case
Ohio83
AdobeScanSep262021.pdf
Store 24," Journal of Managenme Accountin
Chapter
11 Remedies to the
Myopia
Problem
28 See,
for example,
R. Greenwood,
Managerial
Decentraliza
tion: A Studyof the
General
Electric
Philosoply
(Lexington,
MA: D.C.
Heath, 1974).
27, no. 2 (Fall 2015), pp. 39-65,
35 Sec, for example,
M. J. Gibbs, K. A
29 "A Knight
with Thick
Armor for
IBM,"
Business
Week
(August 23, 1903).
30 B. Behn
and R. Riley,
"Using
Nonfinancial
Information
to
Predict
Financial
Performance:
The Case
of the U.S.
Air
der Stede, and M. E. Vargus, erformance Mea
A Journal of onomy and Society
erties and Incentive System Design ndlustrial Pln
Pp. 237-64.
36 "Top Managers' Pay Reveals Neak
line Industry,
" Journal of Accounting,
Auditing &
Finance,
14, no. 1
(Winter 1999). pp.
29-56; A.
Davila and M.
Venkatachalam,
"The Relevance
of Nonfinancial
Perfor-
Link
com/1CODoYe.
37 C. D. Ittner and
D. F. Larcker, "Comino 1
Financial Times (December 28, 201 14), onine al Valie
mance
Measures
for CEO Compensation:
Evidence
from
the Airline
Industry,"
Review of Accounting
Studies, 9,
no. 4 (December
2004), pp. 443-64.
31 Fora
classic academic
article on this topic,
as the title sug
gests, see C. D.
Ittner and D. F.
Larcker, "Are
Nonfinancial
Measures
Leading Indicators
of Financial
Performance?
An Analysis of Customer
Satisfaction,"Journal
ofAccount
38 D. P. Norton,
ing Research,
36 (Supplement,
1998), pp. 1-35.
For a
recent, related
article, see C. X.
Chen, E. M.
Matsumura,
J.39 Towers
Perrin,
Y. Shin, ands. Y. Wu,
"The Effectof
Competition Intensity
and Competition
Type on the Use
of Customer
Satisfac-
tion Measures in
Executive
Annual Bonus
Contracts," The
Accounting Review, 90,
no. 1 (January
2015), pp. 229-63.
32 See, for example,
R. Banker, G. Potter,
and D. Srinivasan,
"An Empirical Investigation
of an Incentive
Plan that
Includes
Non-Financial
Performance
Measures," The
Accounting Review, 75, no. 1
(January 2000), pp.
65-92.
33 See, for example, D.
P. Huelsbeck, K. A.
Merchant, and T.
Sandino, "On Testing
Business Models,"
The Accounting
Review, 86, no. 5 (September
2011), pp. 1631-54.
34 Kaplan and Norton,
The Balanced
Scorecard, p. 31. For
Kaplan and Norton's point in
this quote on "communicat-
ing the meaning of the strategy
to the organization," see,
for example, D. Campbell,
S. M. Datar, S. L. Kulp, and V.
G. Narayanan, "Testing Strategy
with Multiple Perfor-
financial Performance Measurement" Harvard
G. Cokins, "The Promise and Peril of the t
card," Journal of Corporate Accounting e
no. 3 (March-April 2010), pp. 19-28.
Review, 81, no. 11 (November: 2003), pp. 88-9 Ser. Balanred So
The Unbalanced Balanced Scorecard Report (March 15, 2000)
,"Inside the Balanced's
Report (January 1996), pp. 1-5.
40 C. D. Ittner, D. F. Larcker,
and M. W. Meve
orecard, Comput
bectwvn and the Weighting of erformance Measures: :Evitet from a
Balanced Scorecard," The AccountingR
no. 3 (July 2003), pp. 725-58.
41 M. Lipe and S. Salterio,
"The Balanced Scorecard Jut mental Effects
of Common and Unique Perform
Measures," The Accounting Review, 75, no. 3 (July20
pp. 283-98; R. D. Banker, H. Chang, and M. Pizini
Judgmental Effects of Strategy Maps in Balanced s
card Performance Evaluation," International Joumal
Accounting Information Systems, 12 (2011), p. 259-
Chen, J. Jeremias, and T Panggabean,
"The Role ofV
Attention in the Managerial Judgment of BalancedSurs
card Performance
Evaluation: Insights from Using
Eye-Tracking Device,"
Journal of Accounting Resert
54, no. 1 (March 2016), pp.
113-46.
