The Lincoln Electric Company was the world’s largest manufacturer of arc-welding products

and a leading producer of industrial electric motors. The firm employed 2400 workers in two
US factories near Cleveland and an equal number in eleven factories located in other
countries. This did not include the field sales force of more than 200. The company’s US
market share (for arc-welding products) was estimated at more than 40 percent.
The Lincoln incentive management plan had been well known for many years. Many college
management texts referred to the Lincoln plan as a model for achieving higher worker
productivity. Certainly, the firm was successful according to the usual measures.
When James F. Lincoln died in 1965, there had been some concern, even among employees,
that the management system would fall into disarray, that profits would decline, and that
year- end bonuses might be discontinued. Quite the contrary, 24 years after Lincoln’s death, the
company appeared to be as strong as ever. Each year, except the recession years 1982 and
1983, saw high profits and bonuses. Employee morale and productivity remained very good.
Employee turnover was almost nonexistent except for retirements. Lincoln’s market share
was stable. The historically high stock dividends continued.

A Historical Sketch
In 1895, after being “frozen out” of the depression-ravaged Elliott-Lincoln Company, a maker of
Lincoln-designed electric motors, John C. Lincoln took out his second patent and began to
manufacture his improved motor. He opened his new business, unincorporated, with $200
he had earned redesigning a motor for young Herbert Henry Dow, who later founded the Dow
Chemical Company.
Started during an economic depression and cursed by a major fire after only one year in
business, the company grew, but hardly prospered, through its first quarter-century. In 1906,
John C. Lincoln incorporated the business and moved from his one-room, fourth-floor factory
to a new three-story building he erected in East Cleveland. He expanded his work force to 30
and sales grew to over $50,000 a year. John preferred being an engineer and inventor rather
than a manager, though, and it was to be left to another Lincoln to manage the company
through its years of success.
In 1907, after a bout with typhoid fever forced him to leave Ohio State University in his
senior year, James F. Lincoln, John’s younger brother, joined the fledgling company. In 1914
he became active head of the firm, with the titles General Manager and Vice President. John
remained President of the company for some years but became more involved in other
business ventures and in his work as an inventor.
One of James Lincoln’s early actions was to ask the employees to elect representatives to a
committee (called the “Advisory Board”) which would advise him on company operations. The
Advisory Board met with the Chief Executive Officer every two weeks. This was only the first
of a series of innovative personnel policies which, over the years, distinguished Lincoln
Electric from its contemporaries.
The first year the Advisory Board was in existence, working hours were reduced from 55
per week, then standard, to 50 hours a week. In 1915, the company gave each employee a
paid-up life insurance policy. A welding school, which continues today, was begun in 1917. In
1918, an employee bonus plan was attempted. It was not continued, but the idea was to
resurface later. The Lincoln Electric Employees’ Association was formed in 1919 to provide
health benefits and social activities. Over the years, it assumed several additional functions.
In 1923, a piece- work pay system was in effect, employees got two weeks paid vacation each
year, and wages were adjusted for changes in the Consumer Price Index. Approximately 30
percent of the common stock was set aside for key employees in 1914. A stock purchase plan for
all employees was begun in 1925.
The Board of Directors voted to start a suggestion system in 1929. Cash awards, a part of
the early program, were discontinued in the mid-1980s. Suggestions were rewarded by
additional “points,” which affected year-end bonuses.
The legendary Lincoln bonus plan was proposed by the Advisory Board and accepted on a
trial basis in 1934. The first annual bonus amounted to about 25 percent of wages. There was
a bonus every year after that. The bonus plan became a cornerstone of the Lincoln
management system, and recent bonuses approximated annual wages.
By 1944, Lincoln employees enjoyed a pension plan, a policy of promotion from within,
and continuous employment. Base pay rates were determined by formal job evaluation, and a
merit rating system was in effect.
In the prologue of James F. Lincoln’s last book, Charles G. Herbruck wrote regarding the
foregoing personnel innovations:
They were not to buy good behavior. They were not efforts to increase profits. They were not antidotes
to labor difficulties. They did not constitute a “do-gooder” program. They were expressions of mutual
respect for each person’s importance to the job to be done. All of them reflect the leadership of James
 Lincoln, under whom they were nurtured and propagated.

