When pressed at a congressional hearing to name other companies whose employees received pay as large as the bonanza bonuses of his own workers, Bill Jack of Jack & Heintz (Fortune, January, 1944) could think of only one. It was not a war-created enterprise but the forty-seven-year-old Lincoln Electric Co., located like Jack & Heintz in Cleveland, Ohio. Through a remarkable bonus system started in 1934, Lincoln Electric pays what it believes are the highest industrial wages in the world for normal hours. In each of the last three years, bonuses have exceeded salaries, and for 1943 the average annual earnings for all employees were announced as $5,539. As a consequence of Jack's mention of the company, it now has the distinction of being the first to oppose in court, with $3,250,000 at stake, the much debated Renegotiation Law. Lincoln Electric is also battling the Treasury, which wants $1,600,000 more in taxes.
The company is the world's largest maker of equipment for arc welding, the art of fusing metals in the 6,000° Fahrenheit inferno of an electric arc. As the most effective merchandiser in the fiercely contested arc-welding field, Lincoln Electric has for years led its many rivals, including giants like General Electric and Westinghouse, in precipitate price reductions. Unlike its big competitors, Lincoln sticks strictly to its specialty, and concerns itself with neither gas welding nor other forms of electric welding. Fifty-five per cent of Lincoln's business is electrodes. These are the metal rods, around fourteen inches long and of various diameters, that melt in the arc to join pieces, fill holes, or add to the metal being welded. They are sold by weight, and prices are figured to the hundredth of a cent. Forty per cent of Lincoln's business is welding machines, which are mostly motor- or engine-driven generators that produce current for the arcs. The remaining 5 per cent is accounted for by helmets and other accessories.
Probably a third of the welding machines in U.S. shipyards and war plants are of Lincoln manufacture. It is working on the two largest machine orders in its history. One is a $1,250,000 lend-lease shipment of 750 Diesel-driven units to Russia for the repair of war-damaged machinery, and the other is a $1,200,000 British contract for gasoline-driven welders for battlefield repair of armored equipment. The company is so well up on production that, if orders ceased and materials flowed freely, Lincoln would be out of work on machines in two months and on electrodes in three. Lincoln has supplied at least a third of the electrodes for the ship, tank, pipeline, and synthetic-rubber programs. (A Liberty ship requires about 160,000 pounds and a Victory ship about 190,000 pounds of electrodes.) President Roosevelt was talking about arc welding when he wrote Prime Minister Churchill that "Here [in the U.S.] there had been developed a welding technique which enables us to construct standard merchant ships with a speed unequaled in the history of merchant shipping."
The Lincoln brothers
The company was far from unknown, at least in its field, when Jack murmured its name. Its publicity for its products and for arc welding had been brash and continuous. It had paid winners of an essay contest with welded-steel checks and had them canceled with submachine guns. White-haired James Finney Lincoln, sixty-year-old President of the company, was known with considerable justification as "a very, very rugged individualist." He had hunted with Governor John Bricker and helped finance Republican campaigns in Ohio. Through the years he had assailed the New Deal as "glorious larceny" and did not hide his impatience with government questionnaires and priority red tape. He had denounced labor unions, which do not exist at Lincoln Electric, and termed collective bargaining "civil war." In the early days of the war he had written provocative letters advocating nonintervention.
For all his volubility, he said little about the internal workings of Lincoln Electric, a private company with neither debt nor listed stock. Lincoln sometimes explained his incentive system in general, but the financial details of the plan, which his executives seem to regard as a happy medium between old-fashioned capitalism and whatever managed society the future holds, were guarded as trade secrets of a company "organized for profit." Employees were asked not to disclose even to each other the amounts of their bonuses, which were as high as 750 per cent among executives. Much to Mr. Lincoln's annoyance, these are no longer secret. From what government inquisitors have churned up and from what Lincoln Electric reveals, it is possible to present a more detailed account of this remarkable company than at any time in the past.
