1 Pulling it all Together Contracting Perspective Internal Fit External Fit Organizational Policies

2 Slackers l Poor incentives if... »can’t meet bogey »bogey might be changed (ratchet effect) l Other problems w/ piece rates »quality, cooperation, improvement ideas Goldbricking range (stinker jobs) Quota Restriction (gravy jobs) $ Output Ratchet effect Bogey $1.25/hr. } $.85/hr. (day rate)

3 Lincoln Electric’s Slacker Fixes l Shape of pay v. performance »no bogey »never ratchet rate unless methods change –if changed... l target pay level stays same l employees can challenge change l Quality »no piece rate until defects repaired »stencil name on welder »quality component to rating l Cooperation / Ideas »co.-wide bonus pool; varies w/ co. profits »rating: dependability, ideas & cooperation »lifetime employment

4 Incentives: Summary Lessons l To mitigate distortions »use overlapping mechanisms –controls –other measures / rewards »use subjectivity –measures or weights Subjectivity  need for TRU$T »implicit contracting policies »incentives & controls for supervisors

5 External Fit a. Arc Welders l Product »slow tech. / product innovation »synergies w/ electric motor mfg. l Customer »razors & blades »uses up to 30 years –cost & quality, not timely delivery –long-term sales relationships l Market »potential large competitors »global demand »variance (seasonality / cyclicality)? »growth?

6 External Fit b. Strategy Costs  prices  growth »total market size & market share »internal v. acquisition? –scale economies v. core competence? –focus on welders v. expand to motors? l Razor blades »vertically integrate into supplies l Customer relations/ service »internalize sales, not distributors –welding knowledge –sell supplies

7 Internal Fit a. Career Policies l Promote from within »mgt. understands welding mfg. & use –aids performance evaluation »culture building »coordination l Lifetime employment »fits w/ promote from within »fits w/ growth strategy »problem w/ seasonal / cyclical variation l Recruiting probation »screening hard workers, cultural fits l Train sales on welder mfg. & use »aids customer service, product design »fits w/ less complex product, simple product line »fits w/ internalization of sales

8 Internal Fit b. Job & Org. Design l Assembly line, not teams »perf. meas. for piece rates »fits w/ less complex, mature product »fits w/ focus on extrinsic motivation l Flat hierarchy, spartan, few distinctions »lower cost »fits w/ simpler product line l Top-down decision making »fits w/ less complex, mature product, simpler product line »fits w/ promote from within, lifetime employment

9 Internal Fit c. Rewards l Piece rates »extrinsic motivation »fixes for ratchet effect (above) l Bonus pool: overall firm profits »fixes to piece rate problems (above) »fits w/ lifetime employment »fits w/ growth strategy »fits better w/ stable product demand l Subjectivity »piece rates & methods changes »performance ratings »size of bonus pool »problem of trust / risk...

10 Internal Fit d. Voice l Worker & middle mgr. advisory boards; open doors »communication of information »coordination »airing of grievances –builds trust »fits w/ no union l No union »flexibility in work rules –lower cost »fits w/ strong reputation / trust »also reinforces trust l Communication of culture / history »aids trust / reputation building

11 Implicit Contracting & Tru$t l Credibility »history, culture »management consistency –fits w/ founding family, promote within, strong culture »policy consistency l Capital structure »no debt, employee stock –preclude hostile takeovers l fits w/ long-term growth strategy l fits w/ large bonus pool, worker & exec. stock holdings –no bonus for top 2 mgrs. l Reducing favoritism »mutual interests »monitoring of evaluators & multiple evaluators »relative, but not forced, rankings »grievance policies »culture

12 Lincoln’s Strategy through 1996 l Growth »move into AC electric motors »acquisitions v. greenfields –GM / Delco l UAW & plant shutdown –Europe, Brazil l problems transplanting culture l price wars l US v. foreign profits: bonus financing l Inverter technology threat? »welder: big transformer »inverter: more power, smaller transformer –need for new skills (plastics) »WSJ ad l Organizational policies »no more Lincolns »changes?