Catalytic Solutions, Inc.

There are pros and cons regarding the CSI performance measurement and compensation systems.
The pros are as followed. First, the compensation system was both long term and short term
measures. The company combined non-financial and financial measures in order to overcome the myopia
problem. Second, the bonuses were based on the overall performance of the company. This incentive
would encourage employees to work together as a team and foster commitment to overall cooperate
goals. Third, the CSI limited the performance indicators to the range of 4-6. In 2002, the CSI had four
performance areas. This new list of measures presented to the employees about the priorities they should
be focusing on. Fourth, the bonus assignments ranged from 0%-215% of the target amounts. And in the
quality area, the bonus assignment ranged from minus 15% to plus 20%. Having the upper and lower
cutoffs would avoid paying bonuses for performance which is considered bad or worse and maintain
vertical compensation equity.
The cons are as followed. First, the base salary was slightly below the average. And the target
bonus was only 5-10% of an employees base salary. This annual bonus might not be valued and have
impact on the employees since the reward amount was quite small. My recommendation is to increase the
target bonus to 15-30% of the employees base salary. Second, the building infrastructure area liked to
bonus awards had a relatively small percentage. But obtaining QS-14001 certification was a major
challenge for the CSI. So in order to motivate employees, my suggestions is to assign 40% to the building
infrastructure area instead of 20% to create big impact on the employees; and we could shrink the OE
commitments to 85% since managers only identified the programs whereas top executives made the final
decisions. Third, the company was expanding and would possibly go public in the near future. All
bonuses were awarded based on corporate, not individual was not objective and fair enough for a large
company. I suggest an individual performance rewarding system that is congruent with cooperate goals.
For the stock options, the advantages are listed below. First, the company provided incentive
compensation without cash outlay. Second, this long term incentive component could create company
loyalty. Third, giving stock options to employees would motivate them to increase their companys stock
price. For example, by 2002, employees had an average accumulated value in stock option worth 50% of
their annual salary. Here are the disadvantages. First, the stock option might motivate managers not do
take risker projects which could increase stock price volatility. Second, the stock option might also
generate windfall compensation. The stock price might rise because of the market condition, not because
the managers and the lower level employees did an excellent job. Third, the company was planning to go
public, so there was a chance that the company didnt go public or the stock price went underwater. This
situation would definitely have a reverse effect on employee motivation.
For the annual bonus plan, the advantages are listed below. First, this short term incentive would
have a direct impact on the employees. Second, this plan would encourage employees to be focused on
short-term gain and work together as a team. Here are the disadvantages. First, the bonus was determined
only based on the cooperate performance. Individual employee would feel unfair because some of the
objectives were out of their control. Second, the amount of rewards was not large enough to have big
impact on employees. Third, the plan might create some tax issues for the company.