Lincoln Electric takes its name from John Cromwell Lincoln, a studious electrical pioneer whose features have some resemblance to those of Abraham Lincoln. The resemblance, however, is purely accidental, the families being unrelated. The eldest of three brothers, he was born on a farm near Painesville, Ohio. Their father was the Reverend William Ellely Lincoln, a Congregationalist minister who quarreled with his congregations, keeping the family poor and on the move. Their mother earned an M.D. degree after her marriage and practiced medicine when a woman physician was a rarity. The parents hoped at least one son would become a missionary but all learned electrical engineering. The subject was not taught at Ohio State when John worked his way there, but, after graduation in 1888, he took a student course in electricity at Brush Electric Co. in Cleveland. This company pioneered arc lighting, including the first illumination of Niagara Falls, and what he learned working for Brush helped later with arc welding. He worked for another electric company and then lost his savings in the Elliott-Lincoln Co., an electric-motor venture liquidated in 1895.
With $150 borrowed capital and a boy as a helper, he went into the motor business the next year in the basement of his Cleveland home and called his outfit the Lincoln Electric Co. He wrote an electrical handbook and patented a number of improvements on apparatus, but affairs of Lincoln Electric were precarious for years and John often had to mount his bicycle on payday to collect money for the payroll. It was not until 1906 that the company was incorporated with $10,000 self-supplied capital. Growth was slow and sales were still less than half a million a year when John gave up management of the company in 1913 because of a physical breakdown. Now seventy-seven, he is merely Chairman of the Board and Treasurer of the company at a salary of $3,408 with no bonuses. He lives in Arizona and spends summers in Cleveland. Besides his some 22,000 shares of Lincoln Electric stock, he owns the Camel Back Inn at Phoenix, a gold mine near there, and the waterworks at Ajo, Arizona. A Henry George enthusiast, he was nominated for Vice President in 1924 by the Commonwealth Land party. A less colorful electrical engineer was the middle brother, Paul Lincoln, who attended Ohio State, worked for Westinghouse and Lincoln Electric, then headed the Cornell School of Electrical Engineering until retirement.
The youngest brother, strong-willed James Finney Lincoln, the present head of Lincoln Electric, was meanwhile studying electrical engineering at Ohio State. Six-feet-two and weighing 225 pounds, he played first fullback and then tackle on the football team that he captained. He still weighs 225 pounds, looks like a Roman senator, and, while mellow enough to have taught a Sunday-school class of girls, still plunges into any kind of opposition with the blunt drive of a fullback. Lincoln, indeed, regards football as his most beneficial college experience, and has since helped many husky boys through Ohio State. He has chosen many of his engineers from the ranks of athletes; his sales manager, for example, captained a Western Reserve eleven, and the factory superintendent was one of Cornell's greatest ends. In college Lincoln was tutored in mathematics by a brilliant fellow student, Charles F. Kettering, the future General Motors researcher, then employed by the football team to help players make their grades. Typhoid fever kept Lincoln from his degree but nineteen years later Ohio State, of which he is now a trustee, gave him an honorary E.E.
In 1907, J. F. went to work at $50 a month and 2 per cent commission as Lincoln Electric's sole salesman. The next year he married and, at his request, the salary arrangement was changed to $150 a month and 1 per cent of the sales. Although this still stands, Lincoln, always the man to do things differently, collects his salary only for part of the year. In 1941, when entitled to $244,000 under the contract, he took $59,000. But he got $96,400 more in dividends on his some 12,000 shares of stock, and so managed nicely. He never gets a bonus.
