Creating Cultures That Lead To Success: Lincoln Electric, Southwest Airlines, & SAS Institute

Few executives would doubt the importance of employee attitudes and performance to organizational success, or the influence of company philosophy, policy, and practices on attitudes and performance. Particularly impressive are organizations that year after year achieve outstanding results and competitive success as a consequence of their employee-related philosophies, policies, and practices. This article will focus on three of these — Lincoln Electric, Southwest Airlines, and SAS Institute. The purpose here is to delineate and clarify these aspects of their operations, as the three have been and should be models for others. Lincoln Electric, for example, is a model for domestic manufacturers competing with firms in China and Southeast Asia.

While the three operate in very different industries and demonstrate different approaches in managing employees, they share similarities. At the highest organizational levels in each, there is a deep respect for, appreciation of and commitment to the individuals who have joined the organization. Workforce policies and practices emanate from this essential foundation.

Another important similarity is that top management in the three, historically and today, believes that if you take care of employees, in the long run, the needs of shareholders will be satisfied. As you will see, this does not mean being blind to external realities or at all ‘‘soft;’’ far from it. At least two of these organizations (Lincoln Electric and Southwest Airlines) exist in hyper-competitive markets. Every year they must battle for revenues, earnings, and market share while supporting the employees whose work permits the achievement of company targets in these areas. A third similarity is that leaders in each of the three, over a long period of time, have worked very hard to avoid the standard practice of laying off workers when business activity declines. These organizations have not lain off a full-time employee either since their founding or for more than sixty years.

One purpose of this article is to profile organizations who have been able to endure difficult economic times — including the present one — without resorting to significant furloughs and layoffs. There are considerable personal, social, and economic costs associated with layoffs, and it is important to understand how some organizations are able to avoid them.

This article has also been undertaken because reports on Lincoln Electric, Southwest, and SAS in the popular and business press and in textbooks are often dated, and report piecemeal on what makes these firms effective and unique. Practitioners and business instructors require treatment of each company that is contemporary, complete and operational, and yet concise.

Comprehensive understanding of each organization is important because the success of these organizations is not the result of one policy, practice, or feature. As these organizations and those who have studied organizations remind us, many organization elements impacting employees must be present and aligned in order to achieve impressive outcomes. While Lincoln Electric, Southwest Airlines, and SAS Institute are potentially models for others, this is precisely why transitioning to their policies and practices may be difficult.

These examples also illustrate that profound trust in the top management of an organization is necessary to obtain the enviable employee attitudes and outstanding employee performance these organizations have achieved. In how many organizations today is there this trust? For these reasons, replicating the philosophy, policies, and practices may not be easy, even if it is desired, and may require at the minimum entirely new organization leadership.

The remainder of the article will discuss, in turn, Lincoln Electric, Southwest Airlines, and SAS Institute. For each organization, important background and overview information is presented; core company practices identified, and recent information and the author’s overall evaluation and summary comments are provided.

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LINCOLN ELECTRIC

Background and Overview

Lincoln Electric was founded in 1895 by John Lincoln in Cleveland, Ohio, and is based there today. In 1911, Lincoln Electric began producing arc welding equipment and supplies to meet growing demand for this technology. Today, the company is regarded as a technological leader in these areas. John Lincoln was succeeded by his brother James in 1914, who would remain as chief executive officer (CEO) until retiring in 1965, an exceptionally long period of service. Although the company is 115 years old, it has had only seven CEOs. Many of these and most company managers have risen through the ranks, assuring exceptional continuity in organizational policies and practices. It was James Lincoln’s philosophy, including his beliefs about workers and workplace relations, that would spark and shape the company practices that have made the company well known.

Today, Lincoln Electric has approximately 3,300 employees in the United States, most in Cleveland. Before 1950, the company opened plants in Canada and Australia. Since 1950, Lincoln Electric has expanded and now has manufacturing plants in 20 countries, distribution and sales partnerships in 160 nations, and a workforce outside of the United States of about 6,000. The global welding market represents approximately $20 billion in sales annually. Lincoln Electric has the largest market share, about 14%. Its nearest competitor has a market share of approximately 11%.

Core Company Practices

High employee productivity, cost control, and flexibility in responding to customer demand and needs have contributed greatly to the company’s success. These outcomes trace to five major company practices: (1) a piecework compensation system in manufacturing; (2) a year-end bonus for every employee; (3) an advisory board of elected employee representatives and an open-door policy; (4) a guaranteed employment plan; and (5) an employee stock ownership program. With the exception of the guaranteed employment plan, operating for years but formalized in 1958, the other practices have been present at Lincoln Electric since its earliest days. Manufacturing facilities in Canada and Australia have policies and practices that virtually match those in the United States, yet in Europe, South America, and Asia modifications to the core company practices have been necessary. The following sections examine the core practices and other company features.

Piecework compensation system

Piecework compensation systems, in which an employee is paid based on his or her productivity, have a long history of use in the United States. In most instances, they have been replaced by hourly compensation for workers.

The piecework program at Lincoln Electric was installed early in the company’s history in 1915 and has continued with remarkably little modification to its policies to the present day. It has been reported that Lincoln employees regard the piecework program as a source of great strength for the company. This compensation method is used with 90% of the employees who are directly involved in manufacturing. Piecework employees do not receive hourly compensation. Office workers at Lincoln Electric do not participate in the piecework program, though they participate in the other programs to be described.

James Lincoln was aware of the bad reputation of piece- work among workers, labor leaders, and the general public, which continues today. In 1914 James Lincoln wrote: ‘‘The great difficulty was that as soon as a man started to increase his earnings (the piecework rate) was renegotiated and his earnings reduced. We feel that it is essential that that sort of thing should not occur.’’ At Lincoln Electric, once a price is established for a job, that price remains unless a new method or new machine is introduced. Also, at Lincoln, there was and is today no upper cap on what a worker can earn in wages, a rare arrangement where piecework is used.

