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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Guest columnist Frank Koller does not own shares of any company mentioned. The Motley Fool recommends Cisco Systems, Google, Intel, and Procter & Gamble. The Motley Fool owns shares of Google and Intel. Try any of our Foolish newsletter services free for 30 days. 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.