Lincoln Electric got into welding in 1907 when one of Salesman Lincoln's first customers at the Cleveland Steel Castings Co. told him that anybody who could figure out a means for repairing broken castings would be doing "something" for the casting business. The answer was electric arc welding. The metal-melting powers of electric arcs had been noted years earlier and several companies were attempting to make equipment. A proper arc was difficult to maintain, but by applying experience in solving an arc problem for a maker of motion-picture projectors, Lincoln engineers produced their first "stable arc" welder. They also adopted the practice of using a separate machine for each operator. Welding began slowly to be accepted for repair work, and Lincoln Electric itself began to use welding in fabricating motors.
Welding saves ships
Lincoln welding machines were among those used in the dramatic repairing of the interned German ships sabotaged in New York Harbor by their crews during the first World War. By shattering machinery, the Germans thought that they had made the ships useless, but operators of the Wilson Welder & Metals Co. and other companies soon welded the breaks and the vessels sailed as transports. Shipbuilders, however, were cool to welding as a substitute for riveting. Lincoln recalls being told by an executive of the Emergency Fleet Corporation: "Welding is all nonsense, Lincoln. You can't weld ships. I could kick off with my boot any weld that you will ever make." Nevertheless, a few parts were welded and the possibilities were demonstrated so well that the future of the industry was assured. In 1917, the company started its welding school, which has since graduated 25,000 operators.
Lincoln began to make more welding machines and gradually discontinued its individual motor business. Though making automatic arc welders for long seam work, and a few other types, it largely emphasized motor- and engine-driven direct-current sets, whose gasoline and Diesel engines were supplied by other manufacturers. Originally cumbersome affairs that looked like a portion of a powerhouse on wheels, the units now are as smooth as the nose of a torpedo. Controls are usually as simple as those of a table radio set. One of them, which corresponds to a radio receiver's station selector, is called a job selector and determines the type of arc very simply. Sections of the dial are in colors, and even welding operators who are weak on reading have no trouble making adjustments.
Lincoln's latest machine, a creation of Chief Engineer George Landis, occupies barely four square feet of floor space. For one thing, the shaft is mounted vertically instead of horizontally. For another, it turns at 3,600 revolutions per minute, twice the speed of previous models, and is much smaller. General Electric has matched the performance but not the price with a 3,600-r.p.m. horizontal machine.
One innovation popularized by Lincoln is the shielded-arc electrode. This is metal rod coated with chemicals and minerals that liberate protective gases during welding and keep out the oxygen and nitrogen of the air. In decomposing, the coating forms a slag that floats on the molten metal and protects it during cooling. Welds made with a fully shielded arc are largely free of oxides and nitrides, and, Lincoln engineers say, have 20 to 50 per cent higher tensile strength and perhaps 100 per cent greater ductility than welds deposited by an uncoated rod. T. E. Jerabek, Lincoln's chief metallurgist, produced shielded electrodes when a year out of the University of Minnesota. The company was sued about them by the A. O. Smith Corp. (Fortune, October, 1941), which had patented a coated electrode during the World War. Since coated rods had also been made in England, the courts ruled for Lincoln, and manufacturers began to make them generally. Lincoln's electrode production—more than 400 tons a day—is great enough to justify the company's making its own wire, saving perhaps as much as 20 per cent on the steel.
Lincoln's competitors
One of the reasons for Lincoln's technical progressiveness has undoubtedly been the stimulus of its competition, unusually brisk for the electrical manufacturing industry. The company once boasted of making half the electrodes produced in the U.S. but could not do so after the clearing of the patent situation. It is being pressed in electrodes by the Arcrods Corp., owned equally by General Electric and Air Reduction. G. E. and the Wilson Welder & Metals Co., Air Reduction's electric-welding subsidiary, purchase and market the entire output. Arcrods has a modern $600,000 electrode plant at Sparrows Point, Maryland, a small one at Cleveland, and operates a new government-owned plant at Pittsburg, California. Among the dozens of other electrode makers are well-established firms like Westinghouse, Metal & Thermit, Harnischfeger, and A. O. Smith.
