Book Review: Spark: What? A successful company that doesn't lay people off?

From the Wall Street Journal| Mar 1, 2010

In a 1945 letter to President Harry Truman, James Lincoln wrote that
the government's priorities for the postwar economy should focus on
improving cooperation between businesses and their workers.

By all accounts Mr. Lincoln-the head of Lincoln Electric Co., a
Cleveland-based welding-equipment manufacturer-detested the New Deal,
labor unions and welfare programs, but he suggested to Truman that
companies promise continuous employment to their workers as part of a
strategy for economic stability. He was convinced that a no-layoffs
policy was plausible, citing his own company's success at increasing
profit, boosting shareholder dividends and providing higher wages even
though "no person in the last 20 years has been laid off because of a
lack of work."

Sixty-five years later, Lincoln Electric still hasn't laid off U.S.
employees, despite several economic recessions, a three-decade decline
in U.S. manufacturing and Lincoln's own costly miscalculations on
overseas expansion in the 1990s.

Spark

By Frank Koller


(PublicAffairs, 249 pages, $25.95)

In
"Spark," Frank Koller describes the 115-year-old company's unusual
approach to managing its employees, an approach that is all the more
striking today against the backdrop of the layoff mania that has
claimed more than eight million American jobs since late 2007. Mr.
Koller, a veteran correspondent for the Canadian Broadcasting Corp.,
uses Lincoln Electric to argue against layoffs as a response to falling
corporate sales and income.

Mr. Koller contends that layoffs deprive companies of
profit-generating talent and leave the remaining employees distrustful
of management-and often eager to find jobs elsewhere ahead of the next
layoff round. He cites research showing that, on average, for every
employee laid off from a company, five additional ones leave
voluntarily within a year. He concludes that the cost of recruiting,
hiring and training replacements, in most cases, far outweighs the
savings that chief executives assume they're getting when they initiate
wholesale firings and plant closings.

James Lincoln's ideas about changing the dynamics between labor and
management were born out of the calamitous environment of U.S.
manufacturing in the late 19th century, when companies were beset by
frequent strikes and high levels of employee absenteeism and turnover,
often caused by deplorable working conditions and low wages.

Mr. Lincoln's older brother, John, started Lincoln Electric in 1895.
He brought James onboard in 1907 and promoted him to general manager in
1914. From James's earliest days with the company he was determined to
forge a more cooperative relationship with workers than was the norm on
most shop floors. "I knew that if I could get the people in the company
to want the company to succeed as badly as I did," he once wrote,
"there would be no problem we could not solved together."

To create the teamwork he had in mind, James Lincoln relied on four
organizational pillars that remain in place to this day: a management
advisory board made up of employee representatives; wages based on
piecework, so that the quality and quantity of individual workers'
output can be monitored; annual performance-based bonuses; and
guaranteed employment.

Although the no-layoffs pledge would be formally adopted as a policy
only in the late 1950s, the company began the practice, de facto, as
far back as the mid-1920s. James Lincoln, who died in 1965, considered
the guarantee essential for getting employees to trust management and
accept the inevitable wage cuts, reduced work hours and job transfers
that were necessary to keep people working when orders slumped. Over
the years, Lincoln Electric has given itself some wiggle room by
reserving the right to let go employees with less than three years of
service. The policy also doesn't extend to its overseas operations,
which now account for about half of Lincoln's annual revenue.

For decades the publicly traded company has been the world's largest
manufacturer of electric arc welders and other welding equipment, with
sales last year of $1.73 billion. Mr. Koller stresses throughout the
book that Lincoln Electric shouldn't be regarded as a workers'
paradise; its motives have always been rooted in profit. In exchange
for a no-layoff guarantee, Lincoln's 3,300 U.S. employees are subjected
to rigorous performance and productivity standards to keep them from
becoming complacent. Workers who don't meet the company's expectations
receive smaller bonuses or end up getting bounced out entirely. But for
those who can handle the work, Lincoln Electric has been a generous
employer. More than 30% of its annual profit is distributed to
employees through bonuses.

If Lincoln Electric has been successful without layoffs, why haven't
more companies copied the idea? Southwest Airlines is believed to be
the largest U.S. company with a no-layoffs policy. A couple of other
companies have adopted one in the past 20 years but have later
abandoned it. Mr. Koller found indifference and skepticism about
Lincoln Electric during interviews with executives and business-school
students, even though the company has been a standard case study in
business-school curriculums for three decades. Most of the people Mr.
Koller talked to concluded that Lincoln Electric's employment guarantee
requires a unique set of circumstances and conditions that can't easily
be replicated elsewhere.

Mr. Koller attributes the enduring
appeal of layoffs to deeply ingrained notions about the creative
destruction that drives capitalism, though layoffs, he notes, might
just as well be seen as an indictment of corporate leadership. He
quotes Peg Wynn, a former vice president for the semiconductor chip
company Xilinx Inc., who concedes that avoiding layoffs "really
requires great managers." Her company's eight-year experience with a
no-layoffs policy ended in 2004. Ultimately, she says, "just doing what
everybody else does" was easier.

Mr. Tita is a manufacturing reporter for Dow Jones Newswires.