No one is sure when Lincoln Electric had its most recent layoff. CEO Christopher Mapes thinks it was in the 1950s. Vice president Amanda Butler believes it was the late 1940s. Documents suggest it was no later than 1951 and could have been as long ago as 1925. Whenever it was, no one at Lincoln Electric today was there to witness it, or maybe was even alive when it happened.
Layoffs are a fact of business life. Over 1 million U.S. Workers lose their jobs that way every month, according to the U.S. Bureau of Labor Statistics. So for a company to avoid layoffs through the towering inflation of the early 1980s, the stock market plunge of 2000–2001, the Great Financial Crisis of 2008–2009, and the pandemic seems abnormal. To avoid layoffs, surely such a company must sacrifice financial performance. Surely it pays substandard wages to work-averse, clock-watching employees its no-layoffs policy must attract.
But the reality is just the opposite. Lincoln Electric is ferociously competitive, so much so that it “encouraged the exit of several major companies (including General Electric) from the industry,” according to a 1975 Harvard Business School case study on Lincoln—one of the best-selling cases the school has ever produced, says an HBS spokesperson. The company, which reported revenue of $3.8 billion last year, is among the world’s largest producers of arc welding equipment and supplies (some competitors are privately held and don’t publish revenues). Financial statements show that Lincoln’s production employees at its primary manufacturing sites in the Cleveland area receive pay above the manufacturing industry average—around $1,075 a week, as the Bureau of Labor Statistics reported. And remarkably for an old manufacturer, Lincoln Electric isn’t unionized. Founded in 1895, the company went public in 1995. Since then, the S&P 500 is up 740%, while Lincoln Electric stock is up 3,834%.
U.S. Manufacturing output has stagnated over the past 20 years, but Lincoln’s revenue has grown 15-fold. Other companies clamor to learn how Lincoln does it, especially as layoff anxiety mounts with a recession perhaps on the horizon. But the answer isn’t as easy as other employers might wish. Lincoln avoids layoffs by following a unique, decades-old system that requires sobering sacrifices by employees and the company, each making promises to the other that require mutual trust. That system works within the Lincoln culture, but few, if any, other companies have implemented it successfully—and even Lincoln can’t execute it in every part of its business. Is the system an innovative answer for today’s employers, or is it a tantalizing solution just out of reach?
“The program”
“I got an email this week from a manufacturing company in the United States, slightly over a billion dollars in annual revenue. Wanted to meet with me to talk about our program,” says Mapes. “It happens a lot.” Once every three or four months, the company says.
The Lincoln Electric system, known internally as “the program,” is radical and deceptively simple. Production employees agree to let Lincoln increase or decrease their standard 40-hour workweek within limits based on customer demand. They get paid by piecework instead of the hour and receive a year-end bonus reflecting each worker’s performance. The company, in turn, pledges not to lay them off for lack of business.
When CEOs visit Mapes to learn more, he first asks them why they want to install the Lincoln system. If it’s just to increase productivity, he says, “That may not be enough, foundationally, for it to survive.” The system’s impressive results are only the most visible elements of an overarching philosophy of management that guides the business through good times and bad, a comprehensive strategy that Mapes’s visitors typically don’t understand. Without that, he tells them, “you’re probably not going to have the resilience in the program longer term. It’ll be a flash-in-the-pan program.”
The thoroughly elaborated philosophy that undergirds the initiative comes from a larger-than-life character, James F. Lincoln, the youngest brother of the founder, who ran the company from 1914 to 1975, having never previously managed anything. An unlikely amalgam of Milton Friedman, Bernie Sanders, and today’s most fervent stakeholder evangelists, he disdained labor unions, President Franklin Roosevelt, and most corporate executives. He tirelessly promoted welding with a showman’s flair, once sponsoring an essay contest and paying winners with welded-steel checks. Back in those days, when banks canceled paid checks by perforating them, Lincoln had his welded checks perforated with submachine guns.
Yet Lincoln thought factory workers were grievously mistreated. He wrote in his book Incentive Management, “If a manager received the same treatment in matters of income, security, advancement, and dignity as the hourly worker, he would soon understand the real problem of management.” He established an employee advisory board in 1914, still in operation, and accepted many of its suggestions, including reducing hours and increasing wages.
