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

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

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.

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.