View,
mance Measures:
Evidence from a Balanced
Scorecard at
CASE STUDY Catalytic Solutions, Inc.
We're a young company, and this is an exciting
place to work. But the work is intense. People are
here at work 24 hours a day, seven days a week.
Our employees would probably be motivated even
without our bonus plan. But the plan is still impor
tant. It is a tool to focus people's attention on the
"perdte
a "preprofit" stage
of operation. Thus ou
mance measures
are primarily
nonfinan
nonfinancials are what we
need to pay a
attentiont
Michael Redard, Vice
President of Finane
Adnin
1stration for Catalytic Solutions,
Inc., wa was comme
right things... Being a young company, we're still in ng on
his company's performance mea
lce measuremet
462
C a ta
ly tic
S o
lu tio
n s , In
c .
1 S
. M
ik e w
a s c o
n f i d
e n
t th
a t
h is
c o
m n
u U
' n
t i v
e s y
s t e m
s
y s
s y
s t e m
1 s w
e r e
w o
r k
w e r e w
o r k
i n
g ectively, b
u t h
e a
lso k
n ew
C
x h
a u
st sy stem
s a n
d m
e e t increasingly strin
g en
t e m
i s
sio n
s sta
n d
a rd
s w o
rld w
id e.
w O
uld h a v
e t
o e
v o
lv e significantly
o v
e r
h a t th
e s y
s t e m
s
s t h
e c
o m
p a n
y
g r e w
a
'o r y
e a rs, th
re e conpanies h
a d
d o
m in
ated
th e su
p
p ly
o f c
a ta
ly tic
c o
n v
e rte
rs
to th
e a u
to m
o b
ile
m a rk
e t.
lo w
e v
e r, C
SI m
an ag
ers th
o u
g h
t th
at th
e risk of o n
e of th
e s e com
panics being a b
le to
appropriate C
S 's
te
c h
n o
lo g
y w
as relativ ely
low , for sev
eral reaso
n s.
F irst,
C SI
h a d
p aten
t p ro
te c t io
n .
C S
I h
a d
b
e e n
issu
ed t w
o
p at-
a n
d m
a tu
r e d
.
h isto
ry a
n d
stra te
g y
(C S
I) w
as fo u
n d
ed
in S a
m p
a n
y
B a r b
a r a , C
a l i f o
r n
i a , in
1
9 9
6
A n
d e
r s o
n . S
t e v
e , w
h o
h a d
b y
S te
v e
G o
ld e n
a n
d B
ill e n
ts, a n
d
th re
e o
th e rs
w ere
p e n
d in
g .
(E a c h
p
a te
n t
h o
h a d
a P
h D
in m
a te
ria l s
c ie
n c e s ,
e s ta
b lis
h e s
a p
ro te
c tio
n p
e rio
d
o f
17 y
e a rs
.) S
e c o
n d
,
fo rm
u la
tio n
a n
d p
ro p
rie ta
ry
C S
I h
a d
d e v
e lo
p e d
so m
e in
n o
v a tio
n s, su
c h
as th e co
at
e s s e s th
at p ro
d u
ced cataly
tic con- ing com
position and a proprietary m anufacturing pro
C a ta
ly tic
S o
l u
t i o
n s ,
I n
c .
d e v
e l o
p e d
a
n u
f a c t u
r i n
g p
r o
c e s s e s
a n
e w
c o
a t i n
g f o
r
m a n
u s
e r t e r s w
w i t h
b e t t e r p
e r f o
r m
a n
c e
p r i c e s t
h a n
c o
m p
e t i n
g p
r o
d u
c t s .
c e a
n d
su b
sta n
tia lly
lo w
e r
cess, th
a t
C SI
m a n
a g
e rs
th o
u g
h t
w o
u ld
be h
a rd
to
C a ta
ly tic
co n
v erters
im ita
te ,
e v
e n
b a se
d o
n
a fin
ish ed
p
ro d
u c t
a n
a ly
sis re
v e rse
en g
in eerin
g ). T
h ird
, C
S I co
n tin
u ed
to e x
p e n
d
S ig
n ific
a n
t re so
u rc
e s to
im p
ro v
e its te
c h
n o
lo g
y a
n d
to
m a in
ta in
its le a d
. A
n d
fin ally
, su p
p lie
rs to th
e a
u to
m o
b
ile in d
u stry
faced su
b sta
n tia
l b a rrie
rs to e
n try
. It
h a d
ta
k e n
C S
I se v
e ra
l y e a rs to
g e t e
sta b
lish e d
in th
e a
u to
in d
u stry
. N e w
e n
tra n
ts c o
p y
in g
C S
I's te
c h
n o
lo g
y w
o u
ld face sim
ila r
challenges a n
d w
o u
ld n
o t b
e a
b le
t o
dem
a r e u
s e d
t o
r e d
u .
th e pollution c
a u
s e d
by c o
m b
u stio
n
C E
O o
f a publicly held co
m
y e a r s
o f ex
p e rie
n c e a
s
a s e n
io r
e n
g i n
e s .
