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Spark: How Old-Fashioned Values Drive a Twenty-First-Century Corporation: Lessons from Lincoln Electric's Unique Guaranteed Employment Program

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Koller opens by reporting that the best-selling Harvard Business School (HBS) case study of all time is about the Cleveland-based arc-welding manufacturer Lincoln Electric - actually, the HBS has created 8 cases about Lincoln Electric. With 14% of world market-share, it is the largest in the world, and has survived the Great Depression, globalization and the decline of industrial America, and the recent Great Recession. Like Toyota, there are no designated parking spots, special entrances, or eating places for management. Any employee with over three years of tenure is promised the company will do everything it can to avoid layoffs for economic reasons - and for more than 60 none have. Lincoln Electric also has paid a profit-sharing bonus every year for 74-straight years. The amount has almost always exceeded 60% of an employee's base earnings.

Lincoln Electric's story begins in 1895 when John C. Lincoln was laid off from his job at a Cleveland manufacturer of electric motors. Lincoln decided to go into business for himself, and by 1907 had expanded into welding machinery. John's brother, James, soon joined and took over management - John was an inventor. James is the one that implemented piece-rate payment, open-door communications, and the annual bonus. James was accused by various congressmen for years of using the bonus system to avoid paying U.S. taxes. The first payout, in 1934, represented 22% of worker pay. The company has now settled on a standard payout of 32% of earnings before interest, taxes, and bonus.

James also initiated an Advisory Board of elected representatives from throughout the factory, meeting every two weeks. Neither James nor his successors always agreed with the representatives, but they did as much as possible to accommodate the group's requests.

Employees have the right to challenge new piece-rate standards, and the standards cannot be raised unless a new method or materials are introduced. Merit ratings for bonus purposes are based on productivity, quality, adaptability/flexibility (workers have to change assignments when requested), dependability, and awareness and compliance with environmental, health, and safety priorities. Persistent ratings below 80 result in discussions about one's future at the firm, and possible eventual termination.

The 'no-layoff' policy began in 1958. Thirty-hours/week is considered the minimum; standard staffing calls for about 45 hours/week. (Minimum hours are lower in Canada, which has a more liberal unemployment policy.) Lincoln Electric recently implemented an early retirement program to get through the current downturn. The company also has new facilities in China and 17 other nations.

Author Koller asked Lincoln's current leadership if it was concerned that guaranteed employment made workers overly complacent - management admitted that was a concern, and was aware of potential competition from laser welding and some sort of super-adhesive.

Bottom-Line: Lincoln Electric has developed an envirable relationship with its workers and maintained that over the years. However, that bond will be tested as more and more competitors expand production in Asia. I hope Lincoln continues to succeed.

The author of this book, Frank Koller, and I share something in common. He learned of a company named Lincoln Electric, headquartered in Cleveland, as he was listening to an interview of the CEO on National Public Radio (NPR). I learned of the book as I was listening to an interview on NPR of the author. As I live in Cleveland, I am familiar with Lincoln Electric, however I didn't know about some of the things that make them extremely unique, not only in Cleveland, but in the world. Frank Koller, in his book, Spark: How Old Fashioned Values Drive a Twenty-First Century Corporation: Lessons from Lincoln Electric's Unique Guaranteed Employment Program, exposes the world's number one manufacturer of welding machines key strength; its Guaranteed Employment Program. Yes, you read that correctly; if an employee passes the three year probation period, and meets performance standards, they are guaranteed a job for as long as they want to work. Most of the employees retire after 30 to 40 years and, much like manufacturer's of the past, it isn't uncommon for generations of families to work at the company. How is it possible that, under a guaranteed employment program, Lincoln Electric has survived since 1895?