Two transformational policies, still in force and vital to the overall system, resulted from that board. The first was the adoption in 1914 of a piecework system, paying workers not by the hour but by individual output. Even then, piecework was often considered barbaric and exploitative, but Lincoln thought that, properly managed, it could benefit workers and the company. The pay per piece had to be fair so that working at a reasonable pace (in the worker’s view) would pay about the same as the hourly wage for that job in that town. Crucially, the pay per piece also couldn’t be reduced unless the way of doing the job changed, for example, if the company introduced more efficient machines. The system incentivized workers to improve their skills and work hard, in which case they could earn much more than their counterparts at the same job in other companies. Most workers at Lincoln Electric’s Cleveland-area factories, some 3,000, are still paid this way (a few whose jobs aren’t related directly to building the product, such as making tools and dies, are paid hourly).
The second transformational policy, adopted in 1934, was a year-end bonus for all factory workers at the time—straightforward in concept but highly unusual and far from simple as practiced at Lincoln Electric. The bonus can be stunningly generous, often equaling 50% of base pay and occasionally much more, even 100% in outstanding years. The proportion is decided by the top executives, whose bonuses come from a different pool of money. Last year, an excellent year for Lincoln, the average bonus was about $37,500, the company says, equaling some 67% of the average employee’s annual base pay of $55,970. Total pay works out to $93,470.
But the bonuses aren’t doled out equally. Twice-yearly ratings from their supervisor determine each employee’s portion based on output, quality, dependability, and cooperation. Those ratings are distributed on a bell curve, meaning they must average 100. For every worker rated 110, some other worker must be rated 90. “You’re not allowed to say, ‘We’re all A players,’” Mapes says. The bonus pool is allocated accordingly.
The results of implementing this bonus system would have astounded anyone other than James Lincoln. In the 10 years after the system’s adoption in 1934, he increased the bonus pool as a percentage of base pay almost every year until it rose above 100% of base pay during World War II. Including bonuses, the total annual average pay per worker increased 170% in that period. The company believes it paid the highest manufacturing wages in the world at that time, in the mid-1940s. It could afford to do so because, remarkably, dollar output per worker also increased 170%, and profits rocketed.
As those results showed, Lincoln had found a better way, and he wanted to keep it a secret. He would broadly describe his system but kept the eye-popping numbers closely guarded until Coins2Day revealed them in a 1944 article. Lincoln Electric quickly became a corporate celebrity. The Harvard Business School wrote a case study about the company in 1948, the first of many.
The company achieved all this without a no-layoffs policy, but Lincoln eventually concluded that “continuous employment” was essential to achieving “maximum efficiency in industry,” as he wrote in Incentive Management. Factory workers often fear that if they become too productive, some will lose their jobs; increased productivity means fewer workers can produce the same output, so some will get fired. But if they know their job is secure, Lincoln reasoned, they’ll embrace new methods and technologies. Lincoln adopted the Guaranteed Continuous Employment Plan on a trial basis in 1951, and it became official company policy in 1958, covering employees after they had come successfully through a trial period, currently set at three years.
Big tradeoffs
The no-layoffs policy comes with significant limitations.
It covers the multiple northeast Ohio factories for which it was originally created but can’t be instituted at the locations where Lincoln has expanded recently, especially in the international markets where most employees now work. In many of those markets, notably Europe and South America, some elements of the system would violate local laws or regulations. The Netherlands imposes restrictions on pay for performance, for example. In Venezuela, the company can’t use piecework pay or discretionary bonuses.
Layoffs are theoretically possible in some locations without the full system in place, though whether any have occurred is a matter of definition. Lincoln has grown in part by acquisition and has laid off employees at those companies in the past, including France’s Air Liquide welding business in 2017. In Lincoln’s view, that isn’t a layoff because the target company was overstaffed. It’s fixing a previous owner’s problems. But Lincoln Electric has also restructured its European operations in recent years, closing some locations in order to move operations elsewhere. Most people would call that a layoff, which brings up another limitation. James Lincoln promised not to lay off production workers for lack of business, leaving other potential causes unmentioned. Lincoln Electric has avoided layoffs for any reason in its original U.S. Operations, but in locales that hinder the full program’s use, the spirit of James Lincoln’s guarantee becomes murky.
Wherever the company operates, a spokesperson says, Lincoln uses locally permissible elements of its incentive system, such as some kind of variable bonus. Still, Mapes says, “If I could put the program everywhere at Lincoln Electric, I would.”
The program doesn’t rely on magic. Workers pay a price for job security. The welding business booms and busts, and in downturns, the company can cut workers’ hours to as little as 75% (30 hours) of the workweek. In booms, workers must accept overtime to meet demand, but their pay also increases. The employee benefit in either scenario is that they keep their jobs.
