Did Anyone at Harvard Business School Get the No-Layoff Message This Year?

School’s almost out. A new crop of MBAs is poised to assume leadership positions in the American economy.
Have the horrors of the last two years made a difference in how they plan to run this country’s businesses?
The best-selling case study of all time at Harvard Business School (HBS) is not about Coca-Cola or Microsoft, but the
Cleveland-based arc welding manufacturer Lincoln Electric. First published in 1975, the case has sold roughly
300,000 copies. Almost every MBA candidate at Harvard reads the original or one of several updated versions, as do
tens of thousands more business students across America.

I stumbled on that publishing tidbit soon after stumbling onto the story of Lincoln Electric and its amazing unbroken
“guaranteed employment” promise, the subject of my new book, SPARK How Old-Fashioned Values Drive a Twenty-
First Century Corporation.

Guaranteed employment, you may have noticed, is rare these days. 8.4 million Americans lost their jobs during the
recession. Today, the Department of Labor announced that the unemployment rate rose in April to 9.9 percent.
Some of that was due to more people entering the labor force, but more than 15 million Americans remain jobless.
More troubling is that almost 7 million have been unemployed for more than 6 months.

Lincoln Electric, by contrast, has not laid off a permanent American employee for economic reasons since at least
1948. Yet since the 1930s, this Fortune 1000 firm has remained the world’s largest manufacturer of arc welding
technology with factories in 18 countries and sales offices in 150.

The no-layoff guarantee is straightforward: once past a three-year probation, no employee who meets the firm’s
well-defined, regularly-measured performance standards will ever be out of work. The 1975 Harvard case (by
Norman Berg, now Professor Emeritus) explored how Lincoln Electric had grown, while remaining profitable, through
good times and bad. Change a few dates, and the case stands updated to 2010. The key is a mutually-reinforcing
system of incentives to motivate workers with a no-layoff promise, a rich profit-sharing bonus, the use of piecework
to pay factory workers and open internal communications. The case stresses that you can’t cherry pick one element -
such as guaranteed employment - and expect improvements.

But I was puzzled: if so many prospective MBAs, who become America’s corporate elite, study the documented
importance of a guaranteed employment promise to this company’s decades-long record of success, why is it such a
rarity?

One reason is that while the average B-school student reads roughly 400 cases, the Lincoln Electric case is virtually
the only one to introduce a no-layoff policy, in theory let alone in practice. Most students can barely remember the
concept when they graduate.

A more troubling reason is that many professors at Harvard and other MBA schools are deeply skeptical of offering
workers such a bargain.

“It’s a terribly non-optimal and inefficient policy,” says George P. Baker, the co-chair of the HBS doctoral program.
“Lincoln Electric is a special case. Unless there is some other reason for having it, as part of an incentive system, you
would be wrong to recommend it.”

“I’m not unsympathetic to guaranteed employment and the long-term social strengths it builds,” says James
Rebitzer, Chair of the Business Policy Department at Boston University’ School of Management, “But I think there are
only a very few special circumstances where a commitment to no-layoffs actually improves operating efficiency.”

Harvard students such as Corey Crowell (MBA 2009), who read the case just days before we met, got the message: “I
just worry that the sense of a guaranteed job would create complacency ... look at the auto industry.”

At MIT’s Sloan School, Thom Kochan is more positive about the competitive advantage of guaranteed employment
as part of a “whole incentive system.” But Prof. Kochan says most employers run from no-layoff policies such as
Lincoln Electric’s because “Few organizations in America are willing to have as egalitarian a compensation system in
terms of income levels from top to bottom.” (That’s polite for “executive greed.”)

1
 Harvard labor economist Richard Freeman bemoans the fact that layoffs are still accepted as an effective
management tool, despite mounting evidence to the contrary: “No business school encourages students to think
about a scenario where they don’t have the option of getting rid of (employees.) It requires a different set of skills
which I don’t think our B schools are very good at.”

When Norm Berg wrote the case in 1975, he wanted to challenge students to examine the basic principles of our
economy. “Lincoln Electric has felt all along that job security is important to people,” Berg told me. “But most
professors and students at business schools now have no personal experience with layoffs or are even familiar with
people for whom this might have been a problem. (Guaranteeing employment) does not fit their view of the world.
It’s unfortunate, but not surprising.”

After the human carnage of the past two years, that “view of the world” - which dominates most MBA programs -
needs updating. The Lincoln Electric case will be on most reading lists again next fall, but the country needs more B-
school professors to help students understand its powerful message. Then, hopefully, more newly-minted MBAs will
consider adopting no-layoff policies once they become responsible for the future of their employees and their
families.