B ill, fo
rm e rly th
e
p a n
y , h
a d
o v
e r 3
0
i v
e . H
e b e c a m
e t
h e C
E O
o o
f C S
I s h
o rtly
a fte
r ra isin
g
ed m o
n e y
t o
f i n
a n
c e
th e firs
t fe w
y e a rs
o f o
p e ra
tio n
.
E x
h ib
it 1 p
r e s e n
t s a
im e lin
e o
f th e com
pany's early s e e d
H ISO
w
e re
re c o
rd e d
a s C
S I sta
rte d
p ro
d u
c in
g co
n -
o n
stra te
a su b
stan tial co
st ad v
an tag
e o v
er C S
I. S
I's firs
t p
a te
n ts
w e r e is
s u
e in
1 9
9 9
a n
d its
v erters
fo r s
ta tio
n a ry
e n
g in
e s .
T h
e s e
early s a le
s p
ro v
e d
that th e te
c h
n o
lo g
y w
a s v
i a b
l e .
B u
t C
S I's
m a n
a g
e rs
'
im m
ediate g o
al w
a s t o
s u
p p
ly c o
n v
e r t e r s t o
th e huge
autom otive
s e c t o
r th
a t s
p e n
t o
v e r $
7 b
illio n
(e s tim
a te
for 2001) o
n cataly
tic c o
n v
e r te
r s , p
rim a rily
b e c a u
s e
o f
tightening w o
rld w
id e e
m is
s io
n s re
g u
la tio
n s.
C SI's
technological ad v
an tag
e w a s m
ain ly
d u
e to
th e
fact th a t its
c o
n v
e r t e r s u
s e d
5
0 - 8
0 %
le s s P
la tin
u m
S u
p p
lie rs fo
r n e w
p la
tfo rm
s h
a d
to c
o o
p e ra
te w
ith c
a r
m a n
u fa
c tu
re rs
se v
e ra
l y
e a rs
b e fo
re n
e w
m o
d e ls
w e re
la u
n c h
e d
. W in
n in
g a n
e w
o rig
in a l e
q u
ip m
e n
t (O E
) c o
m -
m itm
e n
t tra n
sla te
d in
to sales, b
u t w
ith a o
n e - to
fiv e-y
ear
lag, depending o
n th
e c
u s to
m e r a
n d
th e platform
. In
th e
m e a n
tim e ,
C S
I h a d
to w
o rk
c lo
se ly
w ith
th
e e n
g in
e
developm ent te
a m
sof m ajor c
a r com
panies. S tric
t sc h
e d
u le
s h a d
to b
e m
e t d
u rin
g se
v e ra
l ro u
n d
s o f p
re p
a rin
g .
te stin
g ,
a n
d sh
ip p
in g
sa m
p le
s. C
o n
siste n
c y
a n
d p
e rfe
c t
q u
ality w
e r e c
ru c ia
l. F
u rth
e r,
it w
a s
a p
rereq u
isite fo
r
a u
to in
d u
stry su
p p
liers to o
b ta
in th
e Q S
-9 0
0 0
q u
a lity
certificate, w h
ic h
w a s
a m
o r e d
em an
d in
g eq
u iv
alen t o
f
th e IS
O -9
0 0
0 c
e rtific
a tio
n . It w
a s h
a rd
to o
b ta
in b
u s in
e s s
G roup M
etals (P G
M s)
th a n
d id
co m
p etito
rs' c o
n v
e r t e r s .
S tan
d ard
c o
n v
e r te
r s ty
p ically
c o
n ta
in e d
larg e
a m
o u
n t s
of PG M
s p la
tin u
m , p
a lla
d iu
m , a
n d
rh o
d iu
m .
A s p
o llu
-
tion standards b ecam
e in
creasin g
ly strin
g e n
t (E x
h ib
it2), the d
em an
d fo
r, a n
d th
e p
ric e
o f, P
G M
s h a d
ris e n
d ra
-
m atically (E
x h
ib it 3). In
2 0
0 1
, a b
o u
t 6
0 %
o f th
e w
o rld
w ith
o u
t d
em o
n stratin
g te
c h
n ic
a l sk
ills, a
c o
m m
itm e n
t t o
SUpply o f P
G M
s w a s u
s e d
to p
ro d
u ce
c o
n v
e r t e r s .
