This paper discuses Lincoln Electric’s incentive reward system which has been studied and duplicated by many companies all over the world. The incentive system involves worker compensation through piece work rate where employees are paid according to the quality and quantity of products produced. Employees earning power is determined by how much they can produce at a given duration. Their wage rate is the highest in Cleveland among industrial workers according to Buller & Schuley (2003). This paper seeks to find out why this reward system is not working as well as expected and what can be done about it. In addition, it will explain how the management needs to consider a change process to position the company’s incentive system for the future.
Incentive Reward System at Lincoln Electric
Lincoln Electric employees earning power is determined by how much they can produce at a given duration. Their wage rate is the highest in Cleveland among industrial workers (Buller & Schuler, 2003). The incentive system includes an annual bonus that is based on a merit reward system. There are two appraisals done annually and the marks which are usually up to 110 are used to calculate the bonus at the end of the year. These employees are starting to grumble that their bonuses are not increasing fast enough; they do not feel like these bonuses are rewards but more like compensation. The bottom line is that for rewards to work, they must be desired by the employees.
Management practices in Lincoln Electric
They have an open door policy and there is no routine supervision thus the employees self manage. It is interesting to note that there are usually about 3 levels of supervision between the factory workers and the president of the company (Lincoln Electric, 2011).
Vacancies are first announced internally and externally mainly for entrance position. During the interview process which has neither aptitude nor psychological testing, there are only one on one interviews with a panel made up of vice presidents and supervisors; the final selection is done by the supervisor. It offers employees job security in the fact that after 3 years of working they are going to be permanently employed. There have not been any layoffs since 1948 despite the economic crisis that led to numerous job cuts and business closure.
Performance evaluation is done twice a year and the results are used to determine the amount of the annual bonus. Workers are paid on piece work mode of payment where the quantity and quality of the workers’ output determine the amount of wages he/she gets. In case of substandard production of goods the worker is supposed to redo the products or pay for the loss. The employees go for vacation when the factory closes for two weeks in August and another two weeks during the Christmas break. However, there is no paid leave and in case one gets sick or absent they are not paid those days.
The work environment in Lincoln Electric is very authoritarian with little worker participation as it is controlled by the company advisory board. The workers give the suggestions to the board which in turn presents them to the management and posts the feedback through notice boards for all the workers to see. The management has the notion that if the worker participation is allowed in most decision making processes, workers tend to be lazy and relaxed, something that would not work well for Lincoln Electric. They believe that giving the workers responsibility is including them in participative decision making. According to Buller and Schuler (2003), workers’ suggestions are ignored if they bear no direct benefit to the company.
In-house training is provided for most of the factory workers when they join different work stations. The management argues that it is not necessary to waste funds on outside training for the employees for something that will not benefit the company. There are some fringe benefits for working with Lincoln Electric; they have a retirement and a medical plan for those who have worked for more than 3years.There is the Employment Association that gives disability insurance and a fund for workers’ activities. They have a cafeteria that offers food at a subsidized rate for all employees including the senior executives. This company is one of the few where the executive do not have any privileges like reserved parking, lunch rooms and executive office suites.
Part of the incentive plan is an Employee Stock Ownership Program where the employees purchase shares of the company at a lower rate. It is only eligible for employees that have worked there for at least 3 years. The company’s core mission statement and vision emphasize the importance of customer satisfaction, employee fulfillment and accountability to the share holders. A fulfilled employee is able to give excellent customer service, but a disgruntled one is a nightmare to the company. If the staff in Lincoln Electric is unsatisfied, the management needs to fix that situation before it is too late. There is a lot that the company can improve on to attract and retain satisfied workers.
The management might wonder why such highly paid employees with good bonuses at the end of the year would be grumbling. The work environment in Lincoln Electric does not allow idling or coffee breaks; the employees self manage their work and everyone is always very busy. The workers do not even socialize and working nonstop without a break can lead to burn outs (Buller & Schuler, 2003).
