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How "No Layoffs" Can Work

Nearly every day brings another announcement of a company that's downsizing. In a recent survey of more than 1,600 large employers by the American Management Assn, 58% said they had eliminated jobs in the 12 months ending last June. That's the highest percentage ever recorded in the poll's 15-year history.

Not every business is cutting workers loose, however. As the economic slump has deepened, some innovative companies have found ways to reduce costs without handing out pink slips. Leading the pack is Cleveland-based Lincoln Electric -- and not just in this slowdown. Lincoln hasn't laid off a single U.S. employee in more than five decades. Since the 1950s, it has guaranteed a job to everyone with at least three years of service. In return, its 3,000 workers agree to pay cuts or reassignments if business conditions warrant. They also agree not to join a union.

The policy has drawn kudos from labor experts as a way to avoid layoffs in tough times. Management professors regularly cite Lincoln, a low-profile manufacturer of welding parts and equipment, as a model of corporate responsibility. John Stropki, president of Lincoln's North American operations, recently spoke with BusinessWeek Online reporter Jennifer Gill about how the company weathers slow business cycles and what measures he has taken this year to control costs. Here are edited excerpts of their conversation:

Q: How does guaranteed employment policy work, and what workforce changes have been made this year due to the business slowdown?

A: We guarantee every employee who has three or more years of continuous service at the Cleveland company a minimum of 75% of a normal workweek. We make a commitment to a job, not to a specific job. We will move employees, who are generally cross-trained in many different areas, to the job where we most need them. We try to minimize that, to minimize the disruption it brings. People are paid for the job they're doing, not the job they used to do. The pay might be more, it might be less.

Because of our program, we generally have higher levels of overtime in peak periods rather than hiring people to fill in those peaks. Once we hire people, we won't let them go, so we have to balance on the upside through overtime, and balance on the downside through reduced hours.

That being said, today our business is off approximately 10%. We're working full production schedules in all areas. In fact, we're working some overtime. And yet we do have a small percentage -- less than 10% -- of our workforce that is working a 36-hour week vs. the normal 40 hours. They are nonproduction hourly [employees in such areas as] maintenance and quality control. Our salaried people don't reduce

their hours, so [they help] pick up the slack. The benefit to the company is that we don't lose quality people who we've invested in.

Q: When was the decision made to reduce hours?

A: We made the decision about 90 days ago. We have fewer people on reduced hours now than we did when we implemented it. We don't do [the reduction in hours] arbitrarily. I meet every two weeks with about 30 employees from [various departments] and talk about issues that the company is facing. We publish the minutes [from those meetings] so that every employee knows what our strategy is and how we're approaching the challenges we're facing.

Employees aren't shy about communicating their concerns. But they are very aware of what's happening in industrial manufacturing in the U.S. It's routine to pick up the local paper and read about a plant closing or a layoff in our area. They're benchmarking their situation -- they're gainfully employed, [and] they may be facing a few less hours, but they've got a job to go to.

Q: Is there a risk that productivity will suffer if you guarantee employment? Will people slack off because they know they won't lose their jobs?

A: Most of our production people get paid by the number of parts they produce. [Years ago] the Lincolns had the foresight to know that if they didn't guarantee employment, people would say [to each other]: "Make less, so we'll have a job even when things are slow." The way we can be successful is by having a high level of productivity all the time.

We guarantee jobs for people who meet our perfomance requirements. We don't use performance evaluations to get rid of people. Our No. 1 goal is to drive people's performance so they can succeed. [But] in every environment, there are some people who just don't fit in.

Q: Have you or any of the senior executive officers taken pay cuts?

A: We haven't taken salary pay cuts, [but] a much higher percentage of our total compensation is in profit sharing than it is for the general workforce. In a downturn like this, we will share much greater [pain] than our workforce. We have given a profit-sharing bonus every year consecutively since 1934. [This year's bonus] will be smaller than last year, but it will be paid to everyone.

Q: Why don't more companies have no-layoff policies?

A: Because it's very difficult to administer. It takes a compromise by both parties: Management has to be committed to make a policy like this work, and employees have to accept a degree of flexibility with the system. For many companies, it's easier to say: "Our business is off 20%, [so] we need 30% less people."

[Until recently], we owned a business across the street from us that made electric motors. We made a decision that electric motors were not core to our business because we were a small player in a very big pond. We had about 275 employess there who were covered by our guaranteed employment program. Part of the contract in selling the business in 1999 was that the buyer had to give us back those employees over a two-year period. They remained "loaned" employees.

Despite the fact that the economy for industrial businesses hasn't been that great in the past two years, we've brought every one of those employees back into our business and put them into productive jobs. By the way, the company that bought the business has left town. Had it not been for our commitment, those workers would have been laid off.

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