During World War II, Lincoln prospered as never before. By the start of the war, the company
was the world’s largest manufacturer of arc-welding products. Sales of about $4 million in
1934 grew to $24 million by 1941. Productivity per employee more than doubled during the
same period. The Navy’s Price Review Board challenged the high profits. The Internal
Revenue Service questioned the tax deductibility of employee bonuses, arguing they were not
“ordinary and necessary” costs of doing business, but the forceful and articulate James
Lincoln was able to overcome the objections.
Certainly after 1935 and probably for several years before that, Lincoln productivity was
well above the average for similar companies. The company claimed levels of productivity more
than twice those for other manufacturers from 1945 onward. Information available from out-
side sources tended to support these claims.

Company Philosophy
James F. Lincoln was the son of a Congregational minister, and Christian principles were at
the center of his business philosophy. The confidence that he had in the efficacy of Christ’s
teachings was illustrated by the following remark taken from one of his books:
The Christian ethic should control our acts. If it did control our acts, the savings in cost of
distribution would be tremendous. Advertising would be a contact of the expert consultant
with the customer, in order to give the customer the best product available when all of the
customer’s needs are considered. Competition then would be in improving the quality of
products and increasing efficiency in producing and distributing them; not in deception, as
is now too customary. Pricing would reflect efficiency of production; it would not be a selling
dodge that the customer may well be sorry he accepted. It would be proper for all
concerned and rewarding for the ability used in producing the product.

There was no indication that Lincoln attempted to evangelize his employees or customers
— or the general public, for that matter. Neither the Chairman of the Board and Chief
Executive, George Willis, nor the President, Donald F. Hastings, mentioned the Christian
gospel in speeches and interviews. The company motto, “The actual is limited, the possible is
immense,” was prominently displayed, but there was no display of religious slogans and no
company chapel.

Attitude toward the Customer

James Lincoln considered the customer’s needs the raison d’être for every company. “When any
company has achieved success so that it is attractive as an investment,” he wrote, “all money
usually needed for expansion is supplied by the customer in retained earnings. It is obvious
that the customer’s interests, not the stockholder’s, should come first.” In 1947 he said, “Care
should be taken . . . not to rivet attention on profit. Between ‘How much do I get?’ and ‘How
do I make this better, cheaper, and more useful?’ the difference is fundamental and decisive.”
Willis, too, ranked the customer as management’s most important constituency. This was
reflected in Lincoln’s policy to “at all times price on the basis of cost and at all times keep
pressure on our cost.” Lincoln’s goal, often stated, was “to build a better and better product at a
lower and lower price.” “It is obvious,” James Lincoln said, “that the customer’s interests should
be the first goal of industry.”
Attitude toward Stockholders
Stockholders were given last priority at Lincoln. This was a continuation of James Lincoln’s
philosophy: “The last group to be considered is the stockholders who own stock because they
think it will be more profitable than investing money in any other way.” Concerning division of
the largess produced by incentive management, he wrote, “The absentee stockholder also will get
his share, even if undeserved, out of the greatly increased profit that the efficiency produces.”

Attitude toward Unionism

There was never a serious effort to organize Lincoln employees. While James Lincoln criticized
the labor movement for “selfishly attempting to better its position at the expense of the people it
must serve,” he still had kind words for union members. He excused abuses of union power as
“the natural reactions of human beings to the abuses to which management has subjected
them.” Lin coln’s idea of the correct relationship between workers and managers was shown
by this comment: “Labor and management are properly not warring camps; they are parts of one
organization in which they must and should cooperate fully and happily.”