F u
rth er,
fla w
le ss
p ro
d u
ctio n
, a n
d re
lia b
le o
n -tim
e d
e liv
e rie
s .
there w
a s u
n c e rta
in ty
a b
o u
t th e s
u p
p ly
o f p
a lla
d iu
m ,
m ost o
f w h
ic h
c a m
e fro
m R
u s s ia
. T
h e a
v e ra
g e c
o n
v e rte
r
COst per vehicle tripled b e tw
e e n
1 9
9 0
a n
d 2
0 0
1 ,
b e c o
m -
ing th e th
ird -la
rg e s t a
u to
m o
b ile
c o
m p
o n
e n
t c o
s t a
fte r
Lneengine and tran
sm issio
n . T
h e sav
in g
s resu ltin
g fro
m
S I's
lo w
e r
u s a g
e o
f P
G M
s c o
u l d
r a n
g e
f r o
m $
4 0
f o
r
a
v eh
icle c o
n v
e rte
r to a s m
u c h
a s $
2 0
0 fo
r th o
se
la rg
e sp
o rts utility vehicles (SU
V s). In
a n
in d
u s-
C S
I m a n
a g
e rs
w e re
a lso
in th
e p
ro c e ss o
f d e v
e lo
p in
g
ap p
licatio n
s fo r o
th e r m
a r k
e ts
. O
n e w
a s
th e g
ro w
in g
lig h
t d u
ty d
ie s e l
m a rk
e t,
w h
ic h
, m
a n
a g
e m
e n
t e s t i
m a te
d ,
w o
u ld
to ta
l $
2 .2
b illio
n by
2 0
0 8
. O
u ts
id e th
e
tra n
s p
o rta
tio n
in d
u stry
, th
e p
o w
e r-g
e n
e ra
tin g
s e c t o
r
w a s lik
ely to
b e c o
m e
th e n
e x
t m a jo
r o
p p
o rtu
n ity
. M
o r e
s trin
g e n
t e m
is s io
n re
g u
la tio
n s
re q
u ire
d p
o llu
tio n
r e d
u c tio
n s o
f m o
r e th
a n
50 o
f th e e
x istin
g s ta
n d
a r d
s
by a s early
a s 2
0 0
3 .
T h
e m
a r k
e t
fo r
n a tu
r a l g
a s tu
r b
in e
O u
s C
o s t sav
in g
p o
te n
tia l. A
t th e s a m
e
c o
n v
e r t e r s w
a s e
s tim
a te
d to
g r o
w t o
n early
$ 1
.3 b
illio n
try
e re
m an
u factu
rers "k ill
fo r p
en n
ies," th is p
re-
I s p
ro p
rietary te
c h
n o
lo g
y w
a s sh
o w
n to h
av e
Superior perform
ance by
2 0
0 8
. O th
e r m
a r k
e ts
c o
u ld
in
c lu
d e a l t e r n
a t i v
e fu
e l
ere ab le to
d n
c e c
h a r a c te
r is
tic s .
C S
I c o
n v
e r t e r s
v e h
ic le
s a
n d
fu e l c
e lls
th a t m
a y
s o
m e d
a y
r e v
o l u
t i o
n i z e
w ithstand extrem
ely h ig
h t
e m
p e r a t u
r e s
in
th e tra
n s p
o rta
tio n
in d
u stry
.
4 6
3
h alf o
f th e e
m p
lo y
e e s w
o rk
e d
in m
.
quality control;
o n
e - t h
i r d
w e r e manufacturing
R &
D , a
n d
th e re
s t w
e r e in
sales and
effortsconcent
C h
a p
t e r
1 1
R e m
e d
i e s t o
t h
e M
y o
p i a
P r o
b l e m
assigned ministraion,.
C S
T s e a r ly
r e v
e n
u e s t e m
m e d
l a r g
e l y
fr o
m s a l e s i n
t h
e
a u
t o
i n
d u
s t r y
a f t e r - m
a r k
e t , a S
S 0
m i l l i o
n
m a r k
e t
f o
r c o
n -
v e r te
r r e p
l a c e m
e n
t s .
