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Unformatted text preview: Lincoln Electric Case The production rate at Lincoln Electric (LE) is more than double that of other manufacturers in its industry. An incentive
plan that pays workers for what they produce—and promises no layoﬂs—is responsible. Even in hard times LE has never laid off any US employee, and even rewarded them with a total of $47 million in year-
end bonuses during the most recent recession. Workers receive bonuses averaging between $18,000—$26,000 which
equaled approximately 75% of their salaries. Their total annual pay, including wages, proﬁt sharing and bonuses average
$55,000. These wages are the results of a reward and recognition system that successfully connects the company’s and the
employee’s goals. The incentive plan, which combines pay for output, bonuses and job security, has enabled LE to gain a
competitive advantage in its industry. It has helped the organization increase production efﬁciency and lower the costs of
its products. The company’s productivity rate is double to triple the productivity rate of any other manufacturing
operation that is similar in size. Although the actual work at LE is not difﬁcult, it is not an easy place in which to work. The turnover rate for employees
within their probationary ﬁrst two months is 20%. There’s no room for the nonchalant, disengaged worker. The success
of the entire enterprise depends on a high level of employee input and output, dependability and cooperation. There are
no paid holidays or sick days. Worker must accept job reassignments and overtime is mandatory. There are no reserved
parking spaces, no special seats in the cafeteria and no deﬁnite or restrictive lines of promotion. Promotions are based on
merit only. There is no seniority. Workers also must compete with coworkers for bonuses based on merit. Despite all
these policies, LE is a desirable place to work. It receives nearly 1,000 unsolicited job applications a month and post
probationary turnover rate at LE is less than 3% per year, including deaths and retirements. The LE incentive plan combines compensation with security. The multifaceted incentive system comprises:
0 Piecework pay Shared proﬁts Year end bonuses Stock ownership Job security Suggestion system. Performance based or gain sharing programs like LE are designed to improve overall performance by allowing
contributing workers to share in the proceeds. The piecework method encourages not only productivity but quality results
as well, because the Organization only pays workers for defectless products. If a customer sends a defective part back to
the company, the employee who produced it just repairs it on his or her own time. The company’s methods-engineering
department uses past performance standards, work measurements and time studies to determine piece-rates. LE has
established 70,000 piece rates for various production jobs. The rates don’t change, except for adjustments in the cost of
living or for substantial changes in manufacturing procedures. Some rates have been in effect for more than 30 years.
Workers may challenge the results of any time study or may request a transfer to a job that pays a higher rate. The piece-
rate system is used to allow workers to earn more for their increased output. To reward workers further for their output, LE has established a year-end bonus system that enables workers to increase
their base wages to nearly double. Each year, LE allocates a percentage of US sales for dividends and year-end bonuses.
About 12% of the company’s income went into bonuses and annuities. Workers receive merit ratings twice a year to determine the amount of bonus that they will receive at the end of the year.
The company rates employees on: 0 Output 0 Quality 0 Dependability (absences/late arrivals/overtime availability) 0 Personal characteristics (cooperation/helpfulness with others/money saving ideas) As part of its incentive program, LE also has an employee stock-ownership plan. The stock opportunities provide
employees with not only the incentive to produce so that they can share in the proﬁts, but also with security for their
futures. The company’s guaranteed employment plan provides employees additional job security. Workers who have
been at the ﬁrm for a least three years receive a guarantee of at least 30 hours of work a week. For people who are willing to accept the idea of individual responsibility and who are willing to commit themselves to the
success of the enterprise, instituting a plan similar to LB can be a win-win situation. ll“. .... ...,. “5.4"...‘1. ‘ ownership Pian- WW lNCENTlVE PLAN .the‘ lan's men ‘ tBase Wage * Piecework Advisory Board Merit Ratings Proﬁt Sharing Yearend Bonus ,J- I '2‘: Employee Stock-f1] ‘ Description a Guaranteed 30-hour workweek; components-of nLincom?fEleCtrids, incentive Plan j 'w ‘Llncol_nfsjinc ntive plan combines Job security withja lucrativ com , 1 Standard Job Evaluation procedures
are used to set the base wage. ’ However, job evaluation and market
requirements determine the actual
dollar value of jobs. For every job that can be standard-
ized, normal time-study procedures
are employed to establish piece
rates. - Employees elect representatives to an Advisory Board. All employees,
except department heads and
members of the engineering and time-
study departments, are eligible. Twice a year, managers appraise
employee performance through a
merit-rating program. - All business profits are split three
_ ways: among the company, the shareholders and the employees. ‘ ‘ The annual cash bonus closely approximates the employees’ annual .
earnings. Each employee has the opportunity
to purchase a limited number of ‘ shares of ‘company stock per year. - ' 9o PERSONNEL JOURNAL / AUGUST 199.1 '1 e Guaranteed hours may be terminated by the "b -' r" "1"» t", sation program. Below is a summary Employees are eiiglble’after three years of .
ervice. ’ ' .- Pay rates aren’t guaranteed. 0 Job transfers may be necessary. - Overtime is required during peak demand. company with a six-month notice. lob evaluation compensable factors include
skill, responsibility, mental aptitude, physical
application and working conditions. Piece rates are based on the following calcula‘
tion for consistency and to eliminate constant
revisions: 1934 wage rates times cost of living,
which ﬂuctuates with the index (Bureau of La-
bor Statistics). This product is then compared
with the area average ~skilled hourly rate to
determine the adjustments to the piece rate. The Advisory Board analyzes suggestions that
lead to organizational progress. implement-
ed suggestions have ranged from a savings of
$2,400 to over $200,000. l
! This program uses four report cards. Each card
rates work performance on one of the following:
output, quality, dependability and personal
characteristics, such as the ability to come up
with ideas, and cooperation. The company receives seed money; the share-
holders receive a dividend; and the employees
receive a year-end, proﬁt-sharing bonus. An employee's bonus is a function of his total
annual earnings, biannual merit ratings and
company profits. Employees are eligible after one year of service.
On retirement or termination of employment, the company has the option to repurchase the '
stock. ——-CW ...
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This note was uploaded on 04/30/2010 for the course L&S 101 taught by Professor Chow during the Spring '10 term at Berkeley.
- Spring '10