Beliefs and Assumptions about Employees

If fulfilling customer needs was the desired goal of business, then employee performance and
productivity were the means by which this goal could best be achieved. It was the Lincoln
attitude toward employees, reflected in the following comments by James Lincoln, which was
credited by many with creating the success the company experienced:
The greatest fear of the worker, which is the same as the greatest fear of the industrialist in
operating a company, is the lack of income.......the industrial manager is very conscious of
His company’s need for uninterrupted income. He is completely oblivious, evidently, of the
fact that the worker has the same need.
[The worker] is just as eager as any manager is to be part of a team that is properly
organized and working for the advancement of our economy He has no desire to
make profits for those who do not hold up their end in production, as is true of absentee
stockholders and inactive people in the company.
If money is to be used as an incentive, the program must provide that what is paid to the
worker is what he has earned. The earnings of each must be in accordance with
accomplishment.
Status is of great importance in all human relationships. The greatest incentive that
money has, usually, is that it is a symbol of success........The resulting status is the real
incentive..................................................................................Money alone can be an incentive
to the miser only.
There must be complete honesty and understanding between the hourly worker and
management if high efficiency is to be obtained.

Lincoln’s Business
Arc welding had been the standard joining method in shipbuilding for decades. It was the pre-
dominant way of connecting steel in the construction industry. Most industrial plants had
their own welding shops for maintenance and construction. Manufacturers of tractors and all
kinds of heavy equipment used arc welding extensively in the manufacturing process. Many
hobbyists had their own welding machines and used them for making metal items such as
patio furniture and barbecue pits. The popularity of welded sculpture as an art form was
growing.
While advances in welding technology were frequent, arc-welding products, in the main,
hardly changed. Lincoln’s Inner shield process was a notable exception. This process, described
later, lowered welding cost and improved quality and speed in many applications. The most
widely used Lincoln electrode, the Fleet weld 5P, was virtually the same from the 1930s to
1989. For at least four decades, the most popular engine-driven welder in the world, the
Lincoln SA- 200, had been a gray-colored assembly, including a four-cylinder Continental “Red
Seal” engine and a 200-ampere direct-current generator with two current-control knobs. A 1989
model SA- 200 even weighed almost the same as the 1950 model, and it certainly was little
changed in appearance.
The company’s share of the US arc-welding products market appeared to have been about
40 percent for many years. The welding products market had grown somewhat faster than the
level of industry in general. The market was highly price-competitive, with variations in prices
of standard items normally amounting to only 1 or 2 percent. Lincoln’s products were sold
directly by its engineering-oriented sales force and indirectly through its distributor
organization. Advertising expenditures amounted to less than 0.75 percent of sales. Research
and development expenditures typically ranged from $10 million to $12 million, considerably
more than competitors spent.
The other major welding process, flame welding, had not been competitive with arc
welding since the 1930s. However, plasma arc welding, a relatively new process which used a
conducting stream of superheated gas (plasma) to confine the welding current to a small
area, had made some inroads, especially in metal tubing manufacturing, in recent years. Major
advances in technology which would produce an alternative superior to arc welding within
the next decade or so appeared unlikely. Also, it seemed likely that changes in the machines
and techniques used in arc welding would be evolutionary rather than revolutionary.
Products
The company was primarily engaged in the manufacture and sale of arc-welding products—
electric welding machines and metal electrodes. Lincoln also produced electric motors
ranging from 0.5 to 200 horsepower. Motors constituted about 8 to 10 percent of total sales.
Several mil- lion dollars had recently been invested in automated equipment that would
double Lincoln’s manufacturing capacity for 0.5- to 20-horsepower electric motors.
The electric welding machines, some consisting of a transformer or motor and generator
arrangement powered by commercial electricity and others consisting of an internal
combustion engine and generator, were designed to produce 30 to 1500 amperes of electrical
power. This electrical current was used to melt a consumable metal electrode, with the
molten metal being transferred in superhot spray to the metal joint being welded. Very high
temperatures and hot sparks were produced, and operators usually had to wear special eye
and face protection and leather gloves, often along with leather aprons and sleeves.
Lincoln and its competitors marketed a wide range of general-purpose and specialty
electrodes for welding mild steel, aluminum, cast iron, and stainless and special steels.
Most of these electrodes were designed to meet the standards of the American Welding Society, a
trade association. They were thus essentially the same as to size and composition from one
manufacturer to another. Every electrode manufacturer had a limited number of unique
products, but these typically constituted only a small percentage of total sales.
Welding electrodes were of two basic types:
1. Coated “stick” electrodes, usually 14 inches long and smaller than a pencil in
diameter, were held in a special insulated holder by the operator, who had to manipulate
the electrode in order to maintain a proper arc width and pattern of deposition of the
metal being transferred. Stick electrodes were packaged in 6- to 50-pound boxes.
2. Coiled wire, ranging in diameter from 0.035 to 0.219 inch, was designed to be fed
continuously to the welding arc through a “gun” held by the operator or positioned by
automatic positioning equipment. The wire was packaged in coils, reels, and drums
weighing from 14 to 1000 pounds and could be solid or flux-cored.