In the machine field, the peak of war demand has been passed. Lincoln made 5,000 fewer welding sets in 1943 than in 1942, and when shipbuilding is curtailed, there may be a glut of secondhand machines. Lincoln makes between a third and a half of the motor-generator type welders, but faces a pack of competitors here too. Next in rank is either Hobart, of Troy, Ohio, or General Electric, which also makes machines for Wilson as well as its own complete line. Lincoln's domination might also be affected by popularization of the alternating-current transformer machines, which are produced by scores of companies. Lincoln makes A.C. machines but has not developed them to the extent of its D.C. welders. With a series of color movies, moreover, General Electric is beginning to give Lincoln more competition on the showmanship front.
The incentive system
All these competitors doubtless help keep Lincoln from forgetting the fact that in his early days he categorically announced the goal of a "better and better product at a lower and lower price." He has reduced prices steadily and steeply. In 1917, for example, a 300-ampere Lincoln welder sold for $1,731. Nineteen price reductions, the latest last August, have cut the price to $360. Yet profits and dividends have gone up. (See "A very, very rugged individualist" sidebar below.) How much was due to increased volume is impossible to estimate, but a good deal must probably be attributed to Lincoln's remarkable incentive system. What this amounts to is successful application of several rewards-for-results devices now well known in American industry. The central feature is the Advisory Board formed in 1914 by ambitious J. F. Lincoln when he took charge.
Innocent of manufacturing experience, he wanted the help of men in the plant. "I had one fundamental idea." he explains. "If I could make those men as anxious to make the business succeed as I was, I knew it would succeed." Each department elected a man to meet with Lincoln every two weeks on an Advisory Board. The arrangement still holds. From the beginning this board has performed the duties of the labor-management committees, which have been set up elsewhere with such fanfare since the war. For his services each member receives $100 a year. Departments elect members each month in rotation so that the board changes gradually. Only employees of two years' service are eligible, and no member can serve more than two consecutive terms. The board now includes two elected foreman representatives and two representatives of women workers. Two superintendents and the personnel director also attend and there are usually twenty-five persons at the sessions over which Lincoln, in shirt sleeves as usual, presides every other Monday.
As a result of the board's activities, hours of work were decreased from fifty-five to fifty a week, wages were increased 10 per cent, and the present piecework system installed as early as 1914. Employees now earn a basic hourly wage equal to the community average for their type of work. The average basic earnings in the factory are now $1 an hour, an increase of 16 cents since 1940. Piecework rates are established by time-study men who have worked in the factory, and are guaranteed by the company. They can be changed only by distinctly changing the job. If a worker thinks his rate too difficult, he can challenge it and a time-study man will work at the job for a day. The rate made by him becomes the new rate. As early as 1915, lives of all employees were insured for a year's wages at no cost to the employee. Paid vacations for all, a novelty in some plants in the thirties, began in 1923. Stock was sold to employees beginning in 1925. Though their holdings are probably less than 15 per cent of the total, 350 of the plant's normal 700 rank-and-file workers are stockholders.
Since 1929, a suggestion system has paid employees other than time-study men and engineers half of a year's savings resulting from any change they suggest. Not only is this unusually generous, but an employee has the choice of applying the idea to his own job and taking his money in increased earnings. Two men on a temporary assembly job recently devised a gadget enabling them to earn $4 an hour and to do in two a job expected to require six weeks. The company is conducting a special competition for suggestions for postwar products.
In 1933 the Advisory Board discussed President Roosevelt's famous "more abundant life" speech and suggested that bonuses be paid employees. Save for a small bonus in 1918, the company had paid none. New Deal—hating Lincoln has not been an admirer of President Roosevelt, least of all in the NRA days, but he is in favor of an abundant life "for those who earn it." He agreed to try a bonus system for a year and the board promised to help reduce costs. In 1934, Lincoln sales, which had dropped to a depression low of $1,200,000 in 1932, rose to $3,400,000, thus surpassing 1929, the best previous year. In 1934, Lincoln not only paid his stockholders a 25 per cent greater dividend than in 1933, but paid 22.4 per cent of the payroll in bonuses. With the exception of a drop in 1938, sales and bonuses increased steadily until last year. The average annual wage of employees, including executives, leaped from a low of $1,250 in 1933 to $1,996 in 1934 and $5,400 in 1942.
