Lincoln Electric Case Study

Lincoln Electric Case Analysis The Lincoln Electric Company is a successful business. They boast record profits, have remarkably low employee turnover, and have created an organizational structure that is both researched and respected. The have managed to do these things by focusing on key elements of their business: valuing their employees, having an open door policy, and creating employee ownership.

Valuing Employees Lincoln Electric values its employees. They value their opinions and look out for their best interests. Not a lot of companies can say that.

Not a lot of companies can say that they have an advisory board made up of workers who meet with executives biweekly to discuss employee matters. Lincoln Electric can.

Not a lot of companies can say that they shut down operations four weeks a year for employees to take vacation. Lincoln Electric can. Not a lot of companies can say that they pay their employees very competitive salaries in addition to bonuses, or treat their executives just like all employees, or put their employees’ needs before their shareholders’ needs. Lincoln Electric can.

These are just some of the reasons that Lincoln Electric can boast a virtually nonexistent employee turnover rate. They value their employees and when employees feel valued, it is reflected in their job performance.

According to research, fifty percent of employees who do not feel valued in their jobs say that they plan on changing jobs within the year (Spears, 2012). That same research showed that the employees who did feel valued at work had higher levels of satisfaction and were more engaged and motivated to do their best possible work (Spears, 2012).

George Willis, former CEO of Lincoln Electric, agrees with this research as he stated that employees are the company’s most valuable asset. Shenhar (1993) agrees with that statement, stating that: The success of modern organizations depends a great deal on the satisfaction employees derive from their job, and on their perception of how management and the company at large value them as human beings.

Successful companies make people feel that they are part of a team, or a family, and they practice open communication with their employees, informing their people of new developments and encouraging them to offer suggestions and air their grievances.

(p. 8) Spears (2012) also found that there were many factors that led employees to feel undervalued at work, such as feeling as though they had little involvement in decision making, feeling as though there was no potential for advancement and growth, feeling like they were not receiving an adequate salary, and feeling a lack of nonmonetary rewards.

Lincoln Electric is fulfilling their employees’ needs in most of those categories. In 1914 James Lincoln set up a committee of elected employees to act as an advisory board between the workers and executives. He realized that employee participation in decision making is important to be successful in business.

This helped employees have their voices heard and made them feel as though they did have involvement in decision making, which Spears (2012) points out as one of the key factors for employees to feel valued at work. Spears (2012) also mentioned that employees feel less valued when there is no growth potential.

Lincoln Electric has this covered as well. They post every job opening internally. They only hire externally for entry level positions.

This helps employees feel like they always have a place in the company. They are not in competition with outsiders trying to take their job or their promotion. The outsiders who do make it in have to earn their place by starting in an entry level position. Employees also do not have to worry about job security. Since 1958 Lincoln Electric has had a guaranteed continuous employment policy.

They guarantee their workers at least 30 hours per week and have had no layoffs since World War II.

Even when sales plummeted during the early 1980’s recession, Lincoln Electric still managed to make profits, have no layoffs, and maintain employee bonuses. Since the cost of retaining employees is less than the cost of recruiting and training new employees (O’Connell & Kung, 2007), Lincoln Electric used what they had during the recession. Instead of laying off workers, they retrained them to work in different parts of the company, thus ensuring their loyalty to the company and keeping employee turnover low.

Lincoln Electric also pays their employees a very generous salary, which Spears (2012) pointed out was another key element in feeling valued at work. The company determined salary by comparing jobs to similar ones in the local area and Lincoln Electric’s surpassed its competition by nearly twice as much as other factory workers in the area. These reasons explain why Lincoln Electric’s employees feel valued at work and also why employee turnover is so low, which is a huge cost savings for the company.

The cost of employees on payroll is ignificantly less than the cost of recruiting and initially training new employees (O’Connell ; Kung, 2007). O’Connell & Kung (2007) break down the cost of employee turnover into three components: the company must spend the same amount of money recruiting and hiring a new employee as they did recruiting and hiring the previous employee; there is a period of time before the new employee is hired where the company loses money in productivity; the company invested time and money to get the original employee to 100 percent productivity which is a loss when the employee leaves.

Lincoln Electric is able to keep those costs low by having such a low employee turnover rate. According to researchers, companies that make an effort to enhance pay, benefits, and incentive systems are able to control employee turnover (Simons & Hinkin, 2001). However, money does not always mean happiness. One study found that while a higher compensation package will help improve a company’s ability to attract employees, providing a good work environment is what retains the employees (Heather, 2003).

That study suggests that the physical workplace was in the top three categories leading to employees’ job satisfaction and those who were happy with their work environment were more likely to be happy with their job than those who were not. This makes sense since for workers, their workplace is where they spend the majority of their day. Heather (2003) suggests that if a company can provide a work environment where people can be happy, then they will feel energized and valued and will want to stay with that company.