Manufacturing Processes
The main plant was in Euclid, Ohio, a suburb on Cleveland’s east side. There were no ware-
houses. Materials flowed from the 1Ⲑ2-mile-long dock on the north side of the plant through the
production lines to a very limited storage and loading area on the south side. Materials used
on each workstation were stored as close as possible to the workstation. The administrative
offices, near the center of the factory, were entirely functional. A corridor below the main level
provided access to the factory floor from the main entrance near the center of the plant. For-
tune magazine declared the Euclid facility one of America’s 10 best-managed factories, 1 and
compared it with a General Electric plant also on the list:

Stepping into GE’s spanking new dishwasher plant, an awed supplier said, is like stepping
“into the Hyatt Regency.” By comparison, stepping into Lincoln Electric’s 33-year-old,
cavernous, dimly lit factory is like stumbling into a dingy big-city YMCA. It’s only when one
starts looking at how these factories do things that similarities become apparent. They have
found ways to merge design with manufacturing, build in quality, make wise choices about
automation, get close to customers, and handle their work forces.

A new Lincoln plant, in Mentor, Ohio, housed some of the electrode production
operations, which had been moved from the main plant.
Electrode manufacturing was highly capital-intensive. Metal rods purchased from steel
producers were drawn down to smaller diameters, cut to length, coated with pressed-powder
“flux” for stick electrodes or plated with copper (for conductivity), and put into coils or spools for
wire. Lincoln’s Inner shield wire was hollow and filled with a material similar to that used to
coat stick electrodes. As mentioned earlier, this represented a major innovation in welding
technology when it was introduced. The company was highly secretive about its electrode
production processes, and outsiders were not given access to the details of those processes.

Lincoln welding machines and electric motors were made on a series of assembly lines.
Gasoline and diesel engines were purchased partially assembled, but practically all other com-
ponents were made from basic industrial products (e.g., steel bars and sheets and bar copper
conductor wire).
Individual components, such as gasoline tanks for engine-driven welders and steel shafts for
motors and generators, were made by numerous small “factories within a factory.” The shaft for
a certain generator, for example, was made from raw steel bar by one operator who used five
large machines, all running continuously. A saw cut the bar to length, a digital lathe machined
different sections to varying diameters, a special milling machine cut a slot for the keyway, and
so forth, until a finished shaft was produced. The operator moved the shafts from machine to
machine and made necessary adjustments.
Another operator punched, shaped, and painted sheet-metal cowling parts. One assembled
steel laminations onto a rotor shaft, then wound, insulated, and tested the rotors. Finished
components were moved by crane operators to the nearby assembly lines.

Worker Performance and Attitudes

Exceptional worker performance at Lincoln was a matter of record. The typical Lincoln
employee earned about twice as much as other factory workers in the Cleveland area. Yet the
company’s labor cost per sales dollar in 1989, 26 cents, was well below the industry average.
Worker turnover was practically nonexistent except for retirements and departures by new
employees.
Sales per Lincoln factory employee exceeded $150,000. An observer at the factory quickly
saw why this figure was so high. Each worker was proceeding busily and thoughtfully about
the task at hand. There was no idle chatter. Most workers took no coffee breaks. Many operated
several machines and made a substantial component unaided. The supervisors were busy
with planning and record-keeping duties and hardly glanced at the people they “supervised.”
The manufacturing procedures appeared to be efficient—no unnecessary steps, no wasted
motions, no wasted materials. Finished components moved smoothly to subsequent
workstations.
The Appendix to this case gives summaries of interviews with employees.