Piece rates are established through observation and timing, and a rate is set for an operation to permit an employee working at a normal level of productivity to earn a wage that would be earned in the local labor market for that job. Piece rates are modified occasionally in response to cost-of-living changes. Employees may be asked to move from one job and work area to another to help the organization as demand for products changes. A piecework worker’s wages may fall, and the new assignment may last weeks, months, or a year.  However, a worker knows that others have experienced or will experience this, and is aware that he or she is still employed: elsewhere, he/she would have been laid off.

Year-end bonus program

Every employee at Lincoln Electric participates in the year-end bonus program, in which employees receive a portion of Lincoln profits. In recent years, 32% of the annual profit earned before interest on debt and taxes has been set aside for the bonus. Remarkably, especially when one considers the severity of national business cycles, for every year from 1934 through 2009 Lincoln was able to distribute a bonus to workers. Announced in December, year-end bonuses at Lincoln Electric are typically significant: since 1955, it has averaged 77% of an employee’s annual base pay. Historically, it has ranged from 25% to a very rare 120% of base pay. Bonus awards are based on merit, and Lincoln has employed for decades a formula that assigns weights to employee work characteristics and contributions to the company.

Several times a year, every employee performing piece- work is rated by his or her supervisor on five different performance measures, each measured on a 20 point scale: productivity; quality of the work performed; demonstrated adaptability and flexibility on the job; his/her dependability and teamwork behavior; and the employee’s awareness of and compliance with environmental, health, and safety priorities. An employee can receive more than 20 points on a scale if someone in the workgroup receives less. Though quality control processes are in place, it has been claimed that the care workers take in manufacturing caused by the year-end bonus program and the evaluation criteria enable one-floor supervisor to manage 60—70 workers, a very low ratio for U.S. manufacturing firms.

Hourly and salaried employees at Lincoln Electric are rated on a slightly different set of criteria. A worker’s average percentage rating across the year influences the size of the bonus received. Persistent ratings below 80% lead to coaching and continued ratings at or below this level can lead to dismissal.

Advisory board and an open-door policy

James Lincoln understood that worker attitudes about the company and management had a significant bearing on the organization’s success. In 1914, he formed, as did other organizations at the time, a board of employees elected by workers that would help him stay abreast of the sentiments of employees and influence his decision-making.

Over the years, the recommendations of the board have been accepted and implemented by management. Remarkably, the Advisory Board has met about every two weeks since the time it was established. Discussions here have led to the introduction of most of the core company practices and other workplace policies that in many cases were a first for workers in the American economy, such as group life insurance (1915) and paid vacations (1923). An open-door policy was also established, permitting an employee to meet with and discuss an important issue with the CEO or the company’s president, a policy that continues today.

Guaranteed continuous employment plan

James Lincoln believed that organizations were hurt by the tendency in business cycles to lay off skilled workers. Later, when business conditions improve, productivity suffers as new employees have to be hired and trained. Lincoln was also well aware of the economic and psychological impact of layoffs on workers and families.

The guaranteed employment plan does not guarantee every Lincoln employee a job. The plan covers permanent employees in Cleveland who have completed at least three years of service. Some further understanding of how the company operates and its hiring practices is important in understanding how this plan works. In good economic times, the company makes extensive use of required overtime and limited use (5% of Cleveland employees) of part-time workers, so that it does not have to lay off full-time workers initially when business conditions reduce orders. Executives know the company is impacted by business cycles and assume there will be future slumps in orders. When business orders decline, the first priority is to bring work back into the company that may have been contracted out to external suppliers. Then, part-time workers are let go, and overtime is reduced or eliminated. The probationary period of employment is an unusually long three years, to permit new hires to receive the training and support needed to meet the high- performance demands of their positions, and permit assessment of their work characteristics. If further cuts are required, hours are reduced down to thirty hours. Under the plan, workers are not guaranteed a particular job or rate of pay and must be willing to accept a transfer from one job to another. Employees may be asked to assume tasks that are unrelated to their previous work. If further workforce reductions are required, those in the probationary period with poor performance ratings will be considered next, then those above the three-year mark with consistently low-performance ratings. The above scenario applies to those paid through piece- work or on an hourly basis. The hours of office workers and professional staff are likely to increase, as they are challenged to bring piecework and hourly workers back to work by selling more, cutting costs, and creating new products. The outcome of this decades-long effort to avoid layoffs is impressive: For more than 60 years, no permanent Lincoln employee in Cleveland who meets the company’s performance standards has been laid off due to a lack of work.

Employee stock ownership program

Employee stock ownership contributes to employee interest in the continued and long-term success of a company. Lincoln Electric employees have been able to purchase company stock since the 1930s. Public ownership of Lincoln shares only traces to 1995, when the company issued shares as a consequence of early, costly, and ill-fated expansion attempts in Europe. At the end of 2009, Lincoln Electric had approximately 42 million shares of stock outstanding, with approximately 12% held by company directors and executives, the Lincoln family, and the Lincoln Electric employee 401(k) plan. Institutions hold about 62% of shares and individual investors, likely including Lincoln employees, own the remaining 26%. No doubt reflecting the stock market’s trust in management to continue to generate sales and earnings, for each year of the five-year period 2005 through 2009, Lincoln Electric significantly outperformed both Standard and Poor’s 500 and 400 — in recession-year 2009, for example, by an impressive 65% and 44%, respectively.

Other important company features

Conservative financial management

Maintaining a large cash reserve and low debt has permitted Lincoln Electric to both survive bad economic times without layoffs and to capitalize on acquisition opportunities in the U.S. and abroad.

Other employee benefits

Employees at Lincoln Electric receive paid days off for job-related illnesses and injuries, and as otherwise required by law, but no paid sick days or paid holidays.

Also, the company does not pay for medical insurance for its employees, yet requires that employees have health coverage for themselves and their families and makes available to employees a number of plans at group rates. The company’s goal for decades has been to generate and distribute a generous portion of profits so employees could afford this coverage. The full annual cost of an employee’s health insurance is deducted; pre-tax, from the profit-sharing bonus before it is distributed. The average annual health insurance premium for a Lincoln employee is about $6000. Premiums range from just below $2000 for an employee with a Health Savings Account (HSA) to approximately $13,400 for an HMO plan covering a family. For some employees, then, the premium represented a sizable portion of the year-end bonus distributed in 2008 and 2009, $28,873 and $17,000, respectively — difficult years for the company. Nevertheless, the average earnings of a Lincoln worker (excluding top executives) in 2008 were approximately $70,000.

