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.