O E
c o
m m
i t m
e n
t s w
e r e t o
f o
l l o
w
H o
n d
a
M o
t o
r
C o
m p
a n
y
b e c a m
e
th e e
a r ly
O E
a d
o p
-
te r . I
t s t a r t e d
e v
a l u
a t i n
g C
S i s t e c h
n o
l o
g y
in 1
9 9
9 , a n
d
in O
c t o
b e r 2 0
0 0
it to o
k a n
i n
i t i a l 1 0
% s t a k
e in C
S I . P
ro
d u
c t i o
n fo
r th e H
o n
d a
S t e p
w a g
o n
m o
d e l b
e g
a n
i n
D e c e m
b e r
2 0
0 0
. T
w o
a d
d i t i o
n a l v
e h
i c l e
p r o
g r a m
s
w e r e
a d
d e d
in 2
0 0
1 . In
la te
2 0
0 1
, C S
I w a s a s s i g
n e d to
a h ig
h -
v o
l u
m e p la
tf o
r m
fo r G
e n
e r a l M
o t o
r s s c h
e d
u l e d
to b
e g
in
in 2
0 0
4 . In
early 2 0
0 2
, th e c
o m
p a n
y s ig
n e d
a s t r a t e g
i c
g r e e m
e n
t w ith
F o
r d
to e
v a l u
a t e
s e v
e r a l
h i g
h - v
o l u
m e
p l a t f o
r m
s . B
y th is
tim e ,
C S
I w a s c
o o
p e r a t i n
g a t s o
m e
level w ith m
o st o
f tnte he G
ratitude Award for fu
tu re
s u
c c e s s .
T h
e y
w e r e highly
c o
m m
E a r l y s u
c c e s s e s
G iv
en th
a t th
e m
a i n
p a rt
o f th
e research had
been Cat
rie d
out e a rlie
r, r e c e n
t
ated largelyn th
e d
e v
e l o
p m
e n
t o
f . applications
in clos COoperation M
any of the engineersy were new,
industry experieng
The co
w i t h
t h
e c u
s t o
m e r s .
y o
u n
g P
h D
s w
ith little
p a n
y p
o lic
y w
a s to
to
attract open-minded pegnl. w
e r e n
o t b
u r d
e n
e d
w ith
taken-for-grant established in
th e converter industr
industry. Mike Redarg ed
u led
to b
eg in
e x
p la
in e d
: " T
h is is a
n a n
y signed a
s tr
a te
g ic
o
p p
o rtu
n ity
, b u
t th e re
is a lso
a n
san exciting place
to v ork with lots o a n
element of risk due t
the early stag
e o f th
e com
pany. VW e tend to attrad amb
e risks tio
u s people
w h
o a
r e c
o m
fo rta
b le
taking s o
because they beliey in its
le v
e l w
ith m
o s t o
f th e m
a jo
r a u
t o
m a k
e r s o
f th
e w
o r ld
.
In J
u n
e 2
0 0
2 , C
S I r
e c e i v
e d
th e G
r a t i t u
d e A
w a r t
E x
c e lle
n c y
in R
e s e a r c h
a n
d D
e v
e l o
p m
e n
t by H
o n
d a
M o
to r C
o m
p a n
y . D
u rin
g a sp
e c ia
l a w
a r d
c e r e m
o n
y a t
C SI, M
r. T s u
n e o
T an
ai, s e n
i o
r v
ic e p
r e s i d
e n
t / g
e n
e r a l
m a n
a g
e r of H
onda R &
D A
m e r ic
a s , Inc., s
t a t e d
: "
P eo
p le
c a m
e to
C S
I
mittedand hard w
o rk
in g
. F
u rth
e r,
th e re
w a s
a stro
n g
spiritof team a t
m em
b ersh
ip a
n d
c o
o p
e ra
tio n
, a n
d personnel turnover
w as relatively low
. C SI's hum
an resource practic were
In early
te stin
g ,
e v
e r y
o n
e a t
H o
n d
a w
a s
v e r y
o
n g
- t e r m
e m
p l o
y e e s . M
a n
a g
e rs u
.
im p
r e s s e d
by th e g
re a t p
e r f o
r m
a n
c e o
f th e C
S l prod
W ith
o p
e r a t i o
n s a
n d
U c t. H
o n
d a r e a liz
e d
th e h
u g
e p o
te n
tia l th
a t th
is te c h
-
c o
n t r i b
u t e d
to th
e o
nology p
r o
m is
e d
. O n
b e h
a lf
o f H
o n
d a , I w
o u
ld lik
e to
e x
p r e s s
m y
d e e p
e st g
ra titu
d e to
e v
e r y
o n
e a t C
S I.
