average compensationlevel. The foregoing description of thepersonnel program and the comments inAppendix A further illustrate the desirabilityof a Lincoln job.

While stockholders were relegated toan inferior status by James F. Lincoln, theyhave done very well indeed. Recentdividends have exceeded $7 a share andearnings per share have exceeded $20. InJanuary 1980, the price of restricted stock committed by Lincoln to employees was$117 a share. By July 16, 1980, the stated

Exhibit 2: Lincoln Electric's Financial History

1974 1979 1980 1981 1982 1983 1987 1988 1989Sales (in millions of dollars) $233 $385 $401 $469 $329 $277 $377 $478 $582Return on equity 25% 19% 16% 19% 9% 9% 15% 16% 12%Debt to equity 0% 0% 0% 0% 0% 0% 2% 7% 11%Segment data (% of total sales)

Arc welding products 91% 91% 91% 91%Other products 9% 9% 9% 9%




value at which Lincoln will repurchase thestock if tendered, was $132. A check withthe New York office of Merrill, Lynch,Pierce, Fenner and Smith on July 16, 1980

revealed a bid price on Lincoln stock of $219 a share, with none being offered forsale. Technically, this price applies only tothe unrestricted stock owned by the Lincolnfamily, a few other major holders, and em-ployees who have purchased it on the openmarket, but it gives some idea of the valueof Lincoln stock in general. The risk associated with Lincoln stock, a majordeterminant of stock value, is minimalbecause of the absence of debt in Lincoln's

capital structure, because of an extremelystable earnings record and because of Lincoln's practice of purchasing therestricted stock whenever employees offer itfor sale.

A Concluding Comment

It is easy to believe that the reasonfor Lincoln's success is the excellent attitudeof Lincoln employees and their willingness

to work harder, faster, and more intelligentlythan other industrial workers. However, Mr.Richard Sabo, Manager of Publicity andEducational Services at Lincoln, suggeststhat appropriate credit be given to Lincolnexecutives, whom he credits with carryingout the following policies:1. Management has limited research,

development, and manufacturing to astandard product line designed to meetthe major needs of the welding industry.

2. New products must be reviewed bymanufacturing and all production costsverified before being approved bymanagement.

3. Purchasing is challenged to not onlyprocure materials at the lowest cost, butalso to work closely with engineering

and manufacturing to assure that thelatest innovations are implemented.

4. Manufacturing supervision and allpersonnel are held accountable for

reduction of scrap, energy conservationand maintenance of product quality.5. Production control, material handling

and methods engineering are closelysupervised by top management.

6. Material and finished goods inventorycontrol, accurate cost accounting andattention to sales costs, credit and otherfinancial areas have constantly reducedoverhead and led to excellent profit-ability.

7. Management has made cost reduction away of life at Lincoln and definiteprograms are established in many areas,including traffic and shipping, wheretremendous savings can result.

8. Management has established a salesdepartment that is technically trained toreduce customer welding costs. Thissales technique and other real customerservices have eliminated nonessentialfrills and resulted in long-term benefitsto all concerned.

9. Management has encouraged education,technical publishing, and long-rangeprograms that have resulted in industrygrowth, thereby assuring market poten-tial for the Lincoln Electric Company.

Questions

1. Illustrate the purpose and commitmentcriteria in COCO's Guidance on Control

using Lincoln Electric Co.

2. Illustrate the capability and monitoring/ learning criteria in COCO's Guidance on

Control using Lincoln Electric Co.




Appendix A: Employee Interviews

During the late summer of 1980, the author conducted numerous interviews with Lincolnemployees. Typical questions and answers from those interviews are presented below. In orderto maintain each employee's personal privacy, the names used for the interviewees are fictitious.

Interview I: Betty Stewart, a 52-year-old high school graduate who had been with Lincoln 13 years and who wasworking as a cost accounting clerk at the time of the interview.Q: What jobs have you held besides the one you have now?A: I worked in payroll for a while and then this job came open and I took it.Q: How much money did you make last year, including your bonus?A: I would say roughly around $20,000, but I was off for back surgery for a while.Q: You weren't paid while you were off for back surgery?A: No.Q: Did the Employees Association help out?A: Yes. The company doesn't furnish that, though. We pay $6 a month into the Employee Association. I think

my check from them was $105 a week.Q: How was your performance rating last year?

A: It was around 100 points, but I lost some points for attendance, with my back problem.Q: You lose points for attendance even when you're sick?A: Yes. But after a certain period they don't deduct any more points for that.Q: How did you get your job at Lincoln?A: I was bored silly where I was working and I had heard that Lincoln kept their people busy. So I applied and

got the job the next day.Q: Do you think you make more money than similar workers in Cleveland?A: I know I do.Q: What have you done with your money?A: We have purchased a better home. Also, my son is going to the University of Chicago, which costs $10,000 a

year. I buy the Lincoln stock which is offered each year, and I have a little bit of gold.Q: Have you ever visited with any of the senior executives like Mr. Willis or Mr. Irrgang?A: I have known Mr. Willis for a long time.Q: Does he call you by name?

