Lincoln Electric - Complementarities PDF

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Lincoln Electric – Piece Rates, Complementarities A richer example of complementarity among choices involves the unique set of practices that mark the Lincoln Electric Company (Berg and Fast 1975, see also Milgrom and Roberts 1995). Lincoln Electric’s primary product is equipment and the consumables, such as flux, used in welding. Lincoln long dominated the industry in the United States, leading major firms such as General Electric and Westinghouse to exit rather than attempt further to compete with it. Moreover, Lincoln enjoyed an unb — , have never lost money or had a layoff. The basis for Lincoln’s success was its execution on a

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The centerpiece of Lincoln’s organizational design is very extensive use of piece d Indeed,

also to seek ways to increase one’s output further. They are easy to understand and . At one time they were a very common method for paying industrial workers.

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from piece rates. — —

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process inventory are tolerated. To overcome the “multi tasking” problems amount of the individual bonus is determined by the employee’s supervisor and is e quality of the employee’s output and such factors as perceived cooperativeness. These bonuses normally double the employee’s base earnings from the piece rate. In addition, each employee’s name is stencilled on each

field as a result of a worker’s skimping on quality, the worker’s bonus is docked by

hat makes this promise credible, however? First or a long time, the employees and managers and the founding Lincoln family held most of the stock, and when Lincoln issued new equity to the public in the mid 1990s, it was offered without voting rights.

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They were personally committed to the system, and they well understood its logic and the need to honor the workers’ trust. Fourth, Lincoln has a number of policies that are

increase employees’ trust of the management and reduced the danger of an “us versus them” mentality. Finally, to deal with the problems of matching output to demand,

Each of these features of Lincoln’s design may or may not be attractive on the

systems, but Lincoln’s tolerating it permits the flexibility in the pacing of individuals’ work Absent offsetting incentives for quality and cooperation, piece rates can be disastrous, and so Lincoln’s piece rates are made more effective by the complementary bonus scheme. The effectiveness of the piece rates is also increased by the high levels of trust that are supported by the open communication policies; the ownership structure; the long-term, internally recruited leadership of the firm; and the symbolic acts and policies. The relative rarity of some of these features suggests that they are not valuable in more standard models of organization. They are, however, important elements of the model that underlies Lincoln’s success. Finally, Lincoln attracts and retains employees who like the Lincoln model, and this makes it more effective. Judging from interviews with Lincoln’s employees, they are oriented towards material success and are willing to work hard to achieve it, they are attracted by the individual responsibility and autonomy that Lincoln offers, and they do not want a union. Lincoln’s organization permits it to achieve remarkably high levels of productivity, which is key to realizing its low-cost strategy. But Lincoln actually aims not just for low costs, but also for constantly reducing costs. A major potential barrier to

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doing this would be the workers’ concern that increasing productivity might endanger employment, because the same output could be produced by fewer people. This helps explain another of Lincoln’s very unusual policies, a promise to avoid layoffs. It has stuck by this promise even in severe recessions, when it put production workers to painting the factory rather than lay them off. This policy also probably contributes to the trust that supports the credibility of the piece rates. So another policy that might be of questionable attractiveness in isolation becomes very valuable in the context of what Lincoln seeks to do and how it seeks to do it. Thus, the features at Lincoln together yield much more than would be estimated by looking at the impact of doing any one of them in isolation, exactly because they are complementary with one another.

Source: Modern Firm by John Roberts...