He also says that a good work environment can increase employees’ creativity and motivation. Lincoln Electric has structured their manufacturing plant in Euclid, Ohio to be as efficient as possible.

They streamlined the production line and made material storage and work station layouts functional. Open Door Policy Lincoln Electric’s management practices an open door policy. They have never formally constructed an organizational chart. Management wants its employees to take their problems to the person who can solve them without regards to rank or the chain of command.

Researchers believe that open communication between employees and management is one of the key factors in employee motivation and satisfaction, and it has a positive impact on employee performance (Shenhar, 1993). Shenhar (1993) also says that to have open lines of communication, management must respect employees, be familiar with their attitudes towards their work, take a personal interest in their employees’ problems, and treat each employee with dignity.

This philosophy has worked well for Lincoln Electric.

They have their organization structure set up in a way that a typical foreman supervises as many as 100 workers, yet those workers continue day to day with minimal supervision producing quality goods. Some research shows that an open door policy is a proactive way for management to communicate with employees and can minimize minor problems before they turn into major problems (Nierenberg, 1999). It can even help limit the likelihood of unionization. When organizations establish union-like grievance procedures, the likelihood of union organization is more limited (Trisler, 1984).

However, some research shows that there are flaws in an open door policy. Falconi (1997) says that there are three main problems with open door policies; business leaders are not actually interested in their employees’ thoughts, employees are not honest in their assessment of the company; and encouraging employees to overstep the chain of command is demoralizing to supervisors. Shenhar (1993) also believes that an open door policy will only work if a policy is carefully planned and consistently implemented. He warns that employees may be hesitant to discuss negative issues with their superiors.

Employees’ perception of the open door policy is another obstacle in communication.

Research shows that even if management says their door is open and they sincerely want to listen to employees’ problems, yet no employees take advantage of that policy, then eventually employees will perceive the door to actually be closed (Beck & Beck, 1986). Lincoln Electric’s leaders, however, do seem to care what their employees think. After the advisory board was put into place, workers’ hours were reduced, life insurance policies were instituted, a welding school began, and a bonus plan was attempted, among many other things.

However, management is quick to point out that the advisory board can only recommend actions; they do not have any authority. Seeing as how management chose to implement many of the ideas recommended by the advisory board, it does seem as though they are listening and that the advisory board is working. Lincoln Electric also asked to hear directly from employees.

In 1929, the Board of Directors voted to start a suggestion system, rewarding good operating suggestions with points, equivalent to yearend bonuses. In egards to Falconi’s statement that an open door policy demoralizes supervisors, Lincoln Electric has that covered as management’s authority is quite strong. They put a lot of effort into protecting management’s authority and the employees know who is in charge. Employee Ownership Employee ownership theories operate under the principle that when employees have personal stake in a company, it can lead to an increase in motivation, creativity, information sharing, and cooperation, which can lead to enhanced organizational outcomes (Young, 1991).

Researchers believe that the creation of employee ownership in a company has the potential to transform the company (Ostroff ; Schmitt, 1993).

Lincoln Electric is a prime example of this. Employees receive year-end bonuses based on two factors; how well the company performs and how well the employee performs. So it is in each employee’s best interest to work at their highest possible capacity. That will in turn make the company more money at the same time ensuring they will receive a larger bonus. Bonuses are calculated based on the company’s profitability.

A percentage of that money is put into a pool for employee bonuses and those bonuses are based on each employee’s percentage of pay. Since the money that goes into the pool is based on how well the company performs, it is up to every employee to make sure the company performs at its most profitable. Then what each employee receives of that pool is calculated as a percentage of their salary based on their yearend performance review. The review is equivalent to points which in turn is equivalent to a percentage of the bonus.

Employees can earn additional points throughout the year by making operational suggestions and ideas to management and the advisory board.

Not only is an employee’s bonus based on the profitability of the company, but their investments are as well. Lincoln Electric started an employee stock purchase plan which allows employees to purchase shares in the company at cost. This has advantages to both parties involved. In a sense, it aligns the interests of employees with the interests of the company (Rousseau ; Shperling, 2003).

That interest gives employees a monetary reason to do their jobs to the best of their abilities and motivates them because it gives each individual a profit motive to enhance the company’s profitability (Pierce & Morgan, 1991). The employees have a reason to make sure their company is profitable and the company is confident that their shareholder’s have it’s best interest in mind.

This is a good thing for Lincoln Electric in particular since management does not have the shareholders’ best interests in mind.

According to James Lincoln, the customer comes first, then the employee, then the shareholders. He believes that shareholders are the last group to be considered because they are basically absent in the process of creating profits. For some workers, not only is their bonus and investments based on their performance and the company’s profitability, but their wages are as well. Production workers, among others, are paid by piece rate. This means that employees have the opportunity to earn money based on their own rate of work.

This opportunity motivates them to increase productivity.

