Question

Lincoln Electric was founded by John C. Lincoln in 1895. For decades the com pany had been one of the leading manufacturers of arc welding products in the world. At the end of World War II, more than fifty manufacturers of arc welding products competed in the United States; today only six major manufacturers to main. The vast majority, including such giants as General Electric and Westinghouse, withdrew from the business, primarily because they could not compete with Lincoln Electric. Lincoln Electric's success stemmed from the pro- ductivity of its employees. A unique compensation struc ture that paid piece rate, rewarding an employee for the number of products that employee produced, created an incentive for employees to work as hard and fast as they could. Each product was identified with the employee re- sponsible for it; if errors in the product occurred, that em- ployee had to repair the product-a task for which no pay was forthcoming. Thus, the company generated a rapid rate of production of high-quality products. The company also makes industrial electric motors, but arc-welding products are its main business. Lincoln Electric has the largest mar ket share in the industry, it has 40 percent of the domestic market for electrodes and welding wires, the consumables that constitute the heart of the business. In the 1990s, Lincoln Electric acquired manufacturing plants in Europe, Latin America, and Asia. These acquisitions were disastrous, leading to losses of mil- lions of dollars. Extending the Case Study: Lincoln Electric Lincoln Electric's success was due to the way it paid its employees and it relatively small size. The company was able to have a ratio of 1 manager to each 100 employees, whereas most manufacturing companies worked at a ratio of 1 to 10. Following the herd that was stampeding toward "globalization," Lincoln Electric acquired manufacturing plants throughout the world. The problem was that Lincoln management had never done anything internationally. Moreover, the compensation structure that had led to Lincoln's success did not apply very easily to other countries and cultures. a. Lincoln Electric's piece rate compensation plan created strong incentives for its employees to be productive and to spend most of their time producing products. Explain how this plan created costs for Lincoln Electric's employees, which they tried to minimize by working more. b. Lincoln Electric's global ventures did not fare too well. A reason for this was that their unique compensation system did not transplant very well. Does this mean that economic principles are not applicable outside of the United States?

Answer 1

cost cost for for Lincoln Lincoln employees This plan creates working for pierre rote bay means that workers may come to work When they are sick thereby rüking the health of their coworkers LEO This could shut down or seriously reduce Producten It workers are attempting to work too quickly that could potentially ingure themselves which could open the company to liability iv) It also creates an opportunity cost for workers as the income foregone for not producing extra units Economic principles formulated are for markets with stable government Strong contract enforcement and well defined property rights but some times these conditions vary from country to country In same country labour laws Stricter and labour force hostile to changes in incentive system. This are is more their its possible

Date: 1 Page No.: that outside the US. piecework compensation system u not accepted as they think it disadvantages outweight is advantages. It does not mean that economic principles are not applicable outside of U.S. just the different market need different approach and e incentive systems