Lincoln Electric offers employees a 401(k) plan and makes contributions to an employee’s account of from 4—10% of base wages, depending on years of service. Two to five weeks of paid vacation are also provided, depending on years of service.

Update

Indicating how difficult the domestic and international economy was continuing to be, in February 2009, following poor fourth-quarter results for 2008, Lincoln Electric announced plans to reduce by 10% its global workforce, reduce executive compensation, and implement other cost-saving initiatives. The specific actions Lincoln subsequently undertook reveal its continuing desire to avoid furloughs and layoffs. Entering 2009, the number of temporary and contract employees had been cut and the hours of most hourly and piecework employees had already been reduced to 32 hours per week. In Cleveland, it offered for the first time a voluntary retirement plan to a portion of its workforce, accepted eventually by 300. From 100 to 200 employees were terminated for performance reasons. The wages of salaried employees were cut by 5%, management employees by 10%, and top executives by 20—45%. Lincoln also froze merit raises and external hiring, suspended 401(k) contributions, and cut planned capital expenditures.

Defending Lincoln Electric’s continuing commitment to guaranteed employment in an interview, current company chairman, president, and CEO John M. Stropki provides an explanation that could well have been voiced by James Lincoln many years before. He states: ‘‘when somebody loses their job, and they’re sitting at home every day, I think they lose a good part of their dignity. . . In our system, they come to work every day. Maybe they go home a little bit earlier, or maybe their paychecks are a little bit less, but they don’t lose their dignity.’’

Evaluation

At Lincoln Electric, employees work hard to benefit themselves and their families, their coworkers and their families, and to make the company successful and competitive. Lincoln management reciprocates by maintaining a high degree of transparency, working hard to maintain employment and employee wages, and by honoring its commitments. Employees work in an environment that acknowledges and respects their capabilities and dedication. Employees trust their leaders and their leaders’ commitment to market leadership and company success, and to them. Lincoln is much more a model for other organizations because of these features and outcomes, and less so for its piecework compensation program, which would be difficult for many organizations to apply.

However, Lincoln Electric’s work environment is not for everyone. Hard work is required every day, individual performance is monitored closely, there is compulsory overtime, no sick pay, and earnings can fluctuate because Lincoln requires flexibility in assigning employees to tasks. Materially, Lincoln Electric workers seem to do very well, especially those in the factory who have a high school education or less. The piecework program imposes no upper ceiling on a work- er’s wages, average overtime is from five to 10 hours per week, and there is the frequently significant year-end bonus. Employees in Lincoln’s offices and labs receive competitive wages, supplemented by the generous year-end bonus. Office and lab employees are affected by a frugality that characterizes the company. Off the factory floor, offices and spaces at Lincoln Electric are spartan and sometimes cramped, and the reported salaries of top managers are very modest by today’s standards, suggesting low ceilings on the compensation available at the top of career ladders. Wage compression, a reflection of the company’s egalitarianism, has always been practiced at Lincoln Electric.

Yet, reports suggest that employee turnover at Lincoln Electric is low — overall, 6%, about one-fifth of the turnover in U.S. manufacturing firms. Also, workers have never desired representation by one or more unions. Different generations of many families are present in Lincoln Electric’s workplaces. The company’s commitment to profitability and to its success and the guaranteed employment program permit employees to buy homes and put down roots. This opportunity to experience employment security, geographic stability and security, high earnings — and managerial decency — likely weigh heavily in an employee’s decision to join and to remain at Lincoln, despite the sacrifices and shortcomings that may be involved.

SOUTHWEST AIRLINES

Background and Overview

Founded in 1971, Southwest has not only survived as a relative newcomer in a challenging industry but has achieved over the past 40 years remarkable and consistent business success. The airline’s strategy and operations have changed the industry, and Southwest has become a model for every other airline. Southwest began with four planes serving Texas airports. Its first profitable year was 1973 when it had a net income of $175,000. In 2009, Southwest had its 37th consecutive year of profitability — unmatched in its industry. Its low fares in a time of recession combined with adroit fleet management resulted in Southwest achieving a record full-year load factor of 76% in 2009 — for all Southwest flights, 76% of seats were filled. Southwest’s 2009 passenger revenue of

$9.5 billion was the fourth highest in the U.S. airline industry. Both its passenger revenue and total revenue (over $10 billion) are three times larger than its nearest low-cost competitor, Jet Blue. Southwest is the nation’s largest airline in terms of the number of domestic passengers carried, and today has 537 aircraft. The airline serves 68 cities in 35 states, and in 2009 had over 34,000 full-time equivalent employees. It has a market share of 60% based on the top city-pair markets in the U. S. and the number of passengers carried in these markets. Of all the domestic airlines in existence since 1987, Southwest has the fewest customer complaints and the best on-time performance, and for years has ranked at or near the top of Fortune magazine’s ‘‘100 Best Companies to Work for in America.’’

Core Company Practices

Southwest’s 2009 Annual Report indicates that the company has three passions, ‘‘. . . our Performance, our People, and our Planet,’’ the third item is reflecting the company’s new interest in responsible, sustainable practices. Southwest’s focus on the first two, performance and people, across its history, explains much of the success it has achieved.

Southwest’s strength and success as an organization are best understood by examining (1) the company’s primary strategy implemented over many years, and the operational requirements of that strategy; and (2) the culture and practices created in support of that strategy.

Southwest strategy

Southwest was founded by Herb Kelleher and Rollin King to provide frequent, low-cost service in potentially busy markets located less than 500 miles apart. Early on and well into its history it sought out markets where customers were not served or underserved by air travel. Its fares were designed to compete with travel by car or bus rather than other airlines. Southwest’s emphasis on low fares and skill at keeping fares low has positioned the company well as air travel has become more of a commodity business, where the ticket price is very important. Southwest’s first and current headquarters is at Love Field, Texas. The three letters, LUV, the company’s name on the New York Stock Exchange, acknowledges the airline’s roots and reinforces that ‘‘love’’ of others, including fellow employees, is part of the company’s culture.