If they were being paid an hourly rate and knew that they could not make more money no matter how hard they worked, they might be less likely to push themselves to be productive. This is also very cost effective for Lincoln Electric, since the company is only paying for work that was completed. The effectiveness of this policy can be seen in the attitude of the workers at Lincoln Electric. Workers are constantly busy and thoughtfully going about their task at hand.

They do not waste time with idle chit chat or coffee breaks and they are masters of multi-tasking.

Researchers suggest that when employees develop possessive feelings for their job, they will be motivated to work harder and gripe less (Van Dyne & Pierce, 2004). This is working well for Lincoln Electric’s profitability since there is a theory that a company’s performance is affected by its’ employees’ interests in it (Eisenhardt, 1989). However, other studies have shown that employee ownership does not automatically lead to work satisfaction, motivation, organizational commitment, or productivity (Kruse, 1996).

Kruse (1996) also found that employee ownership in conjunction with perceived participation in decision making is what really has a positive effect on employees’ attitudes and therefore company performance.

Other researchers claim that an employee’s behavior towards it company is motivated by several factors that cannot be linked to one particular aspect, such as employee ownership, as it varies by each human’s need (Klein, 1987). RECOMMENDATIONS Lincoln Electric does many, many things right when it comes to valuing their employees. However, they are lacking in a few areas.

One study suggests that employees feel undervalued when there is a lack of nonmonetary rewards (Spears, 2012). Lincoln Electric compensates their employees adequately and rewards them generously but does not seem to have any sort of nonmonetary reward system. They offer points to their employees for good operating suggestions but those points translate to a monetary end of year bonus.

By setting up some sort of rewards program they could make employees feel individually valued by their superiors even though there is no formal organizational chart.

Cohen (2006) suggests that it is a common myth that rewards have to be monetary. She believes that once the money is spent, the praise is forgotten and a nonmonetary reward system is more personally rewarding. Herzberg (1968) says that pay is not really a motivator. He believes that employees feel undervalued if the pay is insufficient rather than valued if it is sufficient. In Herzberg’s (1968) terms, recognition of an individual’s personal contribution is a positive motivator and is much more important to feeling valued than pay.

An option for a non cash incentive could be company stock.

Non-cash incentives in the form of company stock provides employees a physical symbol of their achievements (Duncan, 2001). The open door policy at Lincoln Electric seems to be working well. Employees feel valued and the company is doing very well. However, arguments have been made that an open door policy may have some downfalls. Shenhar (1993) believes that there is a lack of understanding between what management says they want and what employees believe management wants.

They can say there is an open door policy but employees may still be hesitant to adhere to that policy.

Falconi (1997) argues that employees may only tell their management what they think they would like to hear. Lincoln Electric instituted an advisory board and a suggestion policy to keep employees better connected to management and to make them feel like they have a hand in decision making. However, Falconi has a good point. Some employees may be too intimidated to offer suggestions. Or some employees might be scared to point out things they think are not working or call out poor management practices.

Lincoln Electric could benefit from an anonymous suggestion ystem. That way, employees could have their voices heard without fear of repercussions. Lincoln Electric makes so many efforts to enhance employee value and cut costs. However they did not mention any policy in place to keep excessive absenteeism at bay. Absenteeism is a major cost to many large corporations, costing $118 billion in 2010 (Prater ; Smith, 2011). Research shows that of all of the expenses related to absenteeism, unscheduled time off has the largest impact on business profitability, productivity, and morale (Gale, 2003).

Because companies cannot plan for their employees’ unscheduled time off, they are forced to hire last minute help or pay overtime which is an unnecessary profit loss (Gale, 2003). According to Gale (2003), an effective fix for unscheduled time off is to implement a paid time off program. Lincoln Electric closes its operations two times a year for employees to enjoy time off but this might not be the most practical solution for some people. People’s lives are busy and sometimes things pop up that employees need time off for.

If vacations can only be taken in the allotted company time off, then employees might start to abuse the system and call in sick when they are just in need of a day off.

Many companies are starting to implement work-life programs that help employees tailor their benefits to their specific life needs (Navarro ; Bass, 2006). Another issue that can stem from such strict time off guidelines is presenteeism. Middaugh (2007) defines presenteeism as coming to work even though an employee may be sick or injured, which often results in reduced productivity.

Presenteeism cost businesses $180 billion in 2010 (Prater ; Smith, 2011). Greenburg (2011) describes it as an employee being present at work but being focused on personal business.

A more relaxed time off schedule would give employees the opportunity to use their personal time, instead of the company’s, to conduct personal business. In conclusion, Lincoln Electric has phenomenal human resources practices. However, in any business there is always room for improvement.

If they implemented more non-monetary employee incentives, reworked their open door policy, and allowed customization of employee time off, they might see an even smaller amount of employee turnover and a greater amount of employee productivity. REFERENCES Beck, C. E.

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