Contents:
Preface
Chapter 1: "Tossed Out on the Street Like Worthless Scrap"
Chapter 2: "If We Tried Harder, Could the Company Pay Us More?"
Chapter 3: "Understanding What the End Game is All About"
Chapter 4: "The Proper Step Forward"
Chapter 5: "Layoffs Aren't A Big Deal Anymore"
Chapter 6: "A Terribly Nonoptimal and Inefficient Policy"
Chapter 7: "This is Not About Altruism"
Acknowledgements
Notes
Index

Lincoln Electric was started in Cleveland by John Lincoln, who had been laid off from a small electric motor company even though he invented a highly profitable product for the company. At the time of the founding, 1895, America was experiencing a severe recession; credit was nonexistent, banks were failing, millions out of work, and the government appeared helpless. In 1907, John made the decision to recruit his brother, James, to run the company while he worked to invent electric arc welding equipment. James was just what the fledgling company needed; a business leader, charismatic, motivational, and respectful of anyone that worked hard. It was here, in the early days of the company, that the values that would keep the firm growing were born. The Lincoln's believed that workers were important as people, jobs were important to the worker's families and well being, and that was important to the long-term success of the company. Those values continue to this day. While guaranteed employment wasn't an official policy until 1958, Lincoln hadn't laid any off for several decades prior to that.

Interviewing current and past Lincoln CEO's and employees, management and financial market experts, Harvard Business School professors, and more, Koller examines the effects of guaranteed employment on Lincoln, it's workers, and the general business environment. There are many striking insights in this book. Among them:

1. At its most basic, Lincoln employees trust management. They know that if they work hard for the company, the company will work hard for them. This isn't just an empty promise, it is backed up in the culture of the company.
2. The number one bestselling Harvard Business School case study is one on Lincoln Electric.
3. When asked if he would want to run Lincoln Electric, another CEO said "I don't want to work that hard."
4. While most people are upset with CEO compensation, only five people at Lincoln make more than $1 million a year.
5. Keeping institutional knowledge is key to the long-term productivity and viability of an organization.
6. Lincoln employees are extremely flexible. Most know several jobs, and are transferred to other areas of the factory as demand changes for a product.

The saddest aspect of this book is that I believe few people will read it, especially those in management positions. Most of those managers, as Koller's research proves, cannot or will not believe that an organization can survive by guaranteeing their workers employment or building trust with them. It isn't easy, and it goes against "conventional wisdom," but the long term benefits of guaranteed employment has a huge effect on Lincoln Electric, its employees and their families, the cities in which it operates, and Lincoln's customers. Spark: How Old Fashioned Values Drive a Twenty-First Century Corporation: Lessons from Lincoln Electric's Unique Guaranteed Employment Program is one of the best business books I have read, though most people will view Lincoln's program as "quaint" or not applicable in current market conditions. Highly recommended.

Disclosure:
Obtained from: Library
Payment: Borrowed

This is the story of Lincoln Electric (LECO), an industrial products manufacturer in Cleveland, that is said to practice the type of "human values" management that seems to have become extinct at most other American companies.

According to Koller, Lincoln Electric operates on the principles that were originated by its founding brothers back in the late 1890s:

1. Employees are a high-value resource. "Treat employees like you (management) would want to be treated." Employees who perform their jobs up to company standards (which ARE rigorous) are paid according to the quality and quantity of their work. employees should not have to worry about losing their jobs in tough economic conditions, although they should expect to have hours and compensation curtailed.

2. The key to profitability is paying wages commensurate with productivity. During times of full production Lincoln Electric pays its most productive people bonuses of 70% and 120% of their base wage. At these times assembly line workers may earn $90,000, presumably from bonsuses and overtime pay. During slack times when production falls employee pay is sharply curtailed, but even so, this would seem to be preferable to laying people off.

3. Employee input into the business is essential for continual improvement. Employees make their voices heard through the Employee Advisory Board and the Open Door Policy whereby any employee may talk to the President. Employee bonuses are enhanced by the amount of productivity-improving ideas they originate.

4. In a global economy retaining employees is a competive advantage, not a liability. Companies that imagine that laying American workers off and shipping their jobs overseas to low-wage companies will make them more competitive are likely to discover that bleeding themselves of experience makes them less productive.