Pay performance incentives may not be working out that well for Lincoln Electric because employees need both financial and non financial incentives to be motivated. When people get employed they enjoy the job satisfaction, opportunity to socialize and of course the income but after a while, the money stops being the main motivator and with no other motivators the employees are not productive. This is common in industrial work settings as a lot of work is routine and monotonous (Kerr, 2003).
Why this system does not work elsewhere
Lincoln Electrics’ management system has been replicated by many companies though now they have dissatisfied employees despite having a great incentive management plan as the work environment has changed. Why this system may have worked for Lincoln Electric is because of its cultural back ground. Work in the early days was full of bureaucracy and was a means to an end through income. So the pay performance worked well then and the harder one worked the more they earned. Strong cultural practices in some companies are hard to uproot.
That strategy does not work in other places because motivation dynamics has changed reflecting new work requirements and changed the workers expectations (Kenneth & Walter, 2009). In Lincoln Electric the main motivator is money as seen in some interview conducted at the main factory in Ohio around 1995 (Buller & Schuler, 2003). Another reason why it does not work for other companies is because money is not the only motivator to sustain effective productivity and employee satisfaction.
According to O’Toole and Lawler (2007), today’s employees have changed; they self manage to provide solutions innovate and improvise to meet client’s needs. For this type of employees one needs to combine the extrinsic and intrinsic needs for customer satisfaction. These employees judge their success by assessing the value and effectiveness of their efforts (Sirji, 1988).
The nature of work has also changed with employees being required to use more judgment than the repetitive roles in the previous years. The merit system used at Lincoln Electric states that an employee looses points on absenteeism and other misdemeanors. An employee who has really worked hard will get about the same bonus with the one who was never late or absent but did not work as hard; this acts as a de-motivation tool for the employees. Monetary incentives only work well when used with other non cash incentives (Reif, 1975).
Lincoln Electric does not have an organization chart which stipulates the different job roles and description. This organization forms a hierarchy of getting things done and is a motivation as it gives workers a sense of direction and what to aspire to move to. In this company, there are only two positions between the president and the workers; this does not give many options to choose from.
This company has a strong organization structure that is deeply entrenched so some of the practices have only continued to work because they have been in place for more than 100 years. If those same practices were introduced today, they would not work as well or at all. Trying to replicate this method elsewhere in USA or around the world does not work because workers all over are motivated by different things not just the money and since they would be new in the foreign markets, they would have to offer better conditions to the workers to be able to penetrate the market.
Extrinsic and Intrinsic rewards
Extrinsic rewards are those rewards that are external and usually given to the employee by the employer who determines their size and whether they will be there or not. Intrinsic are those that are internal, controlled by the employee and are psychological as a result of good performance and meaningful work.
Intrinsic rewards have a greater impact on motivation of employees when used with the pay performance incentive (Kenneth & Walter, 2003). Lincoln Electric could use this since their staff is no longer motivated by financial incentives. Workers are more motivated by a sense of purpose and direction which is through a sense of meaningfulness in their work. When they feel that whatever they have done is worth the effort and time, which causes them to want to repeat that once again (Beswick, 2007).
Choice increases motivation through the autonomy given to the worker to figure the best mode to use to accomplish a certain task. An employee will be more effective and more motivated when they feel a sense of progress in their work. Therefore, the management should provide avenues to pursue progress and provide opportunities for growth (Dematteo et al., 1968).
In Lincoln Electric, they only give in-house training and do not promote learning opportunities outside the company unless whatever one is learning is of direct benefit to the company. As an employer, the main concern should not just be about what value the employee adds to the company; the company should also add value to the employee’s life by providing opportunities for them to grow in all aspects. Extrinsic rewards can reduce intrinsic motivation and in this case Lincoln Electric workers are committed to getting the job done not in the job itself; the job is a means to an end (Heath, 1999).