Southwest’s strategy dictated, in the language of the airline industry, point-to-point, short-haul service. Major American airlines then and today utilize a traditional hub-and-spoke model, long-considered the most profitable way to run an airline. The advantages of the hub-and-spoke model, in part, come from economies of scale. Hubs permit passengers from a variety of cities to be accumulated and combined for flights, boosting the percentage of seats filled on flights from the hub, and flight revenue. The accumulation of passengers at hubs permits more flights per day. Flying from one hub to another is primarily long-haul service, which commands higher and more profitable airline ticket prices, as well.

In a point-to-point, short-haul service model, an airline, does not have the same ability to command high ticket prices. Further, airline staff have to be duplicated at each location. To offset these added costs and make a profit, a carrier must be very cost-conscious and maximize the revenue generated by the airline’s physical and human resources. The way Southwest has attempted to achieve this is to engineer quick turnarounds of its aircraft at gates, to minimize the time they are non-revenue generating assets. Early in its history, Southwest discovered many ways to speed the turnaround of aircraft, including using only one aircraft type, flying to less-congested airports to avoid flight delays, and by offering limited services, such as no in-flight meals (their loading takes time).

Quick turnarounds at a gate are not possible without a high level of coordination among the distinct groups of personnel associated with a commercial aircraft, and a high level of employee productivity. There are 12 distinct functions or groups associated with turning around aircraft, and, traditionally, these functions embrace, and are characterized by, different goals, expertise, and status. While their cooperation was essential to Southwest, these groups do not have a history of cooperation in the airlines industry.

The strategy that Southwest embarked on was a precarious one if a high degree of coordination, cooperation, and mutual assistance could not be achieved among staff at a gate. Starting in its earliest days, Southwest, guided by its founders and early leaders, worked hard to evolve a culture that resulted in relationships at the gate and, indeed, throughout the organization characterized by hard work and what one writer describes as ‘‘shared goals, shared knowledge, and mutual respect.’’ The culture also emphasized excellent (though ‘‘no frills’’) customer service. The next section describes Southwest’s culture.

Southwest airlines culture

Southwest’s web site lists the company’s core beliefs and values, the essence of its culture. According to many who have studied, worked with or for Southwest, these are widely embraced and demonstrated by employees and are a key factor in its success. The three key organizing values are Warrior Spirit, A Servant’s Heart, and Fun-LUVing Attitude. Associated with each of the three, as Table 1 shows are from six to eight statements, most clear on their face, that operationalize the values. Employees across the organization are empowered to make decisions using these values as a framework.

Because they provide a more complete picture of South- west’s culture, it is important to consider descriptions of culture provided by employees and a researcher who studied the company’s culture and the cultures of other U.S. airlines. In her book Lessons in Loyalty, Lorraine Grubbs-West, a former Southwest senior executive, distills from 15 years at the airline nine key practices:

• Hire for attitude — train in skills.
• Immerse everyone in the culture immediately.

Keep ‘em learning — consistently present learning opportunities, and use the expertise of your leaders in employee training.

People give as good as they get — show employees they are valued: employee recognition has a very high yield.

• Find the kid in everyone — foster a fun environment.
• Do more with less — and measure everything.

Luv’em in tough times — take good care of your people when they or the company are going through tough times.

• Do what’s right.

Nurture the corporate family — cultivate relationships with community partners, customers, and vendors, and include family members as part of your corporate family.

From her two-year study of the U.S. airline industry, Jody Hoffer Gittell identifies ten primary organization practices that distinguish southwest’s culture from those of its competitors and recommends them for organizations wishing to become high-performance organizations.

Lead with credibility and caring. Gittell claims that credibility is built over time by repeated episodes of organization leaders ‘‘telling it straight.’’ It is also important that employees sense that top leaders care deeply about their wellbeing, evidenced at Southwest by its no-layoff policy and record. At Southwest, caring is demonstrated every day and is a quality evaluated in selecting managers.

Invest in frontline leadership. Organization leaders modelling desired behavior is important at all levels. At Southwest, a particularly critical role is played by frontline supervisors who work side by side with frontline employees and often assist in frontline work, such as loading and unloading aircraft. Frontline supervisors function as servant-leaders or player-coaches. Though Southwest employees are empowered, the company, counter-intuitively, hires more frontline supervisors than other airlines and trains them to model behavior, build employee knowledge, and provide feedback.

Hire and train for relational competence. Rather than hire for and train primarily in functional expertise, at Southwest, employees are hired for attitude first and then trained in the skills needed. Put succinctly by Lorraine Grubbs-West, ‘‘Hire ‘nice,’ because you can’t train ‘nice.’’’ Pilots and mechanics are also required to possess appropriate attitudes, for example, the lack of an attitude of superiority. Carefully developed selection procedures are used to select employees who are interested in building and maintaining good relationships with colleagues, customers, and suppliers. Through training, employees become familiar with other work processes.

Use conflicts to build relationships. Southwest’s view is that conflicts are normal and expected, given the time pressures and interdependence of the flight departure process. Resolving conflicts is viewed as important and the responsibility of every employee. It is understood that resolving conflicts strengthens relationships.

Bridge the work and family divide. At Southwest, employees are able to personalize their work areas and are encouraged to be themselves at work, to view other employees as ‘‘family,’’ and to take an interest in their personal lives — extending help and compassion in times of tragedy or trouble, and celebrating major events with them. At each Southwest station, a Culture Committee plans social and charitable events.

Create boundary spanners. Boundary spanners coordinate the work of groups whose knowledge, goals and status are different. They are important when effective performance requires the close coordination, mutual understanding, and assistance of various groups. At Southwest, Operations Agents are important boundary spanners, and their efforts are vital in achieving a quick turnaround of aircraft and on- time departures. The work of Operations Agents at Southwest is ‘‘hands-on’’ and ‘‘face-to-face’’. Other airlines, to their detriment, have reduced their number, centralized the work, and rely on coordination through computer interfaces.