Employees who perform competently are not only protected from losing their livelihoods during slack times, but are compensated with a fair share of the profits that their productivity generates. It would seem that Lincoln Electric remains a dynamic industrial enterprise because its employee-centered principles of operation are also the most effective ones for business.

However, this book has generated some controversies. Some of the reviewers who claim to be familiar with Lincoln Electric have criticized the book as being a "puff piece" that disguises the purported negatives of Lincoln's methods. One reviewer went to the extreme of complaining that Lincoln's pay-for-productivity causes its factory workers to earn TOO MUCH MONEY, which is one of the most unusual criticisms I have ever heard of.

I have no direct knowledge of Lincoln Electric, but I have worked for other companies that operate on the very same principles that are described in this book. Based on that experience I tend to believe that the book is accurate in portraying Lincoln Electric as a highly successful enterprise that treats its people with respect, pays them fairly, and receives their enthusiasm, loyalty, and best efforts in return.

Lincoln's records as a publicly traded company show it to be a remarkably profitable enterprise. In fact the company just split its stock after making new highs during the worst economic crisis of our lifetime. Not bad business at all for an industrial company in a recession. I don't know if the typical assembly line employee is still earning $70K to $90K as they would if still working overtime at the peak of the business cycle, but if the book is accurate at least they are still employed and earning a base salary + healthcare and retirement benefits. That is also a pretty decent outcome for Lincoln's employees during this very difficult economy when so many other employers are putting their people out of work left-and-right.

My only complaint is that the book is longer than necessary. The first 25% captures the essence of Lincoln Electric and why it has been so successful by every measure of profit, ethics, and employee relations.

I reference Lincoln Electric as an example of how a company can manage sustainable employment AND maintain profitabily during all phases of the busienss cycle, including recessions, in my book A Pragmatic Design for a Sustainable Economy

This book is not just about Lincoln electric. It's actually a history of the lifetime employment concept since the 1800's in the American business scene. I found it interesting to learn why many other companies did this in the era of "corporate welfare" and why they stopped. I found the discussions of studies showing the long term effects of layoffs on the employees, the communities, and even CEOs to be enlightening and somewhat surprising. And I also enjoyed the limited exploration of two modern companies that have tried this approach.

Yes, the Lincoln story gets most of the ink but the longevity of Lincoln's guaranteed employment is pretty powerful and it takes some time to show the nuances of how that program came to be and all the pieces that go into making it work. And it seems to work well, not only for the employees but for the company and for the stockholders as well.

I found it a very interesting read. Not too long as some reviewers have said (except for the end where the author tries to suggest ways that this concept could be expanded.) And I found myself re-considering the very concept of the corporation. This is something I first pondered when I read "The Divine Right of Capital" by Marjorie Kelly. I'm a died-in-the-wool capitalist. But it seems to me that to think a corporation exists solely for the benefit of the stockholders as if in a vacuum detached from the workers, the community, and all the other stakeholders is short sighted at best and deranged at worst. Spark comes to no conclusions on this topic, but it raised some interesting questions in my mind.

The trouble with normal is it always gets worse -- Bruce Cockburn, Canadian folk/rock guitarist and singer-songwriter, from his 1981 song "The Trouble with Normal"

Canadian author Frank Koller quotes his countryman in "Spark" (PublicAffairs paperback, 272 pages, $15.95) in his extended examination of Cleveland, OH-based Lincoln Electric Co. and other companies with no-layoff policies.

"Normal" in American corporate practice is to lay off workers when times get tough, as they have been for the last three or more years. My own profession, journalism, has seen unprecedented layoffs at such major newspapers as The New York Times, the Los Angeles Times (where I worked from 1976 to 1990), the Chicago Tribune, and many other newspapers.

