American Factory Workers Getting $33,029 Yearly Bonuses May Sound Insane, But It's True

Frank Koller is the author of "Spark: How Old-Fashioned Values Drive a Twenty-First Century Corporation", about Lincoln Electric's no-layoff policy. For many years, he was a foreign correspondent and economics specialist for the Canadian Broadcasting Corporation.

On a Friday afternoon in mid-December, Lincoln Electric (NASDAQ: LECO  ) announced the details of its 2013 profit-sharing bonus to the firm's 3,000 American employees, most of whom work in Cleveland (with 7,000 more worldwide).

For 80 uninterrupted years, starting in the Great Depression, Lincoln Electric has made a profit; once again, it was time to share a part of it with employees.

(Warning: Check your pulse.)

For 2013, the average Lincoln Electric worker's bonus was $33,029, representing 62% of base wages or salary.

In total, the company shared $100.7 million with employees, one-third of the corporation's pre-tax profits.

(Check your pulse again.)

For those familiar with Lincoln, these numbers are no surprise. Nor is the fact that since the 1930s, Lincoln Electric has remained the No. 1 producer of arc welding technologies and products in the world.

For others, however, the scale of this profit-sharing bonus seems so out of whack with normal corporate behavior in America that they regularly dismiss the firm as an intriguing but irrelevant outlier.

That's a mistake, for two reasons.

First, because Lincoln's bonus system doesn't rely on black magic. The firm is convinced – by the evidence of its own track record-that the bigger the bonus workers can earn, the harder (and smarter) they will work and, as a result, the better the results for the company.

Second, because a growing number of American businesses are taking the same road, and finding that it pays off.

Notice that we're talking about a profit-sharing bonus, not just a bonus.

Terminology is critical.

To me, the word bonus (as it's normally used in the workplace) sounds like something nice but unexpected, a surprise that I have little control over, nor much insight into why I receive it. And indeed, while almost half of full-time American workers now receive some form of bonus at the end of the year, those bonuses are generally small and usually delivered at the (often mysterious) discretion of their firm's CEO.

Put the phrase profit-sharing in front of bonus, and you're in different territory.

Just think of the questions any worker would naturally ask about a profit-sharing bonus:

  • What's the definition of my firm's profits?
  • What share will employees receive?
  • Will that share change year by year?
  • Will everyone receive an equal share?
  • What happens in bad years?
  • If I work harder, could my share increase?

Ideally, the answers to those questions can help to nurture a company culture where everyone understands that the ongoing financial health of the firm will explicitly – and significantly – benefit every worker. More precisely, every employee knows that working harder, smarter and together will pay off – for everyone.

(To see how one small businessman recently answered these questions as he introduced profit-sharing into his workplace, see the fascinating series of posts from last August and September by cabinetmaker Paul Downs in his blog You're The Boss.)

Profit-sharing businesses now span the economy from small start-ups to many of the biggest and most successful names in business: Cisco, Exxon, Proctor & Gamble, Intel, and Google, to name just a few. Early last month, for example, the restructured big American carmakers announced their profit-sharing bonuses for 2013: GM (approximately $7,000 per employee), Ford ($9,000) and Chrysler ($2,250).

"The Citizen's Share", a new book by Richard Freeman, Joseph Blasi, and Douglas Kruse, three of the country's most prominent labor economists, looks at the fascinating history and future of what they call shared capitalism in America.

After studying hundreds of U.S. companies (large and small, in different industries) that annually share profits with employees (ranging from cash bonuses to various forms of employee stock ownership systems) their conclusion is unambiguous: "The key indicator of economic performance, productivity, and many other measures of firm performance are higher for firms that operate with profit-sharing and employee stock ownership than for otherwise comparable firms that do not follow these practices."

But even more importantly, they find that consistently, more is always better.

  • When more profits are shared, firm productivity goes up, as does return on equity.
  • The more profits shared, the lower the annual employee turnover (a huge cost savings).
  • The more that workers share in profits, the greater their loyalty and willingness will be to work hard for the firm over the long term.