Measure performance broadly

Where important work processes require teamwork, develop measures that assess the effectiveness and success of the entire team rather than using measures that evaluate individual or unit contributions. Sharing the results of measures of this kind foster productive team discussions on improvement and avoids unproductive finger-pointing. These team-level measures are supplemented with other methods that provide individuals and units with important feedback.

Keep jobs flexible at the boundaries. Southwest has clearly defined jobs but makes clear in each job description that part of a job is to do whatever is necessary to make an operation successful. At Southwest, ‘‘whatever else is needed’’ is typically appended to each job description, including jobs where employees are represented by unions.

Make unions your partners, not adversaries; and build relationships with others on whom you rely. Like other airlines, Southwest is heavily unionized. The company, with its emphasis on building effective working relationships, has pursued a partnership rather than an adversarial relationship with its unions, and the emphasis in labor-management relations is on problem-solving. Southwest also partners with other groups upon which it relies, including airports.

Maintain financial reserves. High cash reserves and a low level of debt permit Southwest to manage in periods of air- traffic decline without resorting to furloughs or layoffs.

Employee recruitment, selection, and turnover

This and the remaining sections provide additional information on Southwest’s operations and culture. As previously mentioned, southwest seeks to maintain a team-oriented, egalitarian, and high-performance culture through careful employee selection. The company has identified attributes associated with effective performance in specific positions. And in the company in general and uses, in part, a behaviorally-based interview process to select new hires. Despite this care, one report indicates that approximately 20% of new hires leave the organization during the initial one- to five-week training period, and another 15% leave within the first six months. Overall turnover at Southwest is low by industry standards and reports suggest it is fewer than 10%. New hires usually join the company at an entry level and are expected to progress in the organization.

Compensation and benefits

Southwest employees work hard for their compensation. On the ground, quick turnaround of aircraft is required. Also, flight crews for Southwest and other low-cost carriers spend almost a third more time in the air than their counterparts in the non-discount part of the U.S. airline industry. Despite Southwest’s low fares, yet because of the volume of business those fares generate and an egalitarian philosophy, Southwest employees are among the best-compensated employees in the airline industry.

Wages and salaries

At Southwest, all major employee groups receive wages and salaries that are either the best or among the best in the industry. Average wages and salaries at Southwest were $75,625 in 2009 and have been the highest among all U.S. airlines for every year since 2006.

Pension and benefits

Southwest matches dollar for dollar employee pre-tax contributions to a 401(k) plan up to 7.3% of earnings. In 2009, average pension and benefits per employee at Southwest ($18,695, and 19.8% of average total compensation per employee) were highest among low-cost carriers and fifth among the 14 largest U.S. airlines — with only $700 separating first and fifth place.

Employee stock purchase plan, profit sharing, and other benefits. An employee stock purchase plan permits all employees to buy shares of Southwest stock at a 10% discount. Employees own about 10% of the company’s stock. Fifteen percent of pre-tax income is contributed to the employee profit-sharing plan; a program started in 1973. Southwest offers all employees a range of medical insurance products with varying co-pays, and other benefits such as long-term disability insurance, a dependent and healthcare spending account, and an adoption assistance reimbursement benefit. Reflecting its culture of caring, Southwest and its employees fund a program designed to help individual employees suffering financial hardships resulting from a catastrophic event, or hundreds in a region where disaster strikes.

Other reward and recognition programs

A variety of corporate and local programs encourages and reward desired employee behaviors, and reminds everyone what behaviors are important. Lorraine Grubbs-West describes important national programs in which potential award recipients are nominated by their managers and peers:

1. The President’s Award is presented at an annual banquet to employees who have continued to contribute to the company despite personal challenges, or to employees who have gone well beyond what is expected during the past year?
2. The Winning Spirit Award is a coveted award that is given every other month to any number of employees whose actions reflect company values.
3. The Heroes of the Heart Award presented as close to Valentine’s Day as possible, is given to a behind-the-scenes workgroup that ‘‘has gone above and beyond’’. The name of the workgroup is painted inside a big heart on a Southwest aircraft.

Update

Southwest today continues to emphasize low fares, though its average passenger flight of about 650 miles reflects an offering of longer flights. The airline still extensively uses smaller, secondary airports, though many flights today originate from major airports like Philadelphia and Denver. Southwest still practices it is ‘‘no frills’’ approach in air travel. The company responded to the significant downturn in air travel beginning in 2007 and rising fuel prices by offering a voluntary retirement program to certain employee groups. CEO Gary Kelly reports that the number of Southwest flights was reduced during this period, the work remaining spread out, and employee hours and earnings reduced. Significantly, while other airlines are resorting to furloughs and layoffs and the imposition of new passenger fees to boost earnings,

Southwest has not implemented furloughs or layoffs, or new fees.

To boost passenger volume and revenue, Southwest low- ered some fares and conducted fare sales in 2009. Southwest reduced 10% of total flights in over-served markets, shifting resources and service to underserved markets like Denver. In 2009, an additional revenue of $20 million was realized for a portion of the year from two new initiatives — passengers, for a $10 fee one-way, could now have preferential access to seats and overhead compartments, and for a fare of $75 one- way, were able to have a small cat or dog accompany them in the aircraft cabin during flight. To manage costs, in 2009, Southwest imposed a freeze on a headcount and senior management salaries, reduced planned capital expenditures, and deferred the delivery of new aircraft.

Acquisition of Air Tran Holdings, Inc

In 2010, Southwest announced the acquisition for $1.4 billion of low-fare rival AirTran Holdings, Inc., founded in 1993 as Value Jet. With 8000 employees, AirTran is less than a quarter of Southwest’s size and has 686 daily departures compared with Southwest’s 3,200. The acquisition will open up new cities for Southwest; will provide Southwest with gates for the first time at Atlanta’s Hartsfield-Jackson Airport, the nation’s busiest, and Washington DC’s Reagan-Washington National Airport; and additional gates and flights at other airports currently served.