d e sig
n e d
to e
n c o
u ra
g e th
is c o
o p
e ra
tio n
an d
to attract
lo n
g -term
e m
p lo
y e e s. M
a n
a g
e rs
w e re
closelv nvolved
w ith
o p
eratio n
s a n
d k
n e w
th e ir
em p
lo y
ees w el, which
collective spirit an
d inform
al culture A
s C SI w
a s p
rep arin
g to
r m a s s production, however
it b e c a m
e c le
a r
th a t
s o
m e
m o
r e
fo rm
a l
managerial
s tru
c tu
re s and policies
w e r e n
ecessary . T
he com pany
T h
is a w
a rd
a tte
s te
d to
C ST
's s u
c c e s s
in th
e early
v e a rs
of the com pany's e
x iste
n c e . G
ST 's
c o
n v
e r te
r p
ro u
- o
n a n
u m
b e r o
f d i m
e n
s i o
n s . T
h e em
phasis w
a s m
ainl
u c t had
w o
n accep
tan ce in o
n e o
f th e to
u g
h est
m a r k
e r s
o n
n o
n fin
a n
c ia
l p erfo
rm an
ce in d
ic a to
rs . C
ritical drivers
in the w
orld. M
ike R edard
explained: "T t is e
x tre
m e ly
of long-term
s u
c c e s s
w e r e quality,
o n
-tim edelvery, and
hard to penetrate the a
u to
m o
tiv e m
ark et, c
h a n
g e l3
p
ro d
u ctio
n efficiency.
It w
a s a
lso c
ru c ia
l to
w in new
slow in this industry"
C ST
's product design
h ad
clearly w
o n
a c c e p
ta n
c e
m a n
a g
e r s believed th
a t th
e in
itia l
fo c u
s o
n n
o fin
a n
c ia
l
from the industry. T
he n e x
t step w
a s to
get read y
to
ta rg
e ts
w o
u ld
la te
r tra n
sla te
in to
fin a n
c ia
l s u
c e s s .
produce sev eral m
illio n
perfect quality c o
n v
e rte
rs e
a c h
year. P
ro d
u ctio
n quality
w a s im
portant b
e c a u
s e
th e
itv of to p
e x
e c u
tiv e s. Suppliers' reputations and
auto m arketw
as unforgiving
n eed
ed m
e a su
re m
e n
t iev ices
to k eep
track of progress
sa le
s c o
m m
i t m
e n
t s fro
m O
E c a r m
a n
u f a c tu
r e r s . CSI
G ettin
g n
e w
O E
c o
m m
i t m
e n
t s w
a s th
e responsibi Ces
w e r e th
e key d
e t e r m
i n
a n
t s o
f s u
c c e s s in
th e bIdding
T he co
m p
an y
in 2002 p
r o
c e s s . R
e p
u ta
tio n
w
a s im
p o
rta n
t b e c a u
s e
e a c n
u
C o
m m
i t m
e n
t re
q u
ire d
s e v
e r a l
y e a rs
o f developncd
p m
en t
f th
e a
u to
M Ost of C
S T
S senior m
anagem ent te
a m
had been w ith
w o
rk th
a t h
a d
to
m e e t th
e high
s ta
n d
a r d
s
th e com
pany for sev eral years (see E
xhibit 4). T he n
e w
n
d u
stry .
C S
I a lso
h a d
to
d e m
o n
s t r a t e signincaue
savings over its m
o r e e
s t a b
l i s h
e d
c o
m p
e tito
i
t cO st
est m em
ber w as C
FO K
evin M cD
onnell, w ho joined
in
o r d
e r
2 0
0 2
. C
ST 's
b o
ard consisted of three
of the ex ecu
tiv e
to have
a good ch an
ce o f w
inning i e v
officers and four outside directors.
C SIS
o f w
in n
in g
n e w
contracts
b id
s w
e r e b
a se
d o
n e
s tim
a te
s of unit c
o s tsaere
e d
f o
m
In 2000,CSI em ployed 38 people. That num
ber grew
product specifications providea Dy quickly
to 110 in 2001, and 125 in 2002. In 2002,
about
p r o
v i d
e d
b y
th e c
u s t o
m e r
2 0
0 1
, b u
t
S l S
s a le
s h
a d
c lim
b e d
ste a d
ily th
ro u
g n
a o
m b
e c o
n
Sourte:htp/w w
w .pressreleasenerw
ork.com /pr2002/june /m
ainprl2S0. in
g p
ro fitab
le. T h
e m
a n
a g
e l
htm .
