The Remarkable True Story of the Company That Doesn't Lay Off Its Employees

Between November 2008 and April 2010, Forbes.com tracked layoffs at America's 500 largest public companies. As you would expect in the wake of a major economic meltdown, a lot of jobs were shed: 697,448 of them by Forbes' count.

Among the companies shedding jobs were industrial equipment makers, who saw global demand slump as the housing and automotive markets softened. Caterpillar (NYSE: CAT  ) slashed nearly 20,000 jobs in 2009. Deere (NYSE: DE  ) announced a comparatively smaller 700-job cut the same month.

Yet Cleveland-based Lincoln Electric (Nasdaq: LECO  ) , itself an industrial equipment manufacturing company, bucked that trend.

According to journalist and author Frank Koller, since at least 1948 (and likely much longer), no Lincoln Electric employee who meets predetermined performance criteria has been laid off for economic reasons -- that is, because of slowing sales or a lack of demand in the marketplace.

That includes 2008, 2009, and 2010
Now, that doesn't mean life at Lincoln wasn't stressful during that stretch. Indeed, according to Koller -- who is the author of the excellent book Spark: How Old-Fashioned Values Drive a Twenty-First Century Corporation -- through voluntary early retirement incentive offers, a hiring freeze, and performance-related terminations, Lincoln's employee base shrunk by some 15% from 2008 to 2010.

But the pain of the downturn was shared. Salaries were cut, from the CEO on down through the managerial ranks. Many white-collar workers had to work longer hours to get the factory employees back to work.

In Spark, Koller takes pains to show that despite its no-layoffs policy, Lincoln isn't idyllic -- its performance standards are demanding and sound exhausting. But there is something remarkable about a company with that kind of relationship with its workers. At the risk of devolving into cliche, at Lincoln, there really does seem to be a sense of shared sacrifice, grown out of a culture of trust.

"Guaranteed" employment, and more
Lincoln has four practices in place to create that culture:

1. Advisory Board and open-door management policy.
Lincoln's Advisory Board is made up of elected representatives from across the company and meets every two weeks. There's also an open-door policy, in which any employee can voice a concern directly to the chairman or president's office. (When I chatted with Koller on the phone last month, he said many Lincoln employees have taken advantage of this policy, so it's not just a perfunctory offer.)

2. Piecework.
Piecework is, simply, the notion that you're paid for what you produce on the factory floor. Koller admits that "piecework is a system where it's easy for employers to abuse employees." But in 1914, James Lincoln introduced it, and it's been a pillar of the company's culture since then.

There were two important wrinkles to the piecework system at Lincoln. First, once the piece rate was established by management, it was not to be changed until the production environment changed. And second, there's no cap on earnings -- as long as a worker produced good product, there was no limit on his or her earnings.

3. Merit-based profit sharing.
This practice started at Lincoln during the Great Depression -- a bonus has been paid every year since 1934. Koller's research found that since the 1950s, the average bonus has been roughly 74% of base wages. The average payout in 2010 was $24,000. And to begin with, Koller says Lincoln pays "good wages."

The "merit" of the bonus is carefully measured by the company's sophisticated five-part rating system.

4. Guaranteed continuous employment.
Lincoln formally adopted this policy in 1958, but Koller says it was a de facto policy years prior. "Guaranteed continuous employment" does not mean employees have a job for life, no matter what. In fact, the ground rules are strict:

  • Covered after three years on the job
  • Must meet the company's performance standards, which are transparent and widely discussed (i.e., if employees aren't performing, guaranteed employment doesn't apply)
  • Guaranteed at least 30 working hours a week
  • Overtime is compulsory
  • Assignments are not guaranteed, nor is the pay rate
  • If the company's survival is threatened by conditions beyond its control, the guarantee doesn't hold

That final point may seem like classic fine print, but the company's track record speaks for itself. To repeat: Lincoln hasn't laid off anyone for lack of work since at least 1948. Cisco Systems (Nasdaq: CSCO  ) , which wasn't even founded until 1984, laid off 2,000 employees in the dot-com aftermath; this summer, it's expected to lay off even more than that.

So what?
If this seems like a quaint anomaly of a Rust Belt firm doing old-fashioned things, consider the investment philosophy of Fool co-founder and Stock Advisor co-advisor Tom Gardner: "The most important factor I look for in an investment is how a company takes care of its employees and what sort of culture it is developing."

Lincoln has developed a culture to take care of its employees. Investors haven't fared badly, either: Since going public in 1995, Lincoln has outperformed the S&P 500 by a 2-1 margin. It's also outperformed the market over 10-, five-, and one-year time frames. And customers are satisfied with the arc welding equipment Lincoln produces -- it's the world leader in the industry.