In other words, it's not about being nice to workers. Sharing more profits means that everyone involved – from investors to employees – does better financially. (To say nothing of the obvious fact that customers are happier too.)

How much profit should a company share with its employees? That is, of course, an extremely complicated question to answer: It depends on the unique nature of every individual business, its management's preferences and corporate values, its industry, and the firm's history of labor relations.

James F. Lincoln, one of the two brothers who founded Lincoln Electric in 1895, came to embrace the view (confirmed in "The Citizen's Share") that a small bonus is little more than symbolic window-dressing.

James Lincoln started profit-sharing in 1914, but after a few years of paying bonuses of roughly 3% of employee earnings, he stopped, saying that "few people respond enthusiastically to what is essentially a tip."

In 1934, he restarted the program, paying out a profit-sharing bonus of 25%.

Over the next 80 years, Lincoln's bonus has never dropped below 25% of base wages or salary, has topped 120% in a few years, and since 1950, has averaged roughly 70%.

But it's not just money that ends up being shared. So does decision-making and power.

Successful profit-sharing firms like Lincoln have created corporate cultures which highly value, and indeed critically depend on, employee participation in both day-to-day operations and charting the future.

The rationale is straightforward.

As MIT management expert Zeynep Ton says in her new book about paying workers well: "These ideas to create good jobs for more people are difficult to implement, but possible, profitable and very much worth the effort."

The bigger, the better.

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Read/Post Comments (24) | Recommend This Article (77)

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 February 02, 2014, at 1:14 PM, fujidan wrote:

    Where I worked before retiring they once had Brass Cash as a profit sharing incentive. They paid out nicely when production and quality goal were exceeded. Then the sister was replaced by the brother and the goals were set higher, so high that they were unobtainable. Brass cash withered and died as did workers concern and caring, mirroring management's caring and concern for the workers.

  • Report this Comment On February 02, 2014, at 6:29 PM, tom1948 wrote:

    When I was studying Industrial Engineering in the late 60's, the profit sharing plan of Lincoln was discussed as a successful plan that would replicated throughout industry. The problem is that owners and managers can not stand to see the rank and file getting such high rates so they, like the Brash Cash plan, keep tightening up the requirements. As Mr. Lincoln said many years ago, a token incentive system is not a real motivator, so the plans are continually cut and employees get lower bonuses and the companies has declining productivity.

    Amazing that no one at Lincoln has tinkered with it yet.

  • Report this Comment On February 02, 2014, at 9:23 PM, crymsonkyng wrote:

    This will never catch on in America...the CEO and Board would take a hit in their own bonus, and that just can't happen because we all know they are the ones who drive the economy....right?

  • Report this Comment On February 03, 2014, at 5:56 AM, supportAmerica wrote:

    Profit sharing is an ideal way to maximize production as workers directly benefit from it without increasing a company's fixed costs. Lets hope these workers support their fellow Americans with those bonuses by buying made in the USA products from American companies.

  • Report this Comment On February 03, 2014, at 5:26 PM, TMFGemHunter wrote:

    This is very impressive. I suspect that the larger the corporation, the harder it is to make a profit-sharing plan really pay off for investors as well as employees. Many of the airlines have profit sharing plans that pay out 15% of pretax profit (or 10% up to a certain level and 20% beyond that). But with 70K-80K workers, I think it can be hard for each individual to see any correlation between his/her own effort on the job and the final payout.

    Maybe the problem is just that 15% is not enough and if you went to 25% or 30% it would do the trick! Still, I'm skeptical given the "free rider" problems for companies with large workforces, especially when they are spread out across the country (or world).

    Adam

  • Report this Comment On February 03, 2014, at 5:37 PM, Perry88 wrote:

    This is news because it is so rare in American businesses. Since it has been happening for about 80 years and not a great number of businesses have started duplicating it is not surprising. However, given the current level of greed found in corporate America I see little to no chance of this idea spreading.

