Lincoln Electric
1. What types of performance incentives does Lincoln Electric provide, and how have
these helped to drive performance over the last 25 years?
- Career incentives: if the employee works well, he can be promoted. Most of the top
positions in the company were fulfilled by this method. Workers works better to order to receive
promotion thus the productivity increases.
- Monetary incentives: wages based solely on piecework output plus huge year-end bonus
for performance. Wage based on quality and quality of the produced products. Workers produces
more and with better quality in order to get higher wages.
- Guaranteed employment for all workers (after 2 years of work). Workers do not afraid of
losing job because of introduction of new technologies. Thus, it is easier to implement new
technologies and increase productivity.
There is another channel through the workers’ productivity increases – adverse selection.
Only workers who ready to work a lot are staying in the firm.
2. What are the downsides of Lincoln Electric’s performance incentives?
- Employer has to pay huge wages to workers in order to compensate for risk. The output
of worker is uncertain and does not depend solely on worker. There are a lot of things that may
affect the output (and does not depend on workers). Thus, there is a risk of low output. To
compensate for this risk the company has to increase wages.
- Guaranteed employment can decrease the performance of the workers. When workers do
not have guaranteed employment, they will do their job worse because they will not have a risk of
losing job for bad performance.
- Wages based solely on piecework output may not reflect the quality of produced good
thus the workers may produce goods with bad quality and still receive high wage.
- Providing a career incentive for employers may lead to not to hiring good workers from
outside the firm. Thus, the quality of workers may decrease.
3. Would you like to work in and environment like that at Lincoln Electric?
Personally, I would like to work in Lincoln Electric because I think that the advantage of
such system: higher wages, career incentives, guaranteed employment are more significant than
disadvantages: volatile wage and a lot of work that one person did.
4. Do you think Lincoln Electric’s incentive systems would work outside the US?
Prepare to discuss their success/failure in Russia.
Let's try to consider individual incentive mechanisms
- In most cases, piecework wages can be an effective mechanism, for example, it allows
the employee to feel in control of the situation, but in some cases, it may not motivate employees
if two factors collide: too much dependence on other departments or the external environment and
at the same time distrust of the level of management. For example, workers may refuse piecework
wages because there is a high likelihood of significant downtime due to late delivery of
components. Thus, in countries where the management culture is in the process of formation, and
the level of trust among employees in the level of management is low, this may not work.
- A year-end bonus is common in many countries. But difficulties may arise if the
employee, for example, due to the presence of various risks (low level of development of
institutions, lack of independent courts), is not sure that, firstly, the company will survive until the
end of the year, and secondly, will not deceive him, for example, by artificially demonstrating
losses. For example, in the US, a company tries to demonstrate its efficiency and financial well-
being to attract financing more efficiently. And in other countries, it may be, on the contrary, the
practice of double-entry bookkeeping and the systematic underestimation of profits.
- Individual performance bonuses can also be effective, but for this, there must be an
effective controlling and accounting system that is difficult to manipulate (on the part of
employees). In countries with a low managerial culture and «creative» abilities of workers, this
may not work.
- Guaranteed employment is also linked to an employee trust. For example, are workers'
rights protected? How does the judicial system work? Or how quickly can an employer find other
suitable workers?
- Career progression may depend on the skills and competencies of employees, but in some
regions, it may be more determined by the level of loyalty or personal acquaintances, which can
influence the expectations of employees and their incentives.
- It is also important to understand that the effectiveness of these incentive systems arises
within the framework of a synergistic effect. So, bonuses for individual performance are associated
with guaranteed employment. Workers will form proposals for increasing labor productivity if
they are not afraid of losing their job (for example, less labor will be required). Thus, the
ineffectiveness of some incentive measures may affect the effectiveness of others.
- In the Russian Federation, piecework wages in similar industries are quite common, as
are annual bonuses. However, the controlling and accounting system in most cases is not
transparent and can create difficulties in the process of motivation. Career mechanisms, in turn,
are very opaque, in most cases it is much easier to get a promotion by moving to another company.
If it is possible to create a transparent system of career development within the company and, even
more difficult, to create trust among employees, then perhaps this can be successful. In the Russian
Federation, most private companies have risks associated with a low level of institutional
development (independent courts, property rights) and it is very difficult for employees to be
confident in the company's guarantees in the long term (for example, employees' rights and the
fulfillment of contractual obligations by the employer). This also creates difficulties for the
integrated implementation of the considered incentive mechanisms.
