Monetary Compensation And Lincoln Electric example essay topic

Lincoln Electric built their business on a reputation of delivering a continuously better product to their customers at the best price in the industry. They were able to perpetuate this mission by their use of a unique compensation plan for their workers. Their compensation plan paid workers for production of units, and added to their compensation with generous bonuses based on the success of the company. This compensation plan was the hallmark of Lincoln Electric and has not significantly changed in the over 90-year history of their company. Their compensation system paid workers for production and allowed the workers to make decisions on how best to allocate their time and resources. Their system also determined bonus distribution based on specific measures like dependability, output, cooperation and quality, they made these measures public by giving every employee a rating.

Lincoln Electric's business flourished and the company expanded their operation worldwide using all the same methods that had made them so successful in the United States. However, their operations abroad did not succeed as expected, and their company suffered greatly by the burden of the failing operations. Lincoln Electric made several mistakes in implementing their expansion plans and in key assumptions they made about the applicability of their compensation plan worldwide. Furthermore, when the problems arose they were not well equipped to handle the new challenges.

The success of the Lincoln Electric compensation plan in the United States was that there were no caps on the earning potential of a worker. The more the worker produced the more they could make. This system created in effect, many independent sub-contractors, who were free to make their own decisions about their production. The system fostered a particular type of worker, very independent, tough minded and self-motivated. The management of Lincoln Electric was convinced that their system would work anywhere it was implemented, so when they expanded to foreign countries they assumed easy adoption of their system by foreign laborers. However, many of the foreign workers did not share the same values as the American workers that had made the Lincoln system so successful.

The piecework system is not as effective if the workers are not motivated by strictly monetary compensation, and Lincoln Electric found foreign workers valued other compensation like sick leave and vacation more than their domestic workers. Moreover, many foreign governments had laws that made the full adoption of the key element of Lincoln's piecework system illegal. The Lincoln system was not the same when all pieces of the system were not in place. In addition to the lack of full implementation, the system hinged on a substantial bonus based on the productivity of the company. When the company struggled to make a profit, the bonus was small and the motivation of the workers was lessened. Lastly, the Lincoln Electric core management group was visible on the factory floor in Cleveland and workers felt as if they had a direct connection with the upper management of the company.

Foreign workers, of which many of them were obtained through acquisition, lacked that sense of closeness and direct ownership of the organization. Separate from the difficulty in implementing the foundation of the Lincoln compensation system, the company was hit with misfortune in their expansion. One of the keys to their expansion in Europe was the European Union's elimination of tariffs between European nations. This tariff elimination would allow each European plant to produce specified products and transfer them cheaply to the different European countries. This tariff elimination never happened and Lincoln was stuck with several plants that would have to continue to produce the entire breath of their product lines which never allowed them the economies of scale and scope they were counting on. Even more damaging was the recession that hit economies in Europe and in Japan during the years directly following their most aggressive expansion.

These problems that Lincoln Electric faced were devastating and when it became clear that their expansion plans were failing, Lincoln was slow to take action and unfamiliar with what the appropriate actions were. The underlying root cause of Lincoln's struggles was their 90+ year corporate culture that was founded on an ideology of letting people figure things out. In other words, Lincoln's culture was so ingrained in de-centralized decision rights that when fast action was needed by corporate direction, the corporate management was unable to recognize the need for intervention and assumed the International operations would figure out their own problems. Moreover, all of the Lincoln executives were hired from within. None of them had the knowledge of how to deal with International business problems. In addition to these fundamental root-problems, the successful US operations were the home of the corporate decision makers these execs were highly visible on the factory floor.

It is reasonable to assume that, because of these close proxim ities, corporate executives had a much better feel for the domestic operations and could quickly recognize a problem locally more so than in the International operations. All of these fundamental and cultural foundations at Lincoln Electric were the root cause of the struggles of the operations in foreign countries.