L e com
pany w as still p
e rh
a p
s a y e a r o
r tw
o L
s to
c k
offering w ith
in
a f e w
y e a r s ,
b u
t th e r e na
464
r o
r r T
i G
r
Catalytic Solutions, Inc.
IPO. The company had adequate than the stock options. The target bonus could be from
cpital to
fund its
immediate
and operating needs.
liate product and process devel-
In January 2002, it raised
rces." And with the public low in 2002, the cost of
5% to 15% of an employce's base salary depending on
level within the company. All bonuses were awarded
based on corporate, not individual, performance because, as Mike explained, "We want a team effort, We all win or all lose together."
SSure to rush
stock
market
valuations quite
oital from private
sources was not significantly
emem
illion from
privatesources.
S206
Laisingcapital
than could be
expectected in a public stock offering. Each year the senior managers discussed what ele-
ments they should be focusing on, why focus on those elements was important, and what weight each ele-
ment should carry. These discussions established the Compensation systems
Densation package consisted of list of performance areas on which the bonus ass1gn salary, stock options, and a components: base 2001). Base
salarie were set to be at or
the industry median. Mike Redard noted instances people who
Every employe
ments would be based. Because reliable, objective measures were important, managers recognized that
the company needed to make rapid progress in improv ing some of its systems of measurement.
three
larger, establish
compani took a pay cut to do so."
company
was not large, and lary raises were modest,
bonus(since
slight. below that "In many
joined CSI from
The spread
between the top and bottom salaries in the Exhibit 5 shows the performance areas linked to
bonuses in 2001. The measures reflected company- wide achievements in three areas: receipt of new OE
ypically in the 4-5% range.
The first year they joined CSI, each employee was given stock options. These options
vested over the first four
years at 25% per year and expired 10 years after granting
(or within 30 days of leaving the company). While a for-
mal plan for annual stock option grants had not yet been
implemented, follow-on grants were awarded on an ad hoc basis to ensure that employees' stock holdings were in
line with their current position and contribution to the
company. The value of the stock option component varied
substantially depending on tenure, position in the com- pany and value to the organization.* By 2002, employees
(most of them were hired during the 2000 -2002 period) had on average accumulated value in stock options vworth S0% of their annual salary. The employees, in total, Owned on a fully diluted basis about 24% of CSI shares.
One problem that Mike Redard had observed regarding the options was that "many people don't understand them and don't know how to value them." The options
commitments, execution of existing business, and building of infrastructure.
st
1. In the area of OE commitments, managers identified a number of specific programs that CSI felt they had the opportunity to bid for in 2001. If the manufacturer made the order commitment to CSI, CSI employees would earn a designated portion of their target bonus. The two largest of these programs were given an importance weight of 20% each. This meant that ifcus- tomers committed to both of these programs, employ- ees would earn 40% of their target bonus amount just from this result. Also identified were three other large programs, each of which would add 10% of the target bonus and two smaller programs each with a weight of 5%. Each additional, significant, unidentified OE com- mitment would add 5%, up to a maximum of 15%, of the target bonus. If all of these OE commitments were made in 2001, CSI employees would earn 95% of their target bonuses. These programs were given a high weighting of importance because, as Mike Redard
explained, "absent some problem, an assignment means you are designed into the vehicle platform, thus
cate the importance of some short-term goals 2., Execution of existing business was assessed in
Were, indeed, difficult to value. They could become quite valuable if the company went public and was successful. But they could also become near worthless if the com- pany did not go public or if its performance languished. ne annual bonus plan was put in place in 2001 to employees and to align their interests with firms' objectives. Some
providinga high degree of visibility to future revenue."
bonuses, which were more immediate and "tangible" employees also reciated the cash terms of two elements: shipment volumes to two
major customers and shipment quality. Maximum shipments to each major customer could produce 40% of the target bonus. The measures of quality were serap, shipment errors, and on-time delivery. For each of these measures, performance ranges were set to result in bonuses of minus 5% to plus 5%
This and lisguised.
er hnancial and operational figures in the case are Tcise price of stock options was based on independent valua obtained uring recent financing rounds.
465
for scrap, minus
10% to plus 56 for
shipment errors,
and rero to 10%
for on-time
delivery performance.
omitted some important pert example, it dicd not incide a measin
csl executives knew even his new list of n Chapter 11 Remedies
to the Myopia
Problem
mance indicar . of new patent
3. Finally. in
2001, the
building of
infrastructure
reterred to the
attainment
of QS.0000
certification.
if this oertifcation
was attained,
cmplovecs would
carn 20 of their target
bonuses.