That's a beautiful alignment. As Tom put it, "There are just so many examples of great businesses that cared about their people (e.g., Johnson & Johnson, Whole Foods, Netflix, etc.). It was by doing that, I believe, that they created massive long-term returns for their shareholders. Just watch the turnover rate of employees versus relevant competitors and you will get a useful read on who will create the long-term value." (Koller told me that the annual employee turnover at Lincoln is about 6% a year, well below the 25% to 30% industry average.)

To be sure, this isn't new-age, feel-good stuff -- it's simply good business. James Lincoln, the architect of many of the company's welfare capitalist benefits, summed it up perfectly. Quoting Koller's book Spark: "I knew that if I could get the people in the company to want the company to succeed as badly as I did, there would be no problems we could not solve together."

Want more on Lincoln Electric? Click here to get all our analysis on the stock by adding it to your watchlist.

Brian Richards owns shares of Whole Foods, but no other companies mentioned in this story. The Motley Fool owns shares of Johnson & Johnson. The Fool has created a bull call spread position buy on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Netflix, Johnson & Johnson, and Cisco Systems. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Motley Fool newsletter services have recommended buying puts in Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (61)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2011, at 4:46 PM, BorisSDT wrote:

    Sounds like the greek government or US government LOL.

    http://www.singledudetravel.com/2011/06/now-is-the-time-to-m...

  • Report this Comment On June 23, 2011, at 4:53 PM, mikecart1 wrote:

    "no Lincoln Electric employee who meets predetermined performance criteria has been laid off for economic reasons"

    You can say that about a lot of companies.

  • Report this Comment On June 23, 2011, at 4:55 PM, DaveGruska wrote:

    Interesting story - thanks.

    I worked for a web development company during the dot-com bust, and at one point, everybody was forced to take a sizable salary cut. I was very happy to take it vs. the alternative. The company survived, and most everyone stayed on after the cuts. I made my money back with generous raises over the next few years when things were going well again.

    I'm surprised more businesses don't do this.

  • Report this Comment On June 23, 2011, at 5:24 PM, whyaduck1128 wrote:

    In my last corporate position (over 20 years ago), there was a bonus plan with "pre-determined critieria". The problem is that we were never told what the criteria were, and to no one's surprise, the only people who ever met them were the pre-determined Golden Boys and Golden Girls of the corporation. Every year, you knew who would get the bonuses before the year even began.

    From the article, it reads like Lincoln Electric does it the right way, which is more than I can say for my former employer. I left that job happy to be done with it and have never regretted leaving.

  • Report this Comment On June 23, 2011, at 5:59 PM, Tygered wrote:

    It would be very good business indeed if all companies had this policy.

  • Report this Comment On June 23, 2011, at 6:32 PM, Thaeger wrote:

    This might work out great for companies with an eye to the future, but what about companies that, say, change out their senior management every couple of years (cough Boeing cough)? How will management hide their often horrible decisions, if not by shoring up the bottom line with gratuitous amounts of layoffs and blaming the workers for not working hard enough?

    Sure, the cost of rehiring and retraining all those employees might be horrendous later on, to say nothing of the effects on the morale and productivity of the remaining workforce, and the continued failure to address underlying causes...but the important thing is that today's bottom line looks good. It seems somehow immoral to ask incompetent and shortsighted senior officers to give up the one viable way they have of receiving their hard-swindled bonuses, just so a few million employees and shareholders can benefit from a company that's well run and actually profitable on its own merits.

  • Report this Comment On June 23, 2011, at 10:44 PM, TMFBrich wrote:

    @whyaduck1128,

    The pre-determined bonus is set at 32% of EBIT(B): earnings before interest, taxes, and bonus. That is, the bonus pool to be distributed is 32% of annual pretax profits. That's set by the Lincoln board, and it's very clearly communicated to everyone in the company.

    Thanks for reading.

    Foolish best,

    Brian Richards

  • Report this Comment On June 23, 2011, at 10:52 PM, TMFBrich wrote:

    @Thaeger,

    Lincoln's current chairman/CEO, John Stropki, has been in the post since 2004. In its 116-year history, Stropki is only the seventh chairman of the board.

    Thanks for reading.

    Foolish best,

    Brian Richards

  • Report this Comment On June 24, 2011, at 12:25 AM, Dallas19 wrote:

    I think a few things are overlooked when analyzing this company.

    First, a major part of their workforce is paid (mostly) based on piecework. As sales decline so does their payroll. In most businesses the salaries are a “fixed” cost. This enables them to weather the storm of a recession.

    Secondly, there is some ambiguity in marketing going on by using the term ‘layoff’. Cutting salaries can effectively create turnover because employees may have to leave the company to maintain their standard of living. The company can also increase their “performance” standards to allow them to terminate the bottom half of their production staff. These management changes allow the company to advertize “continuous employee”, however it is smoke and mirrors.

    Don’t get me wrong, I don’t disagree with any of these decisions. I have been an advocate of the same principles in many businesses. I just dislike the way it is presented that this company “better” or has a “spark”. It has a good marketing department.