  • Report this Comment On February 03, 2014, at 5:40 PM, kingfish100 wrote:

    I had an epiphany when it was revealed that Pilot Sully's co-pilot when he landed his plane in the Hudson River saving all lives aboard, was making LESS THAN $20K PER YEAR!!!!!!!!! A good insight that it's not all Kush on board.

    This profit sharing bonus is a wonderful idea and a winner in the risk reward cycle. Wonder if these employees that get the bonuses also generally make less than counterparts in other competitor companies?

  • Report this Comment On February 03, 2014, at 6:34 PM, MCM wrote:

    WOW thats really GREAT. More companies should get on board. When I was in business I would give up to 10k for Christmas & another 5K for year end. Then I had profit shearing & gave 15% of yearlws salary which came out to 15k for some employees. That all stopped when the auto industry started to compare us to China. Just couldnt compete with their low wages so it all stopped & America lost another company.

  • Report this Comment On February 03, 2014, at 6:50 PM, dsliesse wrote:

    I've long been an advocate of profit-sharing programs. It's great to see a success story like this!

  • Report this Comment On February 03, 2014, at 8:34 PM, skeptic94 wrote:

    This is a great plan. Produce real profits - see real profits.

    I was at a company with profit sharing and management made out very well. From supervisors on up there was 10k, 50k, to millions for management. Rank and file was lucky to get a 20% down car payment or two.

  • Report this Comment On February 03, 2014, at 10:07 PM, mikecart1 wrote:

    Profit sharing in understandable and hands-on work environments. For many industries like engineering where you sit in a cubicle all day and depend on so many people to move documents through an overcomplicated system, deal with vendors, and basically have no input on upper management decisions, this system doesn't work.

  • Report this Comment On February 04, 2014, at 12:04 AM, IgotTheMotsFool wrote:

    From a Family owned Business, to Corporate, to International Business, I personally seen Profit Sharing and bonuses diminish to nothing. For those who still receive be blessed with what you get. Even if it is a Thanksgiving Turkey or Christmas Ham, Couple % match on the 401k.

  • Report this Comment On February 04, 2014, at 10:55 AM, observerbob2013 wrote:

    In many ways the modern equivalent of profit share is the move to franchising.

    Companies like McDonalds acheive the same result by effectively selling jobs to people willing to over-acheive in return for a share of their immediate profits.

    In the present economic climate of cutting employee numbers as the first step in any company reorganisation it is unlikely that many companies will follow the Lincoln model despite the obvious advantages.

  • Report this Comment On February 04, 2014, at 11:53 AM, RealityCounts wrote:

    We're from that area-my Mother worked there-in all likelihood she gave up a career to get hitched and..., well, that explains my being. She's nearly 91 years young.

    This fine Company must have ONE HELL of an Exports Footprint. I can tell you that my In-Laws/ Wife's business, very well-known in our present area, are sought-after welder's-the U.S.A. Manufacturing Industry from A-Z has gone the way of the Dinosaur and Dodo Bird.

    Wait, wait, I can still see-and hear-that little guy who looked JUST LIKE the Perdue Chicken patriarch saying and writing, over 20 years ago, that "...that giant sucking sound you're hearing is U.S. Jobs going to Mexico and Canada".

  • Report this Comment On February 04, 2014, at 1:40 PM, ilong wrote:

    Our company also pays such a bonus for the year end results. We are in the chemical business out of Georgia.

  • Report this Comment On February 05, 2014, at 9:26 AM, TMFLomax wrote:

    Funny, I was just thinking about Lincoln Electric and mentioned it in a recent column. This is great stuff! The way it should be in corporate America (and yes, helps and doesn't hurt a business).

    Best,

    Alyce

  • Report this Comment On February 05, 2014, at 10:31 AM, Gyre07 wrote:

    The author must've head about Lincoln over drinks one night as an example of a corporate 'needle in a haystack'. This company is one out of tens of thousands that don't value their workers as fungible commodities which can be easily replaced.