While patents were unquestionably
particular measure was not includeds in the hov
ly impolam, th
because patents occurred infreas
focus of only a few pcople in the cot *pla y and wer
Overal. the pertormance
targets were
set so tat
importantly, CSI manor
emplovees wiould havr "a
decent shot" at earning
100%6
o the target bonus.
iPerformance ranges
were set to
aliow bonus
assicnments to range
from 0 % to 215% of
the target amounts,
but Mike Redard explained
that if
the actual bonus earned
was extreme, say
either 20% or
200 of the target
bonus, then "you'd have to question
whether the performance targets
were set correctly."
In 2001. after what Mike
Redard described as "a lot of
et so that importantly, GSt managers believ Dny. "
indicators would leave employees Incerlama th
that the optimum number of measures was 4-6. that 100% of the target onus was realisticall outcome for the year was for payments of 75-1
many
where the priorities should be. Mike Redard tho howghe
gain set The performance targets for 2002 ere:
able. Entering the last quarter of 2002. . y achir
1ojecte the target bonus.
In addition to these thre compensation elen hard work."
actual performance resulted in employees
earning 1179% of their target
bonus. New OE commit-
ments accounted for 50% ofthe total,
execution for 32.9o, tional ways of rewarding top Dere
qualiry for 159%, and Qs-9000
certifñcation for 206 (see special raises and promotions.
Exhibit 5). The QS-9000 quality certificate was actually
awarded to CSI in January 2002, but since the timing was
so ciose to the end of the year, management counted it as a The future
sucoessful accomplishment of the goal for 2001.
Mike Redard explained that management reserved Overall, Mike Redard and the rest of the CoI
the right to make subjective adjustments to the bonus
ment team was confident that the companv's e
plan. and this QS-9000 timing issue was one example sation system, and in particular its bonus Dlan '
Mike Redard explained that management had
formers, inclu
mpen was
fulfilling its objectives: where they exercised that right.
But he quickly
explained that: "We don't want to make subjective
changes to provide rewards when the company has
cleariy not achieved its targets. Our employees under
We have benefited from the variety of backgroaunds
of our management team. We all worked for difer
ent companies with different compensation pol cies, and we all have experience with both good and
bad bonus systems. The nice thing about working
stand that there can be some variance in the bonus
awards. There will be good years and bad years."
In 2002, the performance areas linked to bonus
awards were changed, as is shown in Exhibit 6. Finan- cial targets, with a weight of 0 - 60% of the target
bonus, were added. The focus was on increasing reve-
nues and reducing operating losses. As in 2001, CSI
continued emphasizing new OE commitments
(0-105% of the target bonus) and quality as reflected in scrap, shipment errors, and on-time delivery total weight of minus 15% to plus 20% of the target bonus).
Building infrastructure was defined in 2002 as the
for CSI is that here we have the chance to do it nght
from the start. Sure, we are still wrestling with how
many performance measures to include and which
ones are most relevant, but lI think the overall struc
ture is working. The bonus plan communicates i"
simple terms to our employees what is important
We met most of our targets last year and hnk
in general people are quite happy with the bon
they received.
incial measures
would proo sin 2002
upgrading of production to full automation, increasing Mike expected that the financial meas safety standards, and obtaining QS-14001 certification ably account for about 30% of the targelme (total weight 0-20%). Having the automated produc He thought that the importance o tion line operational by the end of 2002 was a major challenge. Nevertheless, management had little doubts closer to becoming a public co that the target would be met because it had to be - mass said he "would be shocked u production was crucial for future growth.
ncial measures
became
would probably increasein the future as CSI
company. However, he
eir importanee
exceeded 50%." 466
Catalytic Solutions, Inc.
Company history Exhibit 1 Comp
Strateglc agreement with Ford GM awards production contractQs-9000 certification
Company founded
1999 2000 2001 2002 2003 2004 1996
First patents issued
After-market
production begins
.Series Cfinancing $29.6MM
GE &Cinergy .GM production
begins invest in Series C
Honda agreement signed
Honda production begins
Major US production begins 1st mass production line
Exhibit 2 Tightening NOx emissions standards in the United States
1994 2001 2004
NO, g/km 0.41 0.373
77%
reduction 0.186
0.2
0.043
TIER 2 TIER 1 NLEV
Nntrogen oxide5) emissions are a major cause of smog problems in large cities.
467
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