Southwest’s presence in Atlanta and increased activity at primary and busier airports raises the issue of whether Southwest will be able to continue to meet its goals of quick  turnarounds and on-time departures. Recent data from the

U.S. Department of Transportation suggests that Southwest may be having more difficulty in operating on time. From 2009 to 2010, Southwest dropped from second to eighth among 19 major U.S. airlines in flights arriving on time.

Acquisition issues

Different unions represent workers at each airline, so there are different union contracts that must be merged. An additional complication is that about 83% of Southwest employees are represented by a union, while at AirTran the proportion is only 50%. It is expected that many at AirTran will be switching to new unions. A second issue, largely to be handled by the unions, is seniority list integration. Many AirTran employees are expected to lose seniority. Underreported in the news on the acquisition is the merging of the cultures of the two airlines. Comments by Southwest CEO Gary Kelly permit some cautious optimism in this regard and suggest the cultures are similar. In a Southwest press release, Kelly states: ‘‘Both companies have dedicated people with kindred Warrior Spirits, who care about each other, and who care about serving Customers.’’ Kelly’s assertion is supported by comparative airline statistics.

Evaluation

Southwest employees continue to work for a company whose leaders seem determined to continue their market success, profitability, and commitment to them. Like Lincoln Electric, Southwest practices lean staffing and financially conservative management, maintaining cash reserves and low debt so it can weather poor economic times without resorting to furloughs and layoffs.

Because of the continued success of the Southwest model and the commitment of Southwest management to employees, the company offers employees job security, and good compensation and benefits. Management strives to communicate frequently and honestly with employees, and has an open-door policy. While differences between Southwest stations have been observed, research indicates that working relationships at Southwest are superior to those an employee is likely to experience at other airlines. Despite the emphasis at Southwest on keeping costs down, supervisors are abundant and experienced and are selected and trained to provide frontline employees with training, hands-on assistance in busy times, and quick intervention in conflicts. Diversity and individual expression are embraced at Southwest. Organization, unit, and individual successes and holidays are celebrated; there are many employee-appreciation events; and employees provide assistance to individuals, families, and communities in times of adversity.

The above indicates that for an employee there are many positives associated with employment at Southwest. Southwest appeals to employees who enjoy expressing a ‘‘Warrior Spirit’’ on a daily basis — who like working hard, like teamwork, and an ‘‘all hands on deck’’ organizational philosophy. However, the turnover of information concerning new hires indicates that Southwest may not be the perfect working environment for some. Hard work and in some cases long hours may regularly be required by a company that believes in lean staffing and requires employees to ‘‘do whatever it takes.’’ Air traffic is subject to a great deal of uncertainty, and customer relations at times can be stressful and unpleasant. Also, some individuals do not enjoy social events at work, and some may resist the airline’s dictum that employees treat fellow employees as ‘‘family’’ by taking an interest in their out-of-work successes and difficulties. This blurring of the work-family divide, which also includes non-work time being spent in community activities, may not be desired by some, as well.

SAS INSTITUTE

Background and Overview

SAS, which originally stood for Statistical Analysis System, was founded in 1976 by CEO James Goodnight, a PhD in statistics and formerly a professor at North Carolina State University. SAS is the world’s largest privately held software company, with revenues of $2.3 billion in 2009. Goodnight owns two-thirds of SAS and a partner the remaining third.

The company is headquartered in Cary, North Carolina, a city of 137,000, adjacent to Raleigh, the state capital. In Cary, SAS is located on a 300-acre campus, described in one report as, ‘‘beautiful, many of the buildings are architecturally interesting, and the grounds are inviting.’’ SAS has 4,200 employees in Cary, another 1,000 in the United States, and 7,000 employees based outside of the United States in 54 countries. The culture and amenities that have made the company’s headquarters well known also exist in its operations across the world.

SAS is known for its products, culture, and employee- and family-centered programs. In 2010, SAS was first on Fortune’s list of the Best Companies to work for, and on best-employer lists around the world; and the company has appeared on Fortune’s list in each of the thirteen years the list has been published, ranking in the top five, five times. The average employee tenure at SAS in Cary is ten years, and

300 have worked for SAS for 25 years or more. Annual employee turnover is low and reported to be from 2 to  4%, compared with an average turnover of 22% in the U.S. software industry.

SAS is a leading organization in the rapidly growing field of business analytics or business intelligence. Principally, SAS creates software that permits businesses and other organizations to extract information from data they collect, information that shapes action. SAS has approximately 45,000 customers worldwide.

Core Company Practices

The success of SAS is attributable to new product development, product refinement influenced by customer experience, and quality customer support. Important organization elements that have contributed greatly to SAS’s success are:

(1) a clear set of organization values, matched to market realities, and many policies and practices that reflect these values; (2) a focus on customer requirements and satisfaction; and (3) careful employee selection and the creation of working conditions that have led to high employee productivity, creativity, dedication, and satisfaction. The following sections describe these organization elements.

Company values The SAS 2009 Annual Report lists the principles that still guide the company:

• Commitment to customers.
• Appreciation of and dedication to employees. Adherence to the highest standards of quality and performance of our software.
• Continual innovation that creates lasting value.

A similar set of values, primarily customer-focused, are presented first in SAS’s Corporate Overview on its web site:

Approachable — we are accessible to our customers and make it easy for them to do business with us.

Customer-driven — we work closely with customers to understand and solve their business issues.

Swift and agile — we seek to reduce complexity in a constantly changing world.

Innovative — we champion excellence by creatively and constructively challenging the status quo.

Trustworthy — we act with transparency and openness, and always keep our promises.

The Great Place to Work Institute, which selected SAS Institute as its 2010 Best Company to Work for in America, notes that while many of these values are common among organizations today, SAS is different in that its research indicates that ‘‘what is ‘spoken’ with respect to people, quality and service is supported by behavior that reinforces every message.’’ James Goodnight has said that if  you  put employee and customer needs first the benefits will follow.