  • Report this Comment On February 05, 2014, at 10:41 AM, atkinskd wrote:

    As an stockroom clerk, turned, production technician, turned engineer - management reaps what they sow. The manageres I have worked for who brow beat and demanded got exactly as much as was necessary to stay off their radar. The ones who empowered and COmmanded saw their teams move mountains when the task arrived. Sharing in the spoils of plunder dates back eons. Those who kept it all and shared only minimum suffered mutiny in one form or other. Hunter Douglas had a discretionary bonus - tied to peer review. Lots of backstabbing and games that were played by the production staff. I think Lincoln Electrics mdoel should be mandatory for any publicly traded company. Where's an Indy Car go without the lug nuts, spark plugs, gaskets? Not very far

  • Report this Comment On February 06, 2014, at 12:14 AM, jbomb62 wrote:

    This article demonstrates that companies can put people ahead of profit, or at least include employees in sharing the economic success. Profit sharing is a great way for small business owners to maximize their savings and minimize their taxes, by utilizing a profit sharing option in a 401(k) plan. These plans offer many benefits to business owners, as well as employees.

    Unfortunately, too many business owners think the only way to maximize profits is by exploiting owners. I live in a state (Maine) with a governor that's trying to turn the clock back, pushing for right-to-work laws, outlawing collective bargaining, etc. as a means to create a "business-friendly environment.

    Mr. Koller's article demonstrates that there's a better way, one where everyone benefits.

  • Report this Comment On February 06, 2014, at 1:37 AM, CHill8008 wrote:

    My personal experience: I work for a large company as a union member. I have been through several contract negotiations and for every one the company has offered a profit-sharing program, some I felt were pretty generous, but the union has dismissed each one. Not even open for consideration. Off the table. Some people just want to be paid for the work they do, not for the production they achieve. "The golden carrot" they derisively call it. This issue is multi-sided and all the sides play their parts. There are those on the labor side to which the word "profit" is just dirty and evil and they don't want to be associated with it (I understand that is myopic, but they feel very strongly about it).

    Kudos to Lincoln Electric and I hope this does catch on.

    One way a worker can share in their company's profit is to buy its shares and collect its dividend.

  • Report this Comment On February 07, 2014, at 12:42 PM, kuczynski wrote:

    I believe that 10% of Nucor's profit goes back to employees.

  • Report this Comment On February 07, 2014, at 6:45 PM, harbor1223 wrote:

    Have you ever felt like you did all the work and got none of the credit? Thats what happens to people who continuously struggle to make ends meat. Eventually they say "ahh what the heck" and their givadam gets busted. Don't let that happen to your employees. My employees know what their stake in our company is. They respect it and they try to hold up their end of the bargain. It's just business, it ain't rocket science but it sure works like rocket science.

  • Report this Comment On February 08, 2014, at 12:42 PM, linmarman wrote:

    Lincoln Electric's story is impressive and inspiring. Like many who've posted, I've worked for a variety of companies that have had some type of metric-drive variable bonus program. But not all the companies listed as giving profit-sharing bonuses are increasing employee loyalty. My current company has tied a bonus to a whole slate of metrics, but reserves the right to override the targets. For example, if your site has a late year injury, then there is a huge negative impact on site bonuses. And can be guessed, senior management achieve bonuses that are 10-50X what the wage-roll or individual contributor receive. I believe most of its value has been superceded by other company practices that employee attrition spikes every year just after bonuses are paid. In years past, lots of people quit just after New Years Day, once the bonus was effectively 'vested' but corporate management changed policy so that if you quit before bonuses were actually paid, you forfeited your bonus.

  • Report this Comment On February 08, 2014, at 12:53 PM, valari25 wrote:

    Doesn't CAT have a profit sharing program that somehow resulted in smaller bonuses despite record profits? When management has the ability to tweak the numbers, the program is meaningless.

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