Monday, September 21, 2015

General Radio and the K System

The future is filled with robots and drones and all sorts of people-replacing machines, and one wonders where all the replaced people are going to find work.  A new system is going to be needed - not just a tweeking of the present system but a complete rethinking of everything, from the bottom up.

Melville Eastham, who founded General Radio exactly 100 years ago, wondered about this very question in the early thirties. He and his partner, Henry Shaw, were impressed by the paternalistic philosophy Eastham had seen at a visit to the Carl Zeiss works in Jena, Germany. Ernst Abbe had bought out the Zeiss family in 1888, then gave the entire Company to a foundation with a the following charter:

To cultivate the branches of precise technical industry of Jena (optics and optical glass); to fulfill higher social duties than personal proprietors would permanently guarantee; to take part in organizations and measures designed for the public good; and to provide permanent solicitude for the economic security of the Zeiss Works  and particularly for the further development of the  industrial labor organization  as a source of substance for a large number of people, and to better the personal and economic rights of those people.

Now, neither Eastham nor Shaw was a card-carrying socialist.  Both were capitalists to the core, and so, while they gave a large portion of their equity, Ernst Abbe style, to the Genradco Trust, they designed a salary system that would allow the Company to shrink expenses (this was the 1930s, remember) without shrinking the workforce:  the K System.

The K System was brilliant. The higher-salaried employees, typically engineers and managers, would see their salaries move up and down depending on “K”, a factor that depended on the relationship between sales and orders  to quotas.  K could move in a range between 0.5 and 1.5. (Overages or shortfalls would be banked.) Thus, in bad times, the salaries could be halved, and in fact, K, when launched in 1933, did start at 0.5, but the next month it climbed to 0.6, and it hit 0.95 in January, 1934.

Two refinements were important: First, one was invited, not ordered, to be on “K.” Second, the quota was rigged so that if sales and orders were right on target, K would be 1.1.  Years later, an invitation to be “on K’ would be coupled with admission to the stock-bonus pool.  No one who was invited to be on the K Plan ever declined the offer. 

Amazingly, the Company not only navigated the Great Depression without a single layoff, but, when a local bank failed, it made employees whole, on the basis that the employees were depositors at the bank because the Company banked there.

There is much more to the paternalistic ways of General Radio – medical visits, services provided by the Genradco Trust, Company-paid life insurance (in 1919!), subsidized cafeteria, etc. Of course, the Company had a sound business plan, a stream of MIT engineers to hire, corps of gifted people. The Company lasted 86 years, from its founding in 1915 until it was bought by Teradyne in 2001.

Much more about this remarkable Company can be found in The General Radio Story, a book available from