Intrinsic rewards brought about by self management increase employees concentration and production. Most intrinsic rewards are self sustainable while the extrinsic ones are not. In a case where a company is in a financial crisis, they might cut back the amount of hours the workers put affecting their pay. According to Herzberg’s two factor motivation theory, employees are motivated by motivation factors and hygiene factors. The motivation factors are more concerned with the job content providing intrinsic rewards while the hygiene factors are concerned with the job context. Lincoln Electric management may be working on assumption that their workers require more monetary motivation than they do; they see nothing wrong with their management and wonder why their employees are dissatisfied (Herzberg, 1966).
Recruitment processes and Incentive systems
Lincoln Electric employs professionals and graduates in the company. At entry level for college and high school graduates, the main motivation for this group of employees is primarily income. The recruitment and hiring process is a short process conducted by the vice president and supervisor of that division with the vacancy (Buller & Schuler, 2003). It seems like they actually target people whose main motivation is money. This is not fair as there are people with qualifications out there who are of great contribution to the company but leave after a short while as they are dissatisfied.
For employees to be satisfied and highly motivated the management needs to give total rewards; these include compensation, benefits, work and life balance as well as development (World at Work, 2006). In a work environment, there is an exchange between the employee and the employer. The employee provides time; talent and output while the employer gives total rewards that are desired by the employees.
At Lincoln Electric, an employee gets compensation that includes a salary/wages and bonus as well as benefits such as medical insurance. The employees only get leave when the company closes two weeks in August and the other two during Christmas break. Work and life balance should be every manager’s concern, because if things at home are not working well, the employee cannot be productive. So it is important that employees are able to schedule their leave days to attend to their personal issues, and not have to be tied to a schedule in August and December.
Career development should be crucial and a part of the organizations goals. There should be enough training opportunities provided to enable the employees fit into various roles in the organization. According to Maslow’s hierarchy of needs, a person having met the basic and security needs aspires to fulfill their esteem needs; in this category of needs, a worker seeks recognition, affiliation and status.
Promotions at work can fulfill this need and in Lincoln Electric this is not provided for and may be due to lack of a clear organizational chart. Self concept is an additional source of motivation for employees and is defined by the traits, conception and beliefs that hold (Leonard et al., 1999); it is a reflection of an individual’s sense of self. For an employee who works at Lincoln Electric where the management has not changed in a long time, his or her sense of self concept changes since self perception determines how a person works which is influenced by his environment.
In Lincoln Electric, appraisals are done twice a year by the supervisors of various departments. Through these appraisals, the supervisor awards merit marks that are used to calculate the annual bonus and the criterion used in the appraisals is dependability, creativity, quality, output and cooperation. Individual performance should be linked to the company’s goals and objectives. The appraisal process should also involve self rating by the employee and this should provide functional feedback. Lincoln Electric’s appraisal system may not be valid as it fails to measure all aspects of the job (Success Factors, 2011). It should have clear performance standards like the criteria used to measure dependability, and creativity among others.
According to Caruth and Humphreys (2008), there are eleven traits that any performance appraisal should have. These include formalization, standards and measurements, validity, reliability, open communication, trained appraisers, ease of use, employee accessibility to results, review and appeal procedures. This ensures that appraisals are fair and all the aspects of validity are put in place.
In addition, the appraisal should be an ongoing process throughout the year with constant feedback between the management and the employee. With this, it is easier at the end of the year to compile an employee’s record to get a better picture. When it is apparent when the appraisals are done, workers will strive to be better around the appraisal period; this does not give the true representation of the employee’s performance. With that in mind, it is apparent that Lincoln Electric needs a change be it radical or incremental.
Effective organizational change process to position the firm’s incentive system for the future
Lincoln Electric needs a change due to the visible cracks in its management and employee dissatisfaction as disgruntled employees are very dangerous to an organization since they are in direct contact with the customer and are the face of the company. An unhappy employee usually equals a frustrated customer and thus the company needs to change the following issues; the attitude towards shareholders, better evaluation and a functional reward system.
