Tag Archives: profit

The Corporate Spark

(Photo by Andy Tinkham)

Frank Koller has a very interesting new book Spark that describes Lincoln Electric’s unusual corporate history. Founded in 1895 in Cleveland, it has provided lifelong employment to any employees were meeting their goals and has annually paid a bonus, averaging 60% of worker’s salaries.

The book dovetails well with some current (no pun intended-as Lincoln is an arc welding company) research we are engaged in on the impact of hard times on social and civic engagement.  We are the midst of developing an academic paper, but the popularization of the argument can be found in this op-ed.

In short, both being unemployed and being surrounded by more unemployed Americans, is bad for Americans’ civic and social engagement.  One possible solution is, like Germany, to create incentives for companies to preserve jobs during hard times, rather than having company’s default cost-cutting strategy be to shed jobs.  While cost-cutting and job retention seem incompatible, they need not be. Workers could agree, for example, to each voluntary take a 10% pay cut for the solidarity of all rather than shedding 10% of the workers.

Koller’s book looks at this second strategy.  Companies like Lincoln Electric, founded by the son of an itinerant Christian minister,  adopted some variant of the Golden Rule.  Treat employees as you would want to be treated.  Make sure that all hard-working employees keep their jobs in good times and bad; share the profits from workers’ innovations back to the workers.

The Lincoln Electric annual bonus started in the Great Depression when Lincoln promised his workers that any increase in profits would be shared with all employees.  It has evolved to be a strong part of the corporate culture and Lincoln Electric employees have continued to innovate to keep American jobs, even during a period when almost all metal-working jobs were moving overseas.  Lincoln formalized their Lifetime Employment Agreement in 1958, provided workers were meeting targets.  Lincoln Electric is not overly soft or sentimental about employees; they note that tough economic times can be ripe times to shed unproductive workers.

Overall, it’s a great read, giving one a sense of the values of the company’s founders and later leaders, giving one a picture of the challenges that Lincoln Electric has had to overcome, and helping to crystallize an innovative model that is atypical in America.  I also liked that Koller didn’t try to sugarcoat Lincoln Electric (LE), pointing out places where it didn’t work so well, or how physically difficult the work at Lincoln Electric typically was.

Some comments on the book, not meant to take away from a very interesting read:

1) First, it is generally not optimal to select on the dependent variable.  This is just jargon for saying that if I want to know whether X works (say lifetime employment and annual bonuses) it is usually good to make sure that you include organizations or companies in your sample that didn’t take this strategy and find out if they succeeded or not.  Otherwise, if you track a company that employed these strategies, you can’t isolate what outcomes are uniquely a consequence of this strategy;

2) The book made me wonder why the practice of lifetime employment and LE’s bonus strategy isn’t more widespread across companies if it has been so successful.  It’s quite possible that the lay reader (you or me) hasn’t heard of Lincoln Electric (LE), but it would be astonishing if other metal-working companies didn’t know of its strategy. If Lincoln Electric is so successful, what about it has been their secret ingredient? Is Lincoln Electric successful because of their culture (open-door policy, paying workers piece rates, annual merit bonus system, and job protection)?  Is it their relentless innovation with arc welding? Is the innovation and the corporate culture  related?  Was it the job protection agreement or something about the culture passed on by the founding brothers John Lincoln the inventor and James Lincoln the CEO-manager)?  In a book of this kind, it is always hard to tell. Koller notes in Chapter 4 that many other companies tried lifetime employment in the US but the guarantees did not survive.  Koller argues the Goldilocks theory:  some companies’ lifelong employment approaches were too hot (too coddled an atmosphere that stifled innovation) and others were too cold (workers at these companies didn’t trust management sufficiently and fell prey to unions that claimed that workers were being co-opted).  Ironically, the same lifelong employment practices that fell by the wayside in the US (outside of LE), were partly used to explain Japan’s rise to economic prominence in the 1980s.  Koller mainly attributes the loss of such lifelong employment policies either to issues of leader succession (a new leader that didn’t share this as a value) or economic hard times or fights with unions, but a more analytic look at this would have been interesting.  Also useful to have better data on which other firms during era of “Welfare Capitalism” in the late 1800s were also founded with job guarantees (like Sears). [Chapter 1 has a nice simple history of American labor relations during this period when the Lincoln Electric bonus was established.]

3) Kroller maintains that LE’s gamble to keep lifetime employment  “paid off, ” an assertion I felt simpatico with but didn’t feel that he ever really proved.

4) Retaining workers over their lifetime often requires, as the book notes, reassigning workers to new divisions, if their current division is shedding jobs or doesn’t need as many workers?  Koller asserts that complaints have been relatively few at LE, but how did the company get workers to be relatively flexible and what has ensured that this process works well?  I assume that the key ingredient is trust between workers and management, but it would have been useful to better understand how that trust was built and how the process worked.  [Koller does talk about the importance of trust to their merit-rating and bonus system elsewhere in the book and returns to the theme of trust in the conclusion.]

Koller also provides an interesting chapter about how despite Harvard Business School teaching the case of Lincoln Electric, many business school professors are wary of the Lincoln model:  they think it is inefficient to lock human resources into lifelong relationships when the most productive use of these employees’ talents may change over time; or they believe that lifelong employment is an “anchor around the neck of an executive” during times when a company must change rapidly and radically.

Koller also has two shorter sections on two companies, one east-coast (Hypertherm in Hanover, NH) and one west-coast Xilinx (Bay Area) that have tried other strategies to be loyal to their employees, with differing fates.  Hypertherm has been true to its no-layoff policy through two very tough downturns but is just about to face the transition to a new leader.  Xilinx worked through a very tough economic period by offering employees $10,000 sabbaticals to go back to school or work for non-profits.  They rehired these employees who wanted to return, following the upturn in the tech economy but in 2009 with a new CEO on board, who didn’t believe in lifelong employment, many Xilinx employees were let go and the implicit lifetime employment promise which has existed since 1996 quickly evaporated.