Customer care

SAS offers customers software products, training, learning resources, and customer support, technical, and consulting services. Recent customer surveys report that over 90% of SAS customers are very satisfied with SAS software, and a higher percentage would recommend SAS to colleagues. SAS involves customers in all stages of new product development, from planning to testing and implementation. Annually, SAS formally seeks feedback from software customers and suggestions on new features they would like to see added to software and services. SAS annually sponsors user and executive conferences that provide forums for the exchange of ideas and the basis for product enhancements and new product development. An SAS Chief Technology Officer Advisory Board, consisting of individuals able to represent their companies’ business needs and technology requirements, is another important source of ideas and feedback. Finally, SAS has evolved new internal methods of obtaining ideas and feedback from employees to supplement one-on-one conversations and small group meetings — executive and employee blogs and live Webcasts featuring interviews with SAS executives, on-air questions, and live audience polls.

Employee care

James Goodnight believed from the start that retaining talent was essential to the company’s success and growth. The employee- and family-friendly-and-centered culture and programs, employee benefits, and other amenities at SAS were created with this in mind and deemed especially important because the opportunity to own company shares of stock would not be available. The following sections describe these practices.

Job security

One report indicates that Goodnight values ‘‘constancy . . . continuity and commitment,’’ and ‘‘distains staffing levels that fluctuate with business cycles.’’ Accordingly, SAS has not resorted to layoffs in its history, including the most recent two-year period, a difficult one for the

Company and a period in which many organizations were laying off employees

Hours

In explaining the appeal of SAS as a place to work, a SAS executive in Canada says: ‘‘A lot of people who come to SAS are looking for a safer place to work in a very inhumane, insane industry and that’s what SAS provides.’’ The formal work week is 35 hours, and many employees can establish their own schedules. Hours are not tracked, and there is no monitoring of sick days, though the average reported to be taken annually — 2—2.5 — is very low. Depending on their jobs, employees have the option of working from home if they need or desire to. There is no dress code. Concerning the great autonomy extended to workers, Goodnight says: ‘‘from the earliest days . . . we wanted to create an environment similar to the university, where you have the freedom and flexibility to be creative.’’

Work expectations. Because employees tend to remain, SAS is very selective in whom it hires, and it can be: the company receives an extraordinary number of resumes for its open positions. In recruiting and hiring SAS seeks new employees with characteristics that mirror its values. All employees including new hires are treated as if they are important to the organization and will make a difference. The company encourages creativity and personal growth and permits employees considerable autonomy, yet it holds employees to high standards of performance and is willing to dismiss individuals whose performance continues to disappoint. Goodnight has summarized this approach as, ‘‘Hire hard, manage open, fire hard.’’

Workspaces and work environment. SAS employees are provided with private offices that permit the concentration needed to develop software code. Goodnight believes that creativity is inspired by art. More than 5,000 paintings hang in SAS buildings across the campus, and there is abundant outdoor sculpture, as well. Two full-time artists are on the SAS staff.

Compensation and benefits, company centers, and other amenities

Compensation and benefits

SAS pays competitive wages in relation to its industry. The benefit package employees receive is equal to about 40% of their compensation, an extremely generous offering in relation to what most Amer- icans receive (about 20—25%). SAS employees receive tuition subsidies, participate in health and profit-sharing plans, and a retirement plan with company contributions. Employees pay 10% of their health care premiums. The profit-sharing program provides employees with a bonus of from 5 to 15% of their base pay, depending on company profitability. Depend- ing on organization performance; there is also a discretionary reward bonus for performance in addition to profit sharing. SAS also has the following on-campus centers for the convenience and benefit of employees and their families, and to promote wellness and a healthy work-life balance.

The health-care center

Very popular and centrally located, the health-care center, with a staff of 56, provides allergy shots, blood and pregnancy tests, consultations, examinations, and prescriptions. In 2009, 40% of SAS employees used the center, and there were 40,000 visits by employees and their families.

Wellness and work/life centers

Adjacent to the health- care center are two other centers. A wellness center offers a series of fitness and relaxation programs during the day, such as Pilates and yoga, Wii bowling, aerobics, and massage. The center also offers other health-related programs, including weight management and smoking cessation. A work/life center offers free educational programs on such topics as cooking and healthy eating, and educational programs, private consultations, counseling, and referrals that address family issues such as adoption, divorce, special-needs children, parenting, and elder care. It has been reported that 70% of SAS employees take part in offerings of wellness and work/life centers.

The recreation center

Available to employees and used extensively is a 66,000-foot recreation center that features a gymnasium, weight room, billiards hall, sauna, hair salon, manicurist, and an Olympic-size pool. There are also walking and running trails and on-site workday sport leagues.

Other amenities

The following amenities and services are also available on the SAS campus:

Two subsidized (but not free) on-campus day-care centers for 600 children, which transforms itself into a summer camp

A dry-cleaner, car-detailing service, a UPS depot, a book exchange, a meditation garden, an in-season tax-preparation vendor, and an orthotics store.

Three subsidized cafeterias that serve breakfast and lunches and offer take-out dinners to bring home at night; and kitchens in campus buildings that provide free snacks and drinks.

SAS subsidizes day-care costs and fitness center membership fees for SAS employees who do not work and reside in Cary.

Update

A poor business environment made 2009 a difficult year for SAS, a year in which there were no salary increases. Good- night reassured employees that there would be no layoffs. It is reported that his rationale was that he was in a better position financially to survive this cycle than his employees were. He did ask employees for help in reducing costs, and employees responded by identifying cost reductions that lowered expenses by 6—7%. No published reports could be found discussing the impact of the business downturn on profit sharing or other SAS programs.

Evaluation

A 2010 employee survey conducted to determine the best companies to work for in the United States found that 98% of SAS respondents indicated that often or almost always SAS is a great place to work, and 95% reported that often or almost always SAS is a psychologically and emotionally healthy place to work. The work of many employees at SAS is leading-edge,

Creative and important, and it is not surprising that working at SAS is experienced as satisfying. SAS employees like academics, author books and articles on business analytics. SAS strives to provide an excellent environment for employees in which to perform this work. Time taken from work is minimized by the on-campus location of cafeterias, daycare, healthcare, physical fitness facilities, and other resources. Also permitting employees to focus on their work are the benefits provided by the company and the willingness of SAS to share with them a portion of the profits generated by their work.