A: Yes. In fact, he was very instrumental in my going to the doctor that I am going to with my back. He knowsthe director of the clinic.

Q: Do you know Mr. Irrgang?A: I know him to speak to him and he always speaks, always. But I have known Mr. Willis for a good many

years. When I did Plant Two cost accounting I did not understand how the plant operated. Of course, you arenot allowed in Plant Two because that's the Electrode Division. I told my boss about the problem one dayand the next thing I knew Mr. Willis came by and said, "Come on, Betty, we're going to Plant Two." He spentan hour and a half showing me the plant.

Q: Do you think Lincoln employees produce more than those in other companies?A: I think with the incentive program the way that it is, if you want to work and achieve, then you will do it. If

you don't want to work and achieve, you will not do it no matter where you are. Just because you are meritrated and have a bonus, if you really don't want to work hard then you're not going to. You will accept your90 points or 92 or 85 because, even with that, you make more money than people on the outside.

Q: Do you think Lincoln employees will ever join a union?A: I don't know why they would.Q: What is the most important advantage of working for Lincoln Electric?A: You have an :incentive and you can push and you get something for pushing. That's not true in a lot of other

companies.Q: So you say that money is a very major advantage?A: Money is a major advantage but it's not just the money. It's the fact that having the incentive you do wish to

work a little harder. I'm sure that there are a lot of men here, who, if they worked for Pontiac or some other




place, would not work as hard as they do here. Not that they are overworked – I don't mean that – but I'msure they wouldn't push.

Q: Is there anything that you would like to add?A: I do like working here. I am better off being pushed mentally. In another company if you pushed too hard

you would feel a little bit of pressure and someone might say "Hey, slow down; don't try so hard." But hereyou are encouraged, not discouraged.

Interview II: Ed Sanderson, 23-year-old high school graduate who had been with Lincoln for four years and whowas a machine operator in the electrode division at the time of the interview.Q: How did you happen to get this job?A: My wife was pregnant and I was making three bucks an hour and one day I came here and applied. That was

it. I kept calling to let them know I was still interested.Q: Roughly what were your earnings last year including your bonus?A: $37,000.Q: What have you done with your money since you have been here?A: Well, we've lived pretty well and we bought a condominium.Q: Have you paid for the condominium?A: No, but I could.Q: Have you bought your Lincoln stock this year?A: No, I haven't bought any Lincoln stock yet.Q: Do you get the feeling that the executives here are pretty well thought of?A: I think they are. To get where they are today they had to really work.Q: Wouldn't that be true anywhere?A: I think more so here because seniority really doesn't mean anything. If you work with a guy who has twenty

years here and you have two months and you're doing a better job, you will get advanced before he will.Q: Are you paid on a piece rate basis?A: My gang does. There are nine of us who make the bare electrode and the whole group gets paid based on

how much electrode we make.Q: Do you think you work harder than workers in other factories in the Cleveland area?A: Yes, I would say I probably work harder.Q: Do you think it hurts anybody?A: No, a little hard work never hurts anybody.Q: If you could choose, do you think you would be as happy earning a little less money and being able to slow

down a little.A: No, it doesn't bother me. If it bothered me I wouldn't do it.Q: What would you say is the biggest disadvantage of working at Lincoln, as opposed to working somewhere

else?A: Probably having to work shift work.Q: Why do you think Lincoln employees produce more than workers in other plants?A: That's the way the company is set up. The more you put out, the more you're going to make.Q: Do you think it's the piece rate and bonus together?A: I don't think people would work here if they didn't know that they would be rewarded at the end of the year.Q: Do you think Lincoln employees will ever join a union?A: No.Q: What are the major advantages of working for Lincoln?A: Money.

Q: Are there any other advantages?A: Yes, we don't have a union shop. I don't think I could work in a union shop.Q: Do you think you are a career man with Lincoln at this time?A: Yes.

Interview III: Roger Lewis, 23-year-old Purdue graduate in mechanical engineering who had been in the Lincolnsales program for 15 months and who was working in the Cleveland sales office at the time of the interview.Q: How did you get your job at Lincoln?




A: I saw that Lincoln was interviewing on campus at Purdue and I went by. I later came to Cleveland for a planttour and was offered a job.

Q: Do you know any of the senior executives? Would they know you by name?A: Yes, I know all of them – Mr. Irrgang, Mr. Willis, Mr. Manross.Q: Do you think Lincoln salesmen work harder than those in other companies?A: Yes. I don't think there are many salesmen for other companies who are putting in 50- to 60-hour weeks.

Everybody here works harder. You can go out in the plant or you can go upstairs and there's nobody sittingaround.