Yet Lincoln Electric has in the last few years paid a smaller percentage of each dollar to labor than have its great rivals. In 1942, for example, it paid 20.7 against 39 per cent for G. E. and 48 per cent for Westinghouse. Dollar productivity per Lincoln worker has increased from $8,371 in 1933 to more than $27,000 in 1943, and is far greater than for other companies of its size and in its field. This comparison is weakened by the fact that Lincoln workers are making peacetime products while rivals have added complex war products, but there seems little doubt that Lincoln workers are extraordinarily productive.
This seems to be likewise true of Lincoln executives, who receive most of their earnings through bonuses. These bonuses were increased steadily through 1941 and are continuing generally at that year's level. Bonuses of $40,000 to $50,000 each have gone to Vice Presidents Clarence M. Taylor and Alton F. Davis, Chief Engineer Landis, and Superintendent Harold F. Kneen (their salaries range from $6,500 to $12,500). A number of men received bonuses of $10,000 to $15,000.
Lincoln, who retains final authority, personally decides on the bonus each employee receives. The amount divided is proportional to the success of the company, but no precise mathematical formula is followed. In the case of factory workers, piecework earnings are the first consideration—a good worker gets more than the average. This provides a double incentive for production. Years of service and general usefulness to the company are factors. In 1936, moreover, the company started a fund to provide annuities for retired employees, and in 1941 set up a trust fund of $1 million for severance pay.
All these measures and benefits, coming as they did long before union demand and still far ahead of most industrial standards, mean that unions have made no serious attempts to organize Lincoln Electric workers. Not that J. F. Lincoln would have encouraged them. He makes no secret of his dislike for unions. "Eliminate the inefficiencies of union labor and building costs will be reduced by 40 per cent or more at present hourly rates," he has said. "An army, a ship, a school, a family, or a court, operated on the principle of collective bargaining, obviously would fail." In a debate with a labor leader, he argued: "I don't think the average worker is any more fairminded than the average manufacturer and, if the manufacturer is restrained by law from joining a group and setting the price of a product, why should labor be allowed to organize and set a price?" As a matter of fact, the United Electrical, Radio and Machine Workers, the union most likely to organize Lincoln Electric if it could be organized, has endorsed incentive pay and is now writing clauses freezing piecework rates into contracts.
Lincoln, however, concedes that not all manufacturers are Lincolns and blames the existence of unions on managerial shortsightedness in the past. He argues that almost any manufacturer, with or without unions, could still use similar incentives profitably. "Labor is an individual not a commodity," he lays down the principle. "When treated as a commodity he reacts as such—giving as little as possible and getting as much as he can. He believes that there is only so much work to do so he makes it last as long as possible. He, being an expert at his job, knows 10,000 ways to slow that job down that his boss, who is not an expert, cannot detect ..." Illustrating his principle in detail Lincoln goes on: "Make the worker a member of the team. Production can be stepped up to four times that of another plant doing the same work but where the worker is not a member of the team. This does not mean that a man is nervously working four times as hard, but that in one case he is consciously working while in the other he is consciously trying not to work."
How they do it
Lincoln workers explain their success in cutting costs by saying they are paid "for not doing things." This is certainly at least part of the explanation. The factory is entirely without frills. Save for fluorescent lighting much of the plant looks as it did when Lincoln took the place over from makers of the Grant automobile in 1923. Compared with some new war plants, Lincoln Electric is austere. There is no steam room, no music, no employee newspaper, and even no smoking. The last, a rule of the Advisory Board for efficiency, is enforced during working hours in offices as well as shops.