Employees at SAS are helped to lead healthy lives and to be successful at home, as well. A 35-hour week is expected, earlier reports on the company indicated that overtime is discouraged, and employees are permitted flexibility in  where they work. On-site daycare and a summer camp for children address the child care needs of parents across the year. SAS sponsors events for families and offers an abundance of health and educational programs and services of potentially great benefit to individuals, partners, and families. Concerning these program offerings, it may well be that other leading-edge work is being done by the employees responsible for these initiatives. Their many efforts intended to help employees lead balanced, healthy, and satisfying lives, the company resources invested, and the facilities that have been built may be unprecedented.

The issue of organization ownership is a crucial one going forward. Because SAS is privately held largely by Goodnight, he is free to allocate organizational resources as he wishes. For SAS’s current culture and operations to continue, it is probably important for the organization to remain primarily privately owned, or privately owned with some employee stock ownership. A significant number of shares in public hands, particularly if held by investment companies and pension funds, may impose new, short-term goals on SAS. The primary concerns of investors like these are share price appreciation and dividends. In the publicly held firm today, shareholder interests are typically placed above employee and even customer interests, and employees too often are viewed as ‘‘costs.’’ This is certainly not true at SAS today, where employee and customer interests come first, and employees in this knowledge-based business are seen as vital assets. Significant public ownership could well result in pressure on management to boost profits by reducing employee benefits and amenities.

CONCLUSION

We have considered three organizations that many would conclude have been consistently successful in both human and economic terms over considerable periods of time — from 34 to 115 years. These organizations, leaders in their respective industries, have enjoyed revenue and profit growth even in difficult times, and offer employees good wages, benefits, and employment security. What are lessons that can be learned from the three?

First, many of the managers in these organizations, including top managers, and many employees have opted to stay for the long run, if that is possible. For the organizations, we know the most about, Lincoln Electric and Southwest Airlines, long tenures characterize the workforces. This and promotion from within has permitted the continuation of strategy, culture and practices responsible for the organization’s competitive advantage and success.

Second, in each organization employees from top to bottom are willing to work hard every year in order to continue the success it has achieved. Success has not led to complacency. There seems to be a widespread understanding that success every year requires hard work every year.

Third, the beliefs and values of each organization, the essence of an organizational culture, run deep, are well matched to external realities and market requirements, prompt and shape individual and unit actions, and exert a profound influence on organization processes and programs employee selection, socialization and coaching, training, evaluation, recognition and rewards. In each of the three organizations, the stated, announced culture has been made operational. In none of the organizations are the stated beliefs and values embraced and acted upon by just a few.

Fourth, conservative financial management is practiced in at least two of the three organizations, Lincoln Electric and Southwest Airlines, and possibly the third, as well. Top management decisions and actions are characterized by restraint, yet careful, selective external investments are made to improve an organization’s competitive position. Healthy cash balances and a low level of debt are maintained, anticipating that there will be difficult economic times. These conservative practices permit an organization to demonstrate its commitment to employees by avoiding furloughs and layoffs.

Fifth, the three organizations are willing to make significant internal investments, as well, that are important in keeping the organization successful and leading-edge. Across its history and currently, Lincoln Electric invests in product improvement and new product development, and an employee and manager training. SAS Institute also commits significant resources to these areas: in 2009, an impressive one-quarter of its revenue, not profit, was invested in the first two of them. Southwest Airlines also invests generously in new employee and manager training, and encourages education and training across careers, partly as a means of transmitting and maintaining its culture.

Finally, the leaders of the three have decided not to succumb to external pressures to maximize short-term financial results. These pressures favor shareholders and in many organizations lead to furloughs or layoffs, even in good economic times. SAS Institute is in an enviable position in this regard as it is 100% privately owned. Both Lincoln Electric’s and Southwest’s continued records of profitability and reputations for ‘‘lean’’ operations have permitted the companies to pursue longer-term goals. These three organizations view their skilled and experienced employees as organization assets, important to use, retain, and profit from even in downturns, and essential to have when business conditions improve.

Two books provide additional information on the founding, philosophy, and practices of Lincoln Electric: Joseph A. Maciariello, Lasting Value: Lessons from a Century of Agility at Lincoln Electric (New York, NY: John Wiley & Sons, 2000); and Frank Koller, Spark: How Old-Fashioned Values Drive a Twenty-First-Century Corporation, Lessons from Lincoln Electric’s Unique Guaranteed Employment Program (New York, NY: Public Affairs, 2010). The more recent and excellent book by Koller, a reporter for the Canadian Broadcasting Company, features the histories and comments of Lincoln Electric leaders, managers, and employees, and explores in- depth the issue of layoffs and the wider applicability of the guaranteed employment plan. A recent video  featuring the company, Frank Koller, Lincoln’s CEO, and interviews with workers can be found at http://www.pbs.org/wnet/ religionandethics/episodes/july-9-2010/lincoln-electric/ 6583/. For Southwest Airlines, the book by Lorraine Grubbs- West, Lessons in Loyalty: How Southwest Airlines Does It — An Insider’s View (Dallas, TX: CornerStone Leadership Institute, 2005), provides many anecdotes illustrating how the stated

culture is practiced on a day-to-day basis. A book by Jody Hoffer Gittell, The Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance (New York, NY: McGraw-Hill, 2003), compares Southwest with other domestic carriers and identifies the principles and practices that set Southwest apart. A wealth of data comparing Southwest with other domestic carriers can be found at two web sites:

http://web.mit.edu/airlinedata/www/default.html and http://airconsumer.dot.gov/reports/index.htm. An informative interview with Southwest CEO Gary Kelly from late 2009 in which he discusses the airlines culture and leading Southwest can be found at http://www.youtube.com/ watch?v=k5gPd-zvbiU. Additional information about SAS Institute may be found in two publications at its web site: its Annual Report and the SAS Corporate Overview. The business magazine Fortune carried an informative article about the company by Robert Kaplan (February 2010) when it ranked SAS as the 2010 Best Company to Work For, and a Fortune video about the company can be found at http://money.cnn.com/ video/fortune/2010/01/20/f_bctwf_sas.fortune/.