Organizational Structure
Lincoln never allowed development of a formal organization chart. The objective of this policy
was to ensure maximum flexibility. An open-door policy was practiced throughout the company,
and personnel were encouraged to take problems to the persons most capable of resolving
them. Once, Harvard Business School researchers prepared an organization chart reflecting
the implied relationships at Lincoln. The chart became available within the company, and
management felt that the chart had a disruptive effect. Therefore, no organization chart
appears in this case.
Perhaps because of the quality and enthusiasm of the Lincoln workforce, routine
supervision was almost nonexistent. A typical production foreman, for example, supervised
as many as 100 workers, a span of control which did not allow more than infrequent worker–
supervisor interaction.
Position titles and traditional flows of authority did imply something of an organizational
structure, however. For example, the Vice President, Sales, and the Vice President, Electrode
Division, reported to the President, as did various staff assistants such as the Personnel Di-
rector and the Director of Purchasing? Using such implied relationships, it was determined
that production workers had two or, at most, three levels of supervision between themselves
and the President.

Personnel Policies
As mentioned earlier, Lincoln’s remarkable personnel practices were credited by many with
the company’s success.

Recruitment and Selection

Every job opening was advertised internally on company bulletin boards, and any employee
could apply for any job so advertised. External hiring was permitted only for entry-level
positions. Selection for these jobs was done on the basis of personal interviews; there was no
aptitude or psychological testing. Not even a high school diploma was required—except for
engineering and sales positions, which were filled by graduate engineers. A committee consisting
of vice presidents and supervisors interviewed candidates initially cleared by the Personnel
Department. Final selection was made by the supervisor who had a job opening. Out of over 3500
applicants interviewed by the Personnel Department during one period, fewer than 300 were
hired.

Job Security
In 1958 Lincoln formalized its guaranteed continuous employment policy, which had already
been in effect for many years. There had been no layoffs since World War II. Since 1958, every
worker with over two years’ longevity had been guaranteed at least 30 hours per week, 49
weeks per year.
The policy was never so severely tested as during the 1981–1983 recession. As a
manufacturer of capital goods, Lincoln had business that was highly cyclical. In previous
recessions the company had been able to avoid major sales declines. However, sales plummeted
32 percent in 1982 and another 16 percent the next year. Few companies could withstand such a
revenue col- lapse and remain profitable. Yet, not only did Lincoln earn profits, but no employee
was laid off and year-end incentive bonuses continued. To weather the storm, management cut
most of the non-salaried workers back to 30 hours a week for varying periods of time. Many
employees were reassigned, and the total workforce was slightly reduced through normal
attrition and restricted hiring. Many employees grumbled at their unexpected misfortune,
probably to the surprise and dismay of some Lincoln managers. However, sales and profits—
and employee bonuses—soon rebounded, and all was well again.

Performance Evaluations
Each supervisor formally evaluated subordinates twice a year using the cards shown in Exhibit
1. The employee performance criteria—“quality,” “dependability,” “ideas and cooperation,” and
“Output”—were considered to be independent of each other. Marks on the cards were converted to
numerical scores which were forced to average 100 for each evaluating supervisor. Individual
merit rating scores normally ranged from 80 to 110. Any score over 110 required a special letter to
top management. These scores (over 110) were not considered in computing the required 100-
point average for each evaluating supervisor. Suggestions for improvements often resulted in
recommendations for exceptionally high performance scores. Supervisors discussed individual
performance marks with the employees concerned. Each warranty claim was traced to the
individual employee whose work caused the defect. When that happened, the employee’s
performance score might be reduced, or the worker might be required to repay the cost of
servicing the warranty claim by working without pay.

Compensation
Basic wage levels for jobs at Lincoln were determined by a wage survey of similar jobs in the
Cleveland area. These rates were adjusted quarterly in accordance with changes in the Cleve-
land area wage index. Insofar as possible, base wage rates were translated into piece rates.
Practically all production workers and many others—for example, some forklift operators—
were paid by piece rate. Once established, piece rates were never changed unless a substantive
change in the way a job was done resulted from a source other than the worker doing the job.
In December of each year, a portion of annual profits was distributed to employees as
bonuses. Incentive bonuses since 1934 had averaged about 90 percent of annual wages and
somewhat more than after-tax profits. The average bonus for 1988 was $21,258. Even for the re-
cession years 1982 and 1983, bonuses averaged $13,998 and $8,557, respectively. Individual
bonuses were proportional to merit rating scores. For example, assume the amount set aside
for bonuses was 80 percent of total wages paid to eligible employees. A person whose
performance score was 95 would receive a bonus of 76 percent (0.80 * 0.95) of annual wages.