Factory employees, moreover, doubtless work a bit harder physically and a lot more intently than in many plants. There has been extra pay instead of vacations since 1939. Unlike Jack & Heiutz, which works everybody a twelve-hour day, Lincoln believes a long day breeds accidents and "scientific loafing." In the electrode plant, which operates continuously, men work a forty-eight-hour week in three staggered eight-hour shifts. There are two nine-hour shifts in the main plant. Absenteeism, which is calculated on the basis of workers out regardless of reason, is at the low rate of 1.5 to 2 per cent, compared to 5.42 per cent for twenty-five plants surveyed by the National Association of Manufacturers.
Short cuts on a Lincoln product start before it comes into existence. In most companies a new design is born on a drawing board. The drawings then go to shopmen who follow the specifications in making an experimental model. This may be modified and more drawings and models required. "We have taken design engineers out of the front office and put them to work," boasts Chief Engineer Landis. "The first model is made in the shop, not on paper. After this has been looked over, three or four models are produced and tested. Drawings and specifications are then made. The system encourages shopmen to think and not just follow instructions. Engineers are prevented from designing products that are impractical to manufacture."
The company aims to cut labor costs on every product 10 per cent each year. This isn't always attained, and some years design changes temporarily increase labor costs, but the record is impressive. Hours of direct labor required to produce a 200-ampere welding machine have been cut from 112 in 1921 to less than 20 at present. Direct labor needed to manufacture a ton of 3/16-inch electrodes for welding steel has been reduced from 70 hours in 1929 to 2. The latter reduction is principally accounted for by special high-speed extrusion machines developed by a naturalized German named William Irrgang. Lincoln men are confident that their electrode plant is the most efficient in the world, and a Navy survey confirms their belief. Metal arrives in 3,000-pound coils and is polished, drawn into wire, and cut to electrode lengths. The coating is pressed on these and a conveyer removes them through drying ovens. Ordinary sizes spurt forth at more than 900 electrodes a minute. As some machine guns fire fewer than this number of bullets a minute, this is remarkable production.
Lincoln machinists were among the first to discover that the heat created by the use of tungsten carbide cutting tools could be eliminated, and work expedited at the same time, by increasing the speed of the machines. The chips carry away the heat. Monarch lathes that whirled at 600 r.p.m. were geared up and have been used at 1,200 to 1,800 r.p.m. Armature laminations formerly stacked by hand now drop from the punch presses and stack themselves on a spike devised by Ben Matthews, a young engineer from Colorado. Simply out of eagerness to have the latest in machinery, the company advertised for machine tools that would pay for themselves in two years. The plant was so well equipped in peacetime that only $188,000 was added to its $2 million machinery account in 1941 and 1942, though in the latter year a record total of 35,000 welding sets was produced.
Short cuts are also the rule in the offices and probably were a factor in the company's ability in 1943 to do over three times its 1939 business with only twice as many employees. In many companies an order is copied several times on blanks of various kinds; a single writing in ditto ink does the job at Lincoln. All other forms have been adapted so that they can be stenciled from the original. W. A. Dewald, head of the order department, who receives a $12,500 bonus for this sort of thing, took the problem home one Saturday and had the answer on Monday. Again, Credit Manager Frank Griesinger had the idea that mailing monthly statements to Lincoln's 5,000 regular customers was a largely useless expense. He found only 300 required them. Others now pay on the invoice.
Lincoln selling
Some competitors, who don't exactly love Lincoln after years of meeting price cuts, say his "real edge" has been his largely direct system of selling. For his evangelistic approach he is termed the "whirling dervish" and the "Woolworth" of welding. Today, of course, there is no need of selling, but the company's sales technique doubtless has been a factor in its strength. Vice President Taylor, who is sales manager, estimates that Lincoln has had a sales cost of 6.5 per cent against about 18 per cent for rival selling through jobbers. Commissions, however, have been trimmed generally.