Since 1948, Lincoln Electric Co., the world leader and innovator in arc welding equipment and supplies, has adhered to a policy of not laying off permanent workers (those with three or more years of service) during slow periods and recessions. Instead, as Koller describes in this page-turning economic thriller -- it thrilled me to see humane policies from a publicly traded corporation -- the company reduces its bonuses, cuts hours and even cuts the salaries of top management. In the current "great recession," Lincoln Electric has resorted to buyouts for highly compensated employees -- many of them at or near retirement age.

Workers at Lincoln Electric even spruce up the grimy Cleveland area plants during slow periods. Everybody enters the plant from the same door and there are no special parking spots for the management. Everybody eats in a spartan cafeteria that reminded one former employee of those in "correctional facilities." The company doesn't even pay for medical coverage for its employees, although it requires them to have health insurance. With typical annual shop floor salaries north of $90,000, Lincoln Electric reasons that employees can afford the premiums. Just before Christmas, Lincoln Electric distributes annual bonuses that can exceed the yearly wages of most employees.

The book's long subtitle -- "How Old-Fashioned Values Drive a Twenty-First Century Corporation: Lessons from Lincoln Electric's Unique Guaranteed Employment Program" -- distinguishes the company, founded in 1895 by John C. Lincoln with an investment of $200 to make electric motors and later run for many decades by his brother James F. Lincoln -- who instituted its guaranteed employment plan -- from its "normal" former neighbors. Companies near Lincoln Electric in Euclid -- TRW, Addressograph-Multigraph, Chase Brass, GM's Fisher Body -- are out of business or relocated to other countries, but Lincoln Electric soldiers on in Euclid with its not-so-"normal" employment policy.

Koller interviewed more than 60 Lincoln Electric employees, including management, to find out how a guaranteed employment program works. His legwork included interviewing multigenerational families who've worked at Lincoln Electric, including a husband-wife team. He also looks at the company's business model, the subject of best-selling case studies by Harvard Business School and many other business schools around the world. (For a summary of the 1975 case study by HBS professor Norman Berg and his co-author Norman Fast, click: ...). The 1975 study has sold in excess of 275,000 copies, making it a best-seller in anybody's language!

It should be emphasized that Lincoln Electric is not just a small company in Rust-Belt Cleveland. It's a global concern, with 39 manufacturing locations in 20 countries, including Koller's Canada. Among the operations, manufacturing alliances and joint ventures in those countries are plants in such low-cost producers as China and India. Lincoln Electric is truly a company upon which the sun never sets, with distributors and sales offices covering more than 160 countries.

Chances are pretty good that if you look at an auto body shop, a repair garage, a farmer's workshop or a do-it-yourselfer's shop, you'll find a Lincoln Electric arc welder in the workplace. The company's most popular portable welder was even featured in John Hughes's hit movie "Home Alone!"

While factories across the Midwest shutter their doors, Lincoln Electric has thrived for more than a century. In addition to being profitable and technologically innovative, through good times and bad, the company has fulfilled its unique promise of "guaranteed continuous employment." Workers are viewed as assets--not liabilities. Through flexible hours and job assignments, as well as a merit-based bonus system, Lincoln Electric's employment policies have proven healthy for the company's bottom line its employees and its shareholders.

In "Spark" Koller examines how this unusual and profitable Fortune 1000 multinational company challenges the conventional wisdom shaping modern management's view of the workplace. Through insightful storytelling and extensive interviews with executives, workers, and leading business thinkers, Koller uses the Lincoln Electric example to illustrate how job security can inspire powerful growth and prosperity in our communities, which in our hollowed-out manufacturing base is especially relevant.

Unfortunately for America's workers, while the Lincoln Model has been heavily studied, it hasn't been adopted by many companies. Koller takes us to two companies, Xilink in California, and Hypertherm, in New Hampshire, that have tried guaranteed employment. Following a change in CEO's, Xilink abandoned the policy, reverting to the "normal" layoff practice of its Silicon Valley comperes. Hypertherm, which makes equipment that cuts rather than welds metal, continues to practice a no-layoff policy for employees that have been at the company for a stated period, like Lincoln Electric. Koller also mentions Southwest Airlines, founded in 1971 and based in Dallas, TX, that adheres to the policy.