  • Report this Comment On June 24, 2011, at 7:08 AM, skypilot2005 wrote:

    “consider the investment philosophy of Fool co-founder and Stock Advisor co-advisor Tom Gardner: "The most important factor I look for in an investment is how a company takes care of its employees and what sort of culture it is developing."

    Note: "most important factor"

    I agree.

    Let’s compare this company with many that have overly paid CEOs and boards stacked with their friends/supporters.

    Thanks for the piece and insight.

    Sky Pilot

  • Report this Comment On June 24, 2011, at 11:01 AM, bhessel wrote:

    Brian,

    Don't know if you are familiar with the sf writer Bruce Sterling but one of his earlier novels, “Islands in the Net,” has an interesting take on how the corporation might evolve to be more democratic as it becomes the dominant form of human organization:

    http://www.amazon.com/Islands-Net-Bruce-Sterling/dp/04413742...

  • Report this Comment On June 24, 2011, at 11:38 AM, plange01 wrote:

    what happened to the american people?they sit back and do nothing while they lose their jobs,homes and savings! lambs to the slaughter house? all this while their disgrace of a president has done nothing for almost three years but go on vacation and entertain thousands of celebrities at the white house.even when he sent our troops into libya he was on vacation at the mayan ruins and only came back when he was threatened with impeachment! its time to remove obama from office there may not be a america when his term ends!

  • Report this Comment On June 24, 2011, at 11:56 AM, OffsPDX wrote:

    Good article. However, be careful on saying other companies treat their employees well. Check out glassdoor.com for employee comments on various companies. Example, Netflix employees are not very happy.

  • Report this Comment On June 24, 2011, at 12:01 PM, Dmama wrote:

    Great article!

    So nice to see companies doing things right both from a business standpoint and an ethical standpoint.

    And yes ... these are the kinds of companies I love to invest in, just like Tom. They help make our country a good place to live and work.

    Thanks!

  • Report this Comment On June 24, 2011, at 2:14 PM, miclynntoo wrote:

    Temps do not count as being laid off when they are let go.

  • Report this Comment On June 24, 2011, at 3:06 PM, TMFBrich wrote:

    @miclynntoo,

    Correct. Only employees who have been with Lincoln for three years are covered by the guaranteed employment.

    Foolish best,

    Brian Richards

  • Report this Comment On June 24, 2011, at 3:48 PM, Stonewashed wrote:

    This works, as long as your customers pay their bills. Even when two of our customers weren't paying their bills, who happen to be two big banks that are hailed by Wallstreet, we managed to keep on employees who had been with us the longest. We managed to do this by not paying ourselves and we finally got the money (and these were union employees).

    What was infuriating, was that the companies not paying their bills, insisted on union, and the union was breathing down our necks, not theirs for timely benefit payments, when they themselves were guilty of embezzling funds they had already been given.

    The State of NY was doing the same thing.

    Moreover, we took on the role of the bank, not only for the banks, but the government, and the union.

    I thank God we survived, but something about this gorilla warfare between corporations and their vendors isn't right. It would be interesting to know how timely LECO was with their AP, and if they were slow, if they kept their vendors informed and forked over the money as soon as they got it.

    The banks that owed us money actually seemed delighted to hold it up.

  • Report this Comment On June 24, 2011, at 4:25 PM, TwoDot77 wrote:

    NIce article, I work in management for a company that reduced salaries and benefits, cut every cost possible and survived the downturn. We did have to layoff some employees and that was painful. I respect Lincoln for their policies and foresight in paying piecemeal. It's too bad so many people can only see the negative and not appreciate the fact that many jobs were saved that could have been lost.

  • Report this Comment On June 26, 2011, at 8:41 PM, TMFBrich wrote:

    @bhessel,

    Thanks for the tip -- I'll check it out.

    Foolish best,

    Brian

  • Report this Comment On July 01, 2011, at 1:24 PM, EBerg13 wrote:

    Here in Milwaukee, Koss Corp. used to give their employees "tenure" -- much the same idea. Rather than jacking up production at year end when holiday sales peak, they just stockpiled through the year. It was an incredible idea, coming from an ardent libertarian CEO. More companies should consider this, as it encourages fierce loyalty.

  • Report this Comment On July 03, 2011, at 9:25 PM, WhidbeyIsland wrote:

    Along with bhessel's comment about the sf novel <i>Islands in the Net, </i>I will mention the non-fiction book <i>The Real Wealth of Nations</i> by Riane Eisler, who discusses "partnership" models as an alternative to "dominator" models. (I have no connection to author or publisher.) The company discussed here seems closer to the partnership model of economic functioning.

  • Report this Comment On July 04, 2011, at 4:50 PM, ajstudebaker wrote:

    Three cheers for Lincoln and Koss! They and companies like them will have a great advantage if labor shortages occur in the future [admittedly, unlikely to occur any time soon.].

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