Taylor joined Lincoln as a $60-a-month factory clerk in 1916. After service in the Air Corps, he returned as assembly and test foreman, had charge of time study, and became superintendent of the factory. He had never been a salesman, but one day in 1928 when he was on the roof directing repairs, Lincoln shouted up that he was to take charge of sales. The company is now represented by some ninety salesmen, nearly all college men, most of them graduate engineers, a score of them athletes. They carry coveralls and demonstrate welding.
Three Lincoln plants outside the U.S.—near Toronto, Canada, London, England, and Sydney, Australia—are operated along the lines of the Cleveland plant, but the bulk of the equipment sold abroad comes from the home plant. Fifteen per cent of the output went abroad in prewar days and, barring higher tariffs, Lincoln hopes to do more foreign business.
Lincoln Electric's renown in its field is largely the work of Vice President Alton F. "Charley" Davis, an electrical engineer turned advertising manager. The $300,000 a year that he spends on direct mail and in trade and management magazines is the largest advertising appropriation in the field. He is editor of the Procedure Handbook of Arc Welding Design and Practice, a 1,200-page "Bible of arc welding" of which 200,000 copies have been sold. His books on blueprint reading and lessons in arc welding have been translated into Spanish. As secretary of the James F. Lincoln Arc Welding Foundation, set up in 1936 to promote welding, he has edited several fat volumes of prize papers. In all he has sold over a million books on welding. He has given a welding library to his alma mater, Ohio State, the first school to offer a degree in welding engineering, and hopes to make it the welding research center of the world.
While some competitors label electrodes with numbers, Davis coins names suggesting speed and strength like "Fleetweld" and "Armorweld" for Lincoln. He glamorizes the welding operator with a 110,000-circulation magazine The Stabilizer, filled with pictures and letters of readers. In each issue is a blank on which an operator can promise "never to be guilty of knowingly making a poor weld," and receive a diploma-like certificate. Competitors ridicule this, but Davis has mailed 50,000 of them and they adorn many a shop. These readers are now offered a savings plan to enable them to set up their own shops after the war. Davis publishes for users of welding, Welding Time, a rotogravure tabloid of 90,000 circulation, and Welding Profits, a magazine of 130,000 circulation.
Taxes and renegotiation
Three weeks after Bill Jack advertised Lincoln Electric bonuses to the House Naval Affairs Committee, investigators for that body went over records of the company in Cleveland. Company executives and Lincoln, who had just been elected President of the Cleveland Chamber of Commerce, were summoned before the committee in Washington on May 27, 1942.
Edmund M. Toland, counsel for the committee and famous as a relentless cross-examiner, had things his own way at first. The bonuses were revealed, and the trust and annuity funds noted. Toland calculated that if these payments had not been made, Lincoln Electric would have paid $8,786,316 instead of $4,347,400 in federal taxes for the three years of 1939-41. Lincoln, who can make a courtly and winning speech, testified eloquently in defense of his incentives and the committee came to life like the Congressmen in the filibuster scene of the film, Mr. Smith Goes to Washington. Brandishing two electrodes, he asserted that the price reductions made possible by the bonus system had saved the government $35 million on the Lincoln output in 1941. Chairman Carl Vinson termed "very commendable" the fact that Lincoln had not collected his full salary and that the company had set up its trust fund. The committee thanked the witnesses for appearing. It seemed a triumph for Lincoln. The hearing started a flood of newspaper and magazine stories under headlines like "They Thanked Him for Coming," and "Lincoln Frees the Workers." A few days later, Attorney Toland suffered a heart attack and died. But things were just beginning.
Internal Revenue officials refused to accept the company's 1941 tax return and reopened the one for 1940. It contended that 1941 payments to 400 employees were too high. "No man who works with his hands in a factory." said an official, "is worth more than $5,000 a year." When the Treasury took a formal stand, however, it disallowed the $1 million trust fund set up on the last day of 1941, plus the annuity fund of $400,000 for 1940 and the $575,200 for 1941. The matter, involving $1,600,000 in taxes, is in the Tax Court.