One thing that struck me as hypocritical among the academic critics of guaranteed employment that Koller interviewed was the almost universal opposition to it. Coming from academics who enjoy tenure, this stands out as hypocrisy of the highest order.(for comments by Koller on Harvard Business School and the Lincoln Electric case studies, click: (...)

Purchased for my father, who has really been enjoying it. Author does not waste time on fluff, but sticks faithfully to the subject matter, covering it in such a way that the reader learns a great deal about Lincoln Electric: its history, the human elements that started this company, and the moxie that makes it continue to thrive.

This is the story of how Lincoln Electric has gone 80+ years without a single layoff. About how they have paid a profit sharing bonus EVERY ONE OF THOSE years including through the great depression!! I would make this REQUIRED READING for any MBA student or any corporate leader. Oh by the way they make welding equipment, a manufacturing company based here in good old U.S.A. not surviving but thriving!!! Get it read it and implement key aspects!!!!!

John Gregory Vincent
[...]
The CURE for the Common Workplace

Lincoln Electric - the welder (and supplies) manufacturer - the subject of this book - if they weren't kicking the world's butt at what they do would be bought out, dismantled, and sold off by practitioners of what passes for business management today. How can this company make money when the average annual compensation their 3000-worker strong Cleveland, OH plant takes home is $68,000? That fact alone ought to make anyone interested in Lincoln Electric's story. It did me, that's for sure, about 10 years ago when I first heard about them in a business school case discussion.

Reading Frank Koller's book, "Spark" you do more than satisfy this curiosity. Mr. Koller focuses in on a key aspect of Lincoln that kind of flew below the radar for me till now - guaranteed employment.

As I write this it's the day before Labor Day, 2011. Unemployment is in the news every day. An article in today's paper about the long-term unemployed touched my heart and I thought to myself how desperate and alone so many must be who have had to wrestle with questions about their value in working society - unable to find a place in it for months and years.

Guaranteed employment is not what drives most business managers today, and it's absence from boardroom discussions may be partly why people have become so anti-business since the mortgage-backed securities scandals of 2008.

But Lincoln Electric has delivered on its promise of guaranteed employment even during 2008 and beyond. Dads and moms who work at Lincoln are paying their mortgages, coaching their kids' little league teams, serving on school boards, contributing to charity drives, watching their kids graduate high school, go to college, get married and build for the future because they are not fretting over some fear that tomorrow they'll get a pink slip and be on the street.

Read the book. It'll make you wonder why Lincoln is so rare a sample of industry success. It might even make you mad that virtually no modern managers even make an attempt at harnessing the power that Lincoln has discovered and cultivated for 116 years, in Cleveland, OH.

Frank Koller worked for years to convince Lincoln Electric management to allow him in to interview management (and a few management selected top workers), so that he could write a book about this company, the inspiration for a series of Harvard Business School case studies in the 60s and 70s.

It's apparently a mystery how this old school manufacturing company (they make industrial welding equipment) can survive and even thrive in a billion dollar international corporation, while supposedly paying 70-100% bonuses, paying $90K a year for jobs that ordinarily pay $20K in their market (depressed Cleveland, Ohio) and while supposedly never laying off an employee in their long history.

Koller reveals some of the mysteries behind the curtain and lo, they are not very mysterious at all. The "no lay off" policy only applies to SOME employees (you must work there at least 3 years and have a spotless record) and consists of a minimum 30 hour week, apparently doing menial work such as painting halls or cleaning bathrooms. If your boss doesn't take a shine to you, or simply wants you out, or management wants to let a few employees go without calling it a layoff -- easy-peasy, just award that employee insufficent "points" on an arbitrary scale.