The upside for the company is that it can instantly adjust output and tweak its labor costs more easily and quickly than most employers. “Our team makes adjustments daily, right on the shop floor,” Mapes says. “Our ability to flex what looks like fixed cost and make it more variable on a daily shift-by-shift basis gives us a huge competitive advantage.”
When the pandemic hit in 2020, and demand for industrial equipment plunged, U.S. Unemployment spiked from 3.5% to 14.7% in weeks. “How many companies quickly went in when they saw demand drop, and they attacked labor as fixed costs, laid people off, shut down facilities?” Mapes asks. “We didn’t.” Instead, the company “pulled our levers,” as Mapes says, reducing work hours, offering employees a few weeks of unpaid voluntary time off, and transferring cross-trained workers in badly hit operations to areas with stronger demand. That decision paid off when demand surged back faster than anticipated. With all hands on deck, the company says it could deliver products when competitors couldn’t. Total employment declined less than 3% in 2020, mostly by attrition and employees accepting voluntary buyouts, then rebounded in 2021.
Working hard to get paid
The vast factory where Lincoln Electric makes welding machines just off I-90 in Euclid, Ohio, occupies 34 acres under one roof. A short drive up the highway, another Lincoln factory produces huge quantities of the wires that melt in the welding torch’s 6,500-degree electric arc and help fuse metal pieces. Machines shoot out some 35,000 miles of wire a day, enough to go around the world 1.4 times.
Marlon Barnes, 50, who has been at Lincoln for two years, is an assembler in the machine plant . “I’d been trying to get a job at Lincoln for a long time,” he says. “My previous jobs had been at restaurants. The stress level here is way less.”
Last December, he received his first full-year bonus. “I tried not to think about what it would be,” he says. “When I saw it, I was shocked.” How much? “A little over $30,000.” In light of Lincoln’s piecework pay system, I ask if I’m costing him money by talking with him. He doesn’t say no. He says, “It’s okay.”
Ed Crouse, vice president for Cleveland operations, tells me later that no one is so tightly scheduled that they can’t talk for a few minutes. But, yes, time away from the task means less production and, thus, less pay. At a recent employee advisory board meeting (held every four to six weeks), some employees complained that one of the microwaves in the lunchroom wasn’t working, cutting into their work time and slowing production. The company quickly brought in another microwave.
Bill Wagner, 52, a coil winder, has been at Lincoln for 30 years, joining after leaving the Navy. “We work hard,” he admits. “But you have to work hard if you want to get paid well. I try to tell the younger employees that you need discipline. You can’t just do it once. You need to have it all the time.” Bill says he enjoys his job and wants to stay another 10 years.
Even with a no-layoffs policy, working at Lincoln Electric isn’t for everyone. Examine employee ratings of the company at Glassdoor, Indeed, or other job sites, and you’ll find plenty of criticism. Its fans like the pay and job security, while critics dislike the uncertainty of when they’ll be working and may feel their supervisor plays favorites when rating workers.
Will the no-layoffs policy survive? Lincoln doesn’t promise it will. On the contrary, the company states in its annual SEC report that the Guaranteed Continuous Employment Plan “does not guarantee employment when the Company’s ability to continue normal operations is seriously restricted by events beyond the control of the Company.” In addition, the company can terminate the plan at year-end without reason and with six months’ notice.
A valuable artifact
The larger question is why other employers don’t replicate Lincoln’s program. Mapes says he’s often asked that question. “I just don’t know whether other companies have the ability in their business to build that level of confidence.” He’s referring to employees’ faith that they’ll be rated fairly, receive bonuses, and dodge layoffs. By contrast, Mapes says, Lincoln has “90 years of running the program.” Lincoln does not know of any company that has imported the full system.
The world has changed since James Lincoln’s day. The company says its turnover rate, which it won’t disclose, is lower than the industry average but much higher than it used to be. In the 1960s, it was less than 1% monthly. Company executives believe some new employees aren’t confident they’ll receive bonuses or just don’t want to wait until year-end, and they leave for jobs with higher base pay. Such jobs are easy to find in today’s tight labor market.
Maybe the continuous employment plan has become a valuable artifact, an admired creation that could have been built only in some long-ago era. Maybe no other employer will ever copy it. Maybe, someday, even Lincoln Electric might have to abandon it. But for now—as one part of a unique and perhaps irreproducible system—James Lincoln’s program is still working extraordinarily well.