Reported the House Naval Affairs Committee: "Material presented concerning this company showed excessive profits from government contracts and the avoidance of proper taxes on those profits through the awarding of huge bonuses to officers and employees and the creation of a trust fund for employees." This made Lincoln a prospect for early renegotiation, but he disagreed loudly. He charted the drop of Lincoln prices and the increased production per worker in a pamphlet. He mailed this widely and urged exemption of standard products from renegotiation before three congressional committees. In the name of his Advisory Board, he telegraphed the Navy Price Adjustment Board: "How much must we reduce this efficiency and raise costs to keep from being penalized?"
The matter came to a hearing on September 24. Chairman Kenneth Rockey and the board agreed with Lincoln and his executives that the company had led in price reductions, that the incentive plan had contributed to efficiency, that production had been increased without government facilities, and that the company had given competitors and the Navy technical assistance. On the other hand, the board pointed out the simplicity of the manufacturing, compared to complex articles like bombsights, and reminded them that war has boomed welding. The board concluded that $3,250,000 plus any costs eventually disallowed by the Treasury should be recovered.
"Mr. Rockey, we will not pay," announced Lincoln.
The board passed the matter to Under Secretary Forrestal, who after offering Lincoln a chance to present additional facts notified him thus: "Unless action is taken by you not later than November 5, 1943, to eliminate such excessive profits in a manner satisfactory to me, appropriate action in this respect will be taken by me without further notice to you, by directing the withholding of amounts otherwise due to you, as a contractor or subcontractor, by the government and by prime contractors ..." Lincoln stubbornly replied by asking an injunction against Secretary Frank Knox and Under Secretary Forrestal. Pending action, the Navy agreed not to withhold funds.
Protesting the board's decision bitterly and still facing renegotiation on 1943 business, Lincoln continued to act in character. On December 11 he announced that he refused "to renegotiate his own workers" and gave them bonus checks totaling $3,200,000, largest in the company's history.
"A very, very rugged individualist"
Here is one of the most impressive, not to say utopian, corporate records ever put on paper. James Finney Lincoln of Lincoln Electric, the man who made it, is described by an admirer as a "very, very rugged individualist." As the accompanying article reveals, the description has a certain adequacy. In ten years, Lincoln has approximately halved his price level (2 and 3), more than tripled net income before taxes (9), more than doubled dividend rate (10), and more than doubled the average annual wage (7). Lincoln explains his achievement almost exclusively in terms of this wage increase; by paying unheard-of bonuses (5)—sometimes more than the basic wage—he believes he has stimulated the "normally unused abilities of the worker" and so increased productivity threefold (11).
This beautifully pat analysis, however, is not the whole story. Lincoln's volume (1) has ascended steeply; and increased volume generally is accompanied by improved techniques, decreased costs, increased worker productivity. His warswollen volume is what the Navy had in mind when it asked to renegotiate his contracts (the Navy also feels high profits are inappropriate in wartime). Lincoln is in an expanding industry that did not hit its stride until the middle thirties; prices were due to fall, Lincoln or no Lincoln.
Yet Lincoln, as shown below, paid huge bonuses when volume was still modest. Prices doubtless would have fallen much more slowly had Lincoln not led the way. A competitor has remarked that he makes the same products, uses equivalent machines, hires high-class help but cannot show anything like Lincoln's profits. In short, the Lincoln incentive system must not be undervalued. And whatever his motivation, whatever the precise explanation of his magnificent performance, James Finney Lincoln, who has nothing to do with unions, has nevertheless shared the fruits of that performance with his employees on a scale probably unique in industrial history.
A version of this article appeared in the February 1944 issue of Fortune.