The huge bonuses are subject to management discretion, so can be within or cut back at any time...PLUS, Mr. Koller reveals only the last chapter that NO employee of this much-vaunted company receives health insurance benefits...that's ZERO, never, nothing. This is important, as it is a big part of our current national discussion and the recent reform bill, which STILL makes health care an employee benefit and not a universal right of citizenship (like in Canada). Apparently, each Lincoln employee MUST pay for individual private policies (at sky high rates) out of their bonus -- it's mandatory and a condition of employment, never mind if you are a single person in good health or have a family member with an expensive chronic condition (too bad!) -- so that giant bonus isn't worth nearly what it seems. And you don't get a bonus the first couple of years, so what do you buy your health care with THEN? What happens when your insurance company refuses you (pre-existing condition!) or jacks your rates up to the sky or drops you? This is a huge, huge disparity between the picture of the "perfect company that magically can pay triple wages" and reality.

There is no attempt to interview or investigate other similar companies, such as Lincoln's chief competitor in the US market, Miller Electric. Do they have to pay triple wages or 70% annual bonuses? Do they also forego paying health insurance? We don't know, because Koller's curiousity stops at the Lincoln front gate.

Koller, perhaps as a condition of being allowed inside the company, only speaks to Lincoln executives, and a tiny group of handpicked company employees -- all of them lifers, some whose entire family is employed at Lincoln for many decades and one woman who is "employee of the year" and earns over $90,000 a year for what is a very basic assembly line job, that would normally pay roughly $18,000 a year (she assembles welding gun nozzles). Anybody with a negative experience such as disgruntled employees or people who were fired or "laid off" or unhappy working at Lincoln are marginalized and not even worth talking to. So OF COURSE Mr. Koller hears nothing but "happy stories" of people thrilled to work at this job...he never considers that if one of these people spoke openly, they'd be severely reprimanded (or even fired, using the dreaded "point system") or not receive their full bonus -- AND in addition, the livelihood of their ENTIRE FAMILY, including parents and children, would be jeopardized.

There is a sense here of "how CAN they do it?" -- how does Lincoln pay such stratospheric wages and bonuses -- yet remain competitive with companies that can't possibly do so, companies that have the decency to provide group health insurance. Koller gives no answers to this enigma.

Living in the Cleveland area, I know some people who have worked at Lincoln Electric -- happy and not happy people. Since I was not a writer nor in a position of power or influence, they spoke openly to me. I know for a fact that part of the "no-layoff" scam is that they have hired mostly temps and contract employees for years, except in a couple of key departments. The supposedly "egalitarian" lunch room is a fiction: executives sit at their own tables, away from the riff raff, and employees are harshly discouraged from leaving the "campus" to eat lunch. (Being as little as two minutes late coming back from lunch, even in a blizzard, is grounds for dismissal.)

I'd have been very interested to hear what employees had to say about not having health insurance coverage, especially in the first couple of years of employment before their giant bonuses kick in -- but Mr. Koller considers having no health insurance so unimportant that he buries it in the last chapter of the book, and brushes it aside as if it were a meaningless token. All the bonuses in the world, IMHO, count for little if you are a family crushed by catastrophic health expenses or rescission.

Lastly, I have to really wonder about a high tech manufacturing facility, in the 21st century, that runs on PIECEWORK, something abandoned industrywide by all but the most primitive substandard Asian or Indian companies who have things like child labor. Is Koller suggesting that piece work is the path to the future of American manufacturing? A way to bring back our economic health or lure companies back to our shores? If so, he tells us precious little about what it does to employees, to be constantly under the gun -- to be driven to work at high speeds -- or threatened under some point system of losing their sweet bonus deals.

I don't know. What I do know is that good investigative journalism demands more of a writer than to simply regurgitate propaganda or to prepetuate company legends and fictions to the public. No wonder Lincoln allowed this writer "access"; he must have promised them that he would tell their story, their way...better than any paid advertising agency. That's a sweetheart deal. It's not journalism.