Le: Incentive Sytems & Culture

Lincoln Electric

Incentive System

Cultural implications for the Netherlands

1. Company Background

Lincoln Electric Holdings, Inc. (LE) is a publicly held company founded in 1895 in Ohio, USA. LE is the world leader in designing, developing and manufacturing welding and cutting products and systems, reporting net sales of almost 2 billion dollars in 2006. Headquartered in Cleveland, the firm has 30 manufacturing locations in 18 countries, of which one is located in Nijmegen, the Netherlands. LE markets its products in more than fifty countries, in every inhabited continent and employs more than 7000 people worldwide. Geographic dispersion is managed with the help of an organizational structure based on regions. Top executives of the company are exclusively American nationals, including the CEO and fifteen vice-presidents, of which five are the heads of the regional divisions. Lincoln has established its worldwide presence in terms of sales and production by pursuing a dynamic international expansion strategy mainly based on joint ventures and acquisitions of existing capacities. It seems that the company is evolving towards a geocentric structure in the future with a high degree of local responsiveness and global integration (Heenan, 1979) but the current stage of this development is characterized as a mixture of ethnocentric (top management) and domestic/regioncentric IHRM approaches (Caligiuri, 1995). Lincoln's success has been largely attributed to the company's unique incentive system that will serve as the basis for this report. As LE sees itself as an American company this analysis will assume that the company implements the core of its HR systems worldwide, although local managers have some discretion in adapting to specific circumstances. This paper aims to identify the way LE's US-based HR practices, with regard to its unique incentive system, would work when applied to its operations in the Netherlands, based on insights from cross-cultural literature that is provided in the Appendix.

2. Incentive System

LE's HR systems and practices are based on its long-standing management philosophy that revolves around an unbounded faith in the individual and a belief in the equality of management and workers. These convictions are reflected in the 4 prime components to the HR system: piecework rates, profitability-dependent end-of-year bonuses that can equal or exceed regular pay, guaranteed employment, and limited benefits. Taken together, these practices leave maximum discretion to individual employees, as employees have a large influence on their wages through the level of effort they exert as a result of the performance-contingent rewards they receive. Also, performance bonuses are not exclusively for senior management, but production workers are held responsible for the company's profitability and are aligned to contribute to this by a significant share in the gains realized. In addition, guaranteed employment (in combination with extensive cross-training across functions) ensures employee commitment to the organization as well as more flexibility to market conditions by the cutting and expanding of working hours when economic conditions warrant this. Finally, low benefit levels provided by the company result in individual employees having more of a say in what form of compensation they would like to receive, as they are free to purchase insurances and other benefits with the cash payments they earn. Direct effects of these practices and reinforcing effects and synergies between elements of this system lead LE to have a far higher productivity than other manufacturers within the same industry, lower costs of labour and added flexibility to respond to economic fluctuations because of its skilled and committed workforce. However, this competitive advantage relies heavily on the degree to which employees are comfortable with and motivated by these arrangements. Amongst other things, US culture is expected to influence the preference LE workers display for this compensation system. Therefore, it follows that this system will not work as well in other cultures.

3. Cultural Effects

3.1 Piecework

With respect to the piece-rate pay system, there is proof that from a cultural perspective, this practice would lead to clashes when applied to the Dutch workforce. Even though the US and the Netherlands score similar on several cultural dimensions, De Mooij (1998) points out several important differences between the two cultures that indicate difficulties for LE to adapt its highly performance-oriented culture to the Dutch workforce. First, the Dutch are more future oriented and score highest on this cultural dimension found in the GLOBE research project (House, 2002). Therefore, they are more likely to prefer fixed compensation as this lets them better plan for the future. Second, in US culture winning, status and success are important, which is perfectly reflected in a piece-rate pay system. The GLOBE findings indicate that the US is among the highest ranked countries on assertiveness and performance orientation implying that US employees have fewer problems to be tough, confrontational and competitive. Trompenaars (1993) also found that US citizens are more achievement oriented in contrast to their Dutch counterparts that are not motivated to work hard simply to assure themselves of esteem or emphasize status, winning is "OK" but not the ultimate work-goal. Third, the Netherlands are among the most feminine countries in the world. This means that the Dutch place higher value on caring for others as well as quality of life. A piece-rate compensation plan seems in sharp conflict with these values as it puts employees under severe pressure for achievement, hence reducing life quality and deemphasizing group well being. Finally, the Meaning of Work Study (1987) found that the Americans score highest on the obligation norm ("everyone has a duty in society to contribute by working") whereas the Dutch score highest on the entitlement norm ("work rights and the responsibility of organizations towards society"). This suggests that the Dutch put more emphasis on individual worker rights and agree less with the idea that everyone has the obligation to work.

Overall, these findings suggest that Lincoln is better advised not to implement its piece-work rate system in the Netherlands but rather pay its employees on an hourly basis that gives them more security.

3.2 Annual Bonus

LE pays extraordinarily high yearly bonuses (typically