You Get What You Pay Them

Case: Lincoln Electric Company
Written: 1975 Copies Sold: 284,826
With a tradition of innovation and technological leadership, the Lincoln Electric Company of Cleveland, Ohio, was the
world's largest manufacturer of arc-welding products when this case was written in 1975. The firm owned a number
of patents and was the inventor of the first portable welding machine. But it stood out in other ways, too. While
Lincoln, a nonunion shop, offered no benefits, it provided guaranteed employment, had an employee stock-
ownership plan, and was notable for its egalitarian worker-management culture. However, the company was best
known for its compensation system, paying its workers on a piecework basis, coupled with bonuses based on
company revenues. Although this often resulted in average annual pay for Lincoln workers that was more than
double competitive wages, the company was still a low-cost producer.

HBS professor emeritus Norm Berg, who developed the case along with research assistant Norman Fast (HBS DBA
'77), was at the time course head of Business Policy, the School's required general management course. Recalls Berg,
"We had lots of cases involving new and 'more advanced' approaches to corporate strategy, company organization,
worker morale and productivity, and so on.

"I wanted to find a successful, well-established manufacturing company with a single product line and a clear,
consistent approach to those issues."

Student reaction to the case has been interesting, Berg notes. Once, during an MBA class attended by Lincoln's
president, a student declared that he had high regard for Lincoln but he preferred three-piece suits and executive
dining halls to eating in a company cafeteria. A union leader, invited to a discussion of the case at an HBS club in the
Midwest, commented, "Lincoln workers receive high pay and job security, and there is no need for a union there. But
I'm not worried that there will be a diminishing role for unions, because most of you are too dumb to run your
companies that way."

AFTER BENIHANA, THE STUDENTS' EYES ARE OPENED TO WHAT PROCESS FLOW IS, AND THEY SEE IT EVERYWHERE
THEY GO.
— PROFESSOR DAVID UPTON
Berg expresses some surprise about the ongoing popularity of this case about an unglamorous product in an obscure
industry. "I think its durability comes from the opportunity to discuss the basic management issues it raises—the
value of Lincoln's clear and consistent approaches to strategy, organization, and what motivates workers."

"Motivation is the key to a high-performing organization, and it's at the core of the Lincoln Electric case," agrees
Professor Tom DeLong. In his course Managing Human Capital, DeLong challenges his students' assumptions about
incentives, motivation, and compensation by contrasting the Lincoln case and its focus on the worker-as-individual
with a case about a successful teams-driven organization that he teaches the day before.
2
"A small percentage of students are intrigued by and support the complete meritocracy they see at Lincoln," DeLong
notes. "But the majority rejects the piecework system, although international students do seem more familiar with it
from observing it in their own countries.

"As it happens, the Lincoln Electric Company is now a thriving multinational—and its Cleveland plant remains as
successful as ever."

Lincoln Electric CaseWhat are the Vision, Mission, and Value statements of the Company?
The Lincoln Electric Company is a global manufacturer and the market leader of the highest-quality cutting, welding,
and joining products. With the use of their technologies Lincoln Electrics goalsare to make their customers more
productive and successful. The Lincoln Electric Company has 6principles that make up their mission statement. Total
solutions, expertise, global, principles,stakeholders, and responsibility are all apart of these. They will be driven by
customer satisfaction, andthey will strive to exceed customer expectations. They will differentiate from their
competitors bytechnology, quality, applications engineering, and sales, and marketing expertise. Over 40 percent of
their total sales will come from outside North America. Lincoln Electric will also have manufacturingfacilities located
worldwide. They will base their human resources systems to attract, reward, develop,and motivate high quality
people. With their continuous improvement they will be able to reward theirshareholders and employees. The
company will be responsible and maintain health and safety to everysingle employee. Lincoln Electric also has 6
values statements that they conduct their business inaccordance with. They will respond to their customer needs
and expectations with quality, integrity, andvalue. The company will recognize people as their most valuable asset.
They will maintain and expandthe Lincoln incentive management philosophy. Lincoln Electric will practice prudent
and responsiblefinancial management. They will strive continually to be environmentally responsible. Finally, they
willsupport communities where they operate and industries in which they participate.
Describe the operating philosophy regarding the customer, stockholders, unions, and theirbeliefs/assumptions about
employees.
James Lincoln said, “It is obvious that the customer’s interests should be the first goal of industry.”
Lincoln E
lectrics main goal has always been to satisfy their customer’s. They will do whatever
they can to achieve this goal. They will do anything in their power to make something better, moreuseful, and
cheaper. Also Lincoln Electric gives last priority to stock
holders. James Lincoln stated, “The
last group to be considered is the stockholders who own stock because they think it will be more
profitable than investing money in another way.”

James Lincoln’s attitude towards unionism has never

been too serious. There should always be a civil relationship between workers and managers. All partsof the
organization should cooperate fully and happily. The Lincoln attitude towards employees is veryimportant. The
program must provide that what is paid to the worker is what he has earned. They claimthe greatest incentive that
money has is a symbol of success. There also must be complete honesty andunderstanding between the hourly
worker and management if high efficiency is to be obtained.
Describe Lincolns’ management i
ncentive and employee bonus plans.Describe each of the nine human resource practices credited with their success