The reason why change is inevitable for Lincoln Electric is because of the changing trends in the market, employee awareness and empowerment. People expectations at their work place exceed just being able to earn an income. The incentive plan is only good in terms of motivating employees to work harder to earn more money. What happens to the other aspects of the employees’ well being, like a good working environment, balance between work and life remains a big question.
Change is to cause something to be different and this can be either radical or incremental. Whichever method of change is chosen, it will depend on the need and urgency for the change (Goldberg, 2005). According to Humphreys & Langford (2008), if managers wait till it is too late for change, it will likely be hard and painful. Lincoln Electric incentive plan has been working very well but now it is not any more, therefore it would be wise for the management to make some changes that will help it move forward at present and in the future.
In some situations, organizational change is made difficult by senior leadership in the company and in the case of Lincoln Electric this might be an issue because of the entrenched belief that “if it is not broken do not fix it”. They think of change as something that only happens when what you have been using does not work anymore. If they do not act now when the system is starting to show cracks, it may be too late when they come around to it. Changing an entrenched culture is really difficult and there are numerous obstacles that can stand in the way of the implementation (Humphreys & Einstein, 2004).
Institutional politics can delay jumpstarting of the process and in many organizations there are always people who oppose change and if these kinds of people are in a position of power, ideas are shot down as soon as they are suggested. If workers lack motivation for change the process of change might be delayed or not even work; they need to be convinced why they need the change. Availability of resources also determines whether the change will occur or not. It is possible to allocate resources according to the places that need fewer resources to yield more results.
In a company like Lincoln Electric that has been around for over a 100 years, there is a very strong organization culture and the idea of change may not be welcome. The best type of change would be incremental because if it is started early enough then gradual changes can be implemented.
The management style has been working for a while and this means there is something good about it and it can therefore be indentified and made even better while uprooting the bad. The reason why the employees may be feeling dissatisfied with the bonus could be that it is getting less and less, something caused by the hard economic times. Despite not losing their jobs, the employees feel that since they are still working as hard or even harder then the bonuses too should reflect that factor.
Read the Lincoln case one wonders if it is that bad and why someone would want to work for Lincoln Electric. If someone’s motivation is money and they do not care about the job satisfaction then this would be ideal. The employees are highly paid and they work twice as hard for that pay. The employees that work so hard deserve better working environment with modern facilities. The work environment actually affects productivity and according to some studies, furniture, lighting, temperature and noise levels affect work productivity.
Apart from the physical work environment there needs to be room for employees to interact and coffee breaks should be part of the new organizational culture. These coffee breaks give employees a chance to re-energize and know their fellow employees. Employees also need vacations and leave days; it is unfair to have to restructure your life so that you can always go for vacation only when the company closes twice a year. With the changing working environment where people are working even from home, it is archaic to work 48 weeks in a year during which you should not get sick or late.
A lot has to change as it is highly unlikely that in the future Lincoln Electric will be able to always get the unsophisticated money motivated workers to hire. There has been a great turnover of the new employees and the old employees may stay on and put up with the bad management practices as most of them may be afraid to leave such high salaries in this uncertain economy. It is not ethical for an organization that employs so many people in the country to have such low recruitment standards so as to make sure that they employ those that really need the money.
Money is not a motivator according to Herzberg’s theory of motivation; it is a hygiene factor which may cause dissatisfaction. Other motivating factors for the employees according to this theory are achievement, recognition, nature of the work and advancement. Generally, workers are motivated by the “urge to get better and better at something that matters”. When workers stop doing the job well because they enjoy doing it and only work hard for the pay, the management needs to evaluate that situation and motivate those workers. Incremental progress brings positive emotions that lead to high motivation and get the necessary support from management to get over an obstacle.
Problems with pay performance
It can lead to disappointment especially when an employee has worked very hard and expects a certain amount of bonus and if it is less than expected it lowers his morale. The company gets what they measure; Lincoln Electric will always get the factor that they measure in the merit card. If the appraisal system does not measure other aspects, they will be ignored as workers focus on getting high points in the appraisal.