Vacations
The company was shut down for two weeks in August and two weeks during the Christmas
season. Vacations were taken during these periods. For employees with over 25 years of
service, a fifth week of vacation could be taken at a time acceptable to superiors.

Work Assignment
Management had authority to transfer workers and to switch between overtime and short
time as required. Supervisors had undisputed authority to assign specific parts to individual
workers, who might have their own preferences due to variations in piece rates. During the
1982–1983 recession, fifty factory workers volunteered to join sales teams and fanned out
across the country to sell a new welder designed for automobile body shops and small
machine shops. The result—$10 million in sales and a hot new product. Employee
Participation in Decision Making
Thinking of participative management usually evokes a vision of a relaxed, no authoritarian
atmosphere. This was not the case at Lincoln. Formal authority was quite strong. “We’re very
authoritarian around here,” said Willis. James F. Lincoln placed a good deal of stress on
protecting management’s authority. “Management in all successful departments of industry
must have complete power,” he said. “Management is the coach who must be obeyed. The
workers, however, are the players who alone can win the game.” Despite this attitude, there
were several ways in which employees participated in management at Lincoln.
Richard Sabo, Assistant to the Chief Executive Officer, related job
enlargement/enrichment to participation. He said, “The most important participative
technique that we use is giving more responsibility to employees. We give a high school
graduate more responsibility than other companies give their foremen.” Management put
limits on the degree of participation which was allowed, however. In Sabo’s words:
When you use “participation,” put quotes around it. Because we believe that each person
should participate only in those decisions he is most knowledgeable about. I don’t think
production employees should control the decisions of the chairman. They don’t know as much
as he does about the decisions he is involved in.

The Advisory Board, elected by the workers, met with the Chairman and the President every
two weeks to discuss ways of improving operations. As noted earlier, this board had been in
existence since 1914 and had contributed too many innovations. The incentive bonuses, for
example, were first recommended by this committee. Every employee had access to Advisory
Board members, and answers to all Advisory Board suggestions were promised by the following
meeting. Both Willis and Hastings were quick to point out, though, that the Advisory Board
only recommended actions. “They do not have direct authority,” Willis said, “and when they
bring up something that management thinks is not to the benefit of the company, it will be
rejected.” Under the early suggestion program, employees were awarded one-half of the first
year’s savings attributable to their suggestions. Later, however, the value of suggestions was
reflected in performance evaluation scores, which determined individual incentive bonus
amounts.

Training and Education

Production workers were given a short period of on-the-job training and then placed on a piece-
work pay system. Lincoln did not pay for off-site education, unless very specific company needs
were identified. The idea behind this policy, according to Sabo, was that not everyone could
take advantage of such a program, and it was unfair to expend company funds for an
advantage to which there was unequal access. Recruits for sales jobs, already college
graduates, were given on-the-job training in the plant, followed by a period of work and
training at one of the regional sales offices.

Fringe Benefits and Executive Perquisites

A medical plan and a company-paid retirement program had been in effect for many years. A
plant cafeteria, operated on a break-even basis, served meals at about 60 percent of usual
costs. The Employee Association, to which the company did not contribute, provided disability
insurance and social and athletic activities. The employee stock ownership program resulted in
employee ownership of about 50 percent of the common stock. Under this program, each
employee with more than two years of service could purchase stock in the corporation. The
price of the shares was established at book value. Stock purchased through this plan could be
held by employees only.
Dividends and voting rights were the same as for stock which was owned outside the plan.
Approximately 75 percent of the employees owned Lincoln stock.
As to executive perquisites, there were none. Executives had crowded, austere offices; no
executive washrooms or lunchrooms; and no reserved parking spaces. Even the top
executives paid for their own meals and ate in the employee cafeteria. On one recent day,
Willis arrived at work late because of a breakfast speaking engagement and had to park far
away from the factory entrance.