Q: Do you see any real disadvantage of working at Lincoln?A: I don't know if it's a disadvantage but Lincoln is a Spartan company, a very thrifty company. I like that. The

sales offices are functional, not fancy.Q: Why do you think Lincoln employees have such high productivity?A: Piecework has a lot to do with it. Lincoln is smaller than many plants, too; you can stand in one place and see

the materials come in one side and the product go out the other. You feel a part of the company. The chanceto get ahead is important, too. They have a strict policy of promoting from within, so you know you have achance. I think in a lot of other places you may not get as fair a shake as you do here. The sales offices areon a smaller scale, too. I like that. I tell someone that we have two people in the Baltimore office and theysay, 11 you've got to be kidding." It's smaller and more personal. Pay is the most important thing. I haveheard that this is the highest paying factory in the world.

Interview IV: Jimmy Roberts, a 47-year-old high school graduate, who had been with Lincoln 17 years and whowas working as a multiple drill press operator at the time of the interview.Q: What jobs have you had at Lincoln?A: I started out cleaning the men's locker room in 1963. After about a year I got a job in the flux department,

where we make the coating for welding rods. I worked there for seven or eight years and then got my presentjob.

Q: Do you make one particular part?A: No, there are a variety of parts I make-at least 25.Q: Each one has a different piece rate attached to it?A: Yes.Q: Are some piece rates better than others?A: Yes.Q: How do you determine which ones you are going to do?

A: You don't. Your supervisor assigns them.Q: How much money did you make last year?A: $47,000.Q: Have you ever received any kind of award or citation?A: No.Q: What was your merit rating last year?A: I don't know.Q: Did your supervisor have to send a letter-was your rating over 110?A: Yes. For the past five years, probably, I made over 110 points.Q: Is there any attempt to let others know . . . ?A: The kind of points I get? No.Q: Do you know what they are making?A: No. There are some who might not be too happy with their points and they might make it known. The

majority, though, do not make it a point of telling other employees.Q: Would you be just as happy earning a little less money and working a little slower?A: I don't think I would-not at this point. I have done piecework all these years and the fast pace doesn't really

bother me.Q: Why do you think Lincoln productivity is so high?A: The incentive thing – the bonus distribution. I think that would be the main reason. The pay check you get

every two weeks is important too.Q: Do you think Lincoln employees would ever join a union?A: I don't think so. I have never heard anyone mention it.Q: What is the most important advantage of working here?




A: Amount of money you make. I don't think I could make this type of money anywhere else, especially withonly a high school education.

Q: As a black person, do you feel that Lincoln discriminates, in any way, against blacks?A: No. I don't think any more so than any other job. Naturally, there is a certain amount of discrimination,

regardless of where you are.

Interview V: Joe Trahan, 58-year-old high school graduate who had been with Lincoln 39 years and who wasemployed as a working supervisor in the tool room at the time of the interview.Q: Roughly what was your pay last year?A: Around $55,000: salary, bonus, stock dividends.Q: How much was your bonus?A: About $23,000Q: Have you ever gotten a special award of any kind?A: Not really.Q: What have you done with your money?A: My house is paid for-and my two cars. I also have some bonds and the Lincoln stock.Q: What do you think of the executives at Lincoln?A: They're really top-notch.Q: What is the major disadvantage of working at Lincoln Electric?A: I don't know of any disadvantage at all.Q: Do you think You produce more than most people in similar jobs with other companies?A: I do believe that.Q: Why is that? Why do you believe that?A: We are on the incentive system. Everything we do we try to improve to make a better product with a

minimum of outlay. We try to improve the bonus.Q: Would you be just as happy making a little less money and not working quite so hard.A: I don't think so.Q: You know that Lincoln productivity is higher than that at most other plants. Why is that?A: Money.Q: Do you think Lincoln employees would ever join a union?A: I don't think they would ever consider it.Q: What is the most important advantage of working at Lincoln?A: Compensation.

Q: Tell me something about Mr. James Lincoln, who died in 1965.A: You are talking about Jimmy Sr. He always strolled through the shop in his shirt sleeves. Big fellow.

Always looked distinguished. Gray hair. Friendly sort of a guy. I was a member of the advisory board oneyear. He was there each time.

Q: Did he strike you as really caring?A: I think he always cared for people.Q: Did you get any sensation of a religious nature from him?A: No, not really.Q: And religion is not part of the program now?A: No.Q: Do you think Mr. Lincoln was a very intelligent man, or was he just a nice guy?A: I would say he was pretty well educated. A great talker-always right off the top of his head. He knew what

he was talking about all of the time.

Q: When were bonuses for beneficial suggestions done away with?A: About 15 years ago.Q: Did that hurt very much?A: I don't think so.Q: Is there anything you would like to add?A: It's a good place to work. The union kind of ties other places down. Electricians only do electrical work,

carpenters only do carpenter work. At Lincoln Electric we all pitch in and do whatever needs to be done.Q: So a major advantage is not having a union?A: That's right.

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