Another scenario is when a worker is earning a comfortable salary; he will not see the need to improve performance. According to Pfeffer & Sutton (2000), the key indicator of a balanced score card are Employee’s safety, satisfaction, continuous improvement, customer satisfaction, quality and financial performance in that order; a satisfied employee guarantees high performance. Some of the non financial awards that Lincoln Electric can incorporate into their management are praise, assigning interesting opportunities, continued training and promotions.
Generational conflict could be another reason why this system of management is developing cracks. After the world war, the generation that was born then known as baby boomers and before that the Veterans had a totally different outlook towards work and the working experience as compared to the X and Y generations. According to a UN Joint Talent Management Team (2011), the different generations grew up with different issues that shaped their perceptions about life and work. The veterans were raised before and during the war and may be used to orderliness, strict regimes and value authority. Such people respond well to work environments that have directed style of management. They are not risk takers and very cautious in their undertakings. They also seem to equate promotions with seniority and believe that work should be done in the office only.
Their motivation is self worth able to provide for one’s family while those born after the war learnt the value of sacrifice and hard work, so they are very loyal to the organization. They are a generation that really valued hard work and they lived to work hard. Generation X born after the 1980’s is the first to grow up with technology and has to live in the shadow of the previous generation that had very influential people; they are highly independent and work to live. The generation Y is composed of technology children who are very good in multitasking, easily bored and demand a healthy balance between work and life. They were brought up through much empowered styles by their parents and are not shy to voice their opinions and thus expect employers to give more to their workers.
In terms of communication, the older generation is comfortable with personal contact and telephone use while the X and Y generation will email text and IM. They do not believe in the necessity of physically being present at work from 8am to 5pm to be productive; as long as you deliver results and have the autonomy to decide what works well for you. This brings conflicts between generations especially if the management is of the veteran and baby boomer generation who think that the X and Y generation have no respect for authority and do not value hard work. The X and Y generation think that the previous generations are too rigid and are scared of change.
To be successful in management across these four generations, you have to understand what their beliefs and expectations are and work to train them to work together by emphasizing on their strengths. One needs to train the older generations to have the modern global approach to work to be able to accommodate emerging customer demands and expectations. The method of teaching and training chosen also determines whether the training works or not. Generation X and Y are more multimedia savvy and will learn more with simulation and creative approach to training (Ashim, 2011).
When motivating across the generation divide, the veterans might be happy just being where they are while the baby boomers think that monetary compensation is good enough. Generation X reasons that since they have done what is expected to get a promotion they should then be promoted, while the Y question why they have not been promoted yet and they already did what they were told to do. Lincoln Electric’s management style might have worked in the early years but now it is not because of the different generations working there. The baby boomers generation is what forms the majority of the management team which explains why they do not understand why anyone would be dissatisfied with the high rewards for hard work and appreciate the concept of long working hours with no vacations.
There is a great need for change at Lincoln Electric. The company can try a more democratic or participatory management style. In addition, the company needs to empower its employees to enable them perform highly by giving them room to grow and develop their careers. The human resource department should have a more inclusive recruitment process as well as an appraisal system. This will make sure that the company gets highly qualified workers and not just those whose only motivation is money. The management can incorporate intrinsic and extrinsic rewards with the aim of motivating the employees and ensuring that they appreciate their annual bonuses.
Lincoln Electric has a management style that has been replicated in other companies and has worked very well. However, there are cracks in the system and wise management is necessary to patch them up urgently. The current caliber of employees that Lincoln Electric attracts are college and high school graduates of X and Y generations who are less motivated by monetary rewards. The authoritarian rule worked well then because that is what that generation understood and expected. The Y generation might join Lincoln Electric only to leave frustrated as they have been brought up in an era that demands that workers be favorable for their performance and that there is life after work. This generation’s ideas concerning work structures are very flexible.
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