Financial Policies
James F. Lincoln felt strongly that financing for company growth should come from within the
company—through initial cash investment by the founders, through retention of earnings, and
through stock purchases by those who worked in the business. He saw the following
advantages to this approach:
1. Ownership of stock by employees strengthened team spirit. “If they are mutually
anxious to make it succeed, the future of the company is bright.”
2. Ownership of stock provided individual incentive because employees felt that they
would benefit from company profitability.
3. “Ownership is educational.” Owner-employees “will know how profits are made and
lost; how success is won and lost......there are few socialists in the list of stockholders
of the nation’s industries.”
4. “Capital available from within controls expansion.” Unwarranted expansion would not
occur, Lincoln believed, under his financing plan.
5. “The greatest advantage would be the development of the individual worker. Under the
incentive of ownership, he would become a greater man.”
6. “Stock ownership is one of the steps that can be taken that will make the worker feel
that there is less of a gulf between him and the boss........Stock ownership will help the
 worker to recognize his [or her] responsibility in the game and the
importance of victory.”
Until 1980, Lincoln Electric borrowed no money. The company’s liabilities consisted mainly of
accounts payable and short-term accruals.
The unusual pricing policy at Lincoln was succinctly stated by Willis: “At all times price on
the basis of cost, and all times keep pressure on our cost.” This policy resulted in the price for
the most popular welding electrode going from 16 cents a pound in 1929 to 4.7 cents in 1938.
More recently, the SA-200 welder, Lincoln’s largest-selling portable machine, had decreased in
price from 1958 through 1965. According to Dr. C. Jackson Grayson of the American
Productivity Center in Houston, Texas, Lincoln’s prices had increased only one-fifth as fast as
the Consumer Price Index from 1934 to about 1970. This resulted in a welding products
market in which Lincoln became the undisputed price leader for the products it
manufactured. Not even the major Japanese manufacturers, such as Nippon Steel for
welding electrodes and Osaka Transformer for welding machines, were able to penetrate this
market.
Substantial cash balances were accumulated each year preparatory to paying the year-end
bonuses. The bonuses totaled $54 million for 1988. The money was invested in short-term US
government securities and certificates of deposit (CDs) until needed. The company’s financial
history is shown in Exhibit 2.

How Well Did Lincoln Serve Its Stakeholders?

Lincoln Electric differed from most other companies in the importance it assigned to each of
the groups it served. Willis identified these groups, in the order of priority ascribed to them, as
(1) Customers, (2) employees, and (3) stockholders.
Certainly the firm’s customers had fared well over the years. Lincoln prices for welding
machines and welding electrodes were acknowledged to be the lowest in the marketplace.
Quality was consistently high. The cost of field failures for Lincoln products had recently
been determined to be a remarkable 0.04 percent of revenues. The “Fleet weld” electrodes
and SA-200 welders had been the standard in the pipeline and refinery construction
industry, where price was hardly a criterion, for decades. A Lincoln distributor in Monroe,
Louisiana, said that he had sold several hundred of the popular AC-225 welders, which were
warranted for one year, but never handled a warranty claim.
Perhaps best-served of all management constituencies were the employees. Not the least of
their benefits, of course, were the year-end bonuses, which effectively doubled an already
aver- age compensation level. The foregoing description of the personnel program and the
comments in the Appendix further illustrate the desirability of a Lincoln job.
While stockholders were relegated to an inferior status by James F. Lincoln, they did very
well indeed. Recent dividends had exceeded $11 a share, and earnings per share approached
$30. In January 1980, the price of restricted stock, committed to employees, had been $117 a
share. By 1989, the stated value at which the company would repurchase the stock if tendered
was $201. A check with the New York office of Merrill Lynch, Pierce, Fener and Smith at that
time revealed an estimated price on Lincoln stock of $270 a share, with none being offered
for sale. Technically, this price applied only to the unrestricted stock owned by the Lincoln
family, a few other major holders, and employees who purchased it on the open market. Risk
associated with Lincoln stock, a major determinant of stock value, was minimal because of
the small amount of debt in the capital structure, because of an extremely stable earnings record,
and be- cause of Lincoln’s practice of purchasing the restricted stock whenever employees
offered it for sale.

A Concluding Comment
It was easy to believe that the reason for Lincoln’s success was the excellent attitude of the
employees and their willingness to work harder, faster, and more intelligently than other
industrial workers. However, Sabo suggested that appropriate recognition be given to Lincoln
executives, whom he credited with carrying out the following policies:
1. Management limited research, development, and manufacturing to a standard product
line designed to meet the major needs of the welding industry.
2. New products had to be reviewed by manufacturing and all producing costs verified
be- fore the products were approved by management.
3. Purchasing was challenged not only to procure materials at the lowest cost but also to
work closely with engineering and manufacturing to ensure that the latest
innovations were implemented.
4. Manufacturing supervision and all personnel were held accountable for reduction of
scrap, energy conservation, and maintenance of product quality.
 5. Production control, material handling, and methods engineering were closely super-
vised by top management.
6. Management made cost reduction a way of life at Lincoln, and definite programs
were established in many areas, including traffic and shipping, where tremendous
savings could result.
7. Management established a sales department that was technically trained to reduce
customer welding costs. This sales approach and other real customer services
eliminated nonessential frills and resulted in long-term benefits to all concerned.
8. Management encouraged education, technical publishing, and long-range programs
that resulted in industry growth, thereby assuring market potential for the Lincoln
Electric Company.
Sabo wrote, “It is in a very real sense a personal and group experience in faith—a belief that
together we can achieve results which alone would not be possible. It is not a perfect system,
and it is not easy. It requires tremendous dedication and hard work. However, it does work, and
the results are worth the effort.”

Appendix

Employee Interviews
Typical questions and answers from employee interviews are presented below. The employees’
names have been changed to protect their privacy.

Interview 1
Ed Sanderson, a 23-year-old high school graduate who had been with Lincoln four years and
who was 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: $45,000.
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 20 years here, and you have 2 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 many electrodes 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: 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 2
Roger Lewis, a 23-year-old Purdue graduate in mechanical engineering who had been in the
Lincoln sales 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 plant tour 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. Hastings, Mr. Willis, Mr. Sabo.
Q: Do you think Lincoln salespeople work harder than those in other
companies?
A: Yes. I don’t think there are many salespeople 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 up-
stairs, and there’s nobody sitting around.
Q: Do you see any real disadvantage to 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 chance to get ahead is important, too. They have a strict policy of promoting
from within, so you know you have a chance. I think in a lot of other places you may not get as
fair a shake as you do here. The sales offices are on a smaller scale, too. I like that. I tell
someone that we have two people in the Baltimore office, and they say, “You’ve got to be kidding.”
It’s smaller and more personal. Pay is the most important thing. I have heard that this is the
highest-paying factory in the world.

Interview 3
Joe Trahan, a 58-year-old high school graduate who had been with Lincoln 39 years and who
was employed as a working supervisor in the tool room at the time of the interview.
Q: Roughly what was your pay last year?
A: Over $56,000; salary, bonus, stock dividends.
Q: How much was your bonus?
A: About $26,000.
Q: 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: 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 guy. I was a member of
the Advisory Board one year. 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 the time.
Q: When were bonuses for beneficial suggestions done away with?
A: About 18 years ago.
Q: Did that hurt very much?
A: I don’t think so, because suggestions are still rewarded through the merit rating system.
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. At other places,
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.
Questions
1. How would you characterize Lincoln Electric’s strategy? In this context, what is the
nature of Lincoln’s business and upon what bases does this company compete?
2. What are the most important elements of Lincoln’s overall approach to organization
and control that help explain why this company is so successful? How well do
Lincoln’s organization and control mechanisms fit the company’s strategic
requirements?
3. What is the corporate culture like at Lincoln Electric? What type of employees would
be happy working at Lincoln Electric?
4. What is the applicability of Lincoln’s approach to organization and control to other
companies? Why don’t more companies operate like Lincoln?
5. What could cause Lincoln’s strategy implementation approach to break down? What
are the threats to Lincoln’s continued success?
6. Would you like to work in an environment like that at Lincoln Electric