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Catalytic Solutions, Inc.
Author(s):
Matejka, Michal
Merchant, Kenneth A.
Van der Stede, Wim A.
Functional Area(s):
   General Management
   Organizational Behavior
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 8
Teaching Note: Available. 
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First Page and the Assignment Questions:
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 important. It is a tool to focus people's attention on the right things … Being a young company, we're still in a “pre-profit” stage of operation. Thus our performance measures are primarily non-financial. The non-financials are what we need to pay attention to.

Michael Redard, Vice President of Finance & Administration for Catalytic Solutions, Inc., was commenting on his company's performance measurement and incentive systems. Mike was confident that his company's systems were working effectively, but he also knew that the systems would have to evolve significantly over time as the company grew and matured.

Company History and Strategy

Catalytic Solutions, Inc. (CSI) was founded in Santa Barbara, California in 1996 by Steve Golden and Bill Anderson. Steve, who had a Ph.D. in material sciences, developed a new coating formulation and proprietary manufacturing processes that produced catalytic converters with better performance and substantially lower prices than competing products. Catalytic converters are used to reduce the pollution caused by combustion engines. Bill, formerly the CEO of a publicly held company, had over 30 years of experience as a senior executive. He became the CEO of CSI shortly after raising seed money to finance the first few years of operation.

Exhibit 1 presents a timeline of the company's early history. CSI's first patents were issued in 1999 and its first sales were recorded as CSI started producing converters for stationary engines. These early sales proved that the technology was viable. But CSI's managers' immediate goal was to supply converters to the huge automotive sector that spent over $7 billion (estimate for 2001) for catalytic converters, primarily because of tightening worldwide emissions' regulations.

CSI's technological advantage was mainly due to the fact that its converters used 50-80% less Platinum Group Metals (DGMs) than did competitors' converters. Standard converters typically contained large amounts of DGMs platinum, palladium, and rhodium. As pollution standards became increasingly stringent (Exhibit 2), the demand for, and the price of, DGMs had risen dramatically (Exhibit 3). In 2001, about 60% of the world supply of DGMs was used to produce converters. Further, there was uncertainty about the supply of palladium, most of which  came  from  Russia.1  The  average  converter cost per vehicle tripled between 1990 and 2001,  becoming the third largest automobile component cost after the engine and transmission. The savings resulting from CSI's lower usage of DGMs could range from $40 for a small-vehicle converter to as much as $200 for those used in large sports utility vehicles (RVUs). In an industry where manufacturers “kill for pennies,” this presented an enormous cost saving potential. At the same time, CSI's proprietary technology was shown to have superior performance characteristics. CSI converters were able to withstand extremely high temperatures in exhaust systems and meet increasingly stringent emissions standards worldwide.

Assignment

1.    Evaluate the CSI performance measurement and compensation systems. What changes would you suggest be made to these systems, if any? Explain.

2.    Fast-forward 10 years. Assume that CSI has been successful. It is now a much larger, public company. It has three operating divisions (investment centers) that focus on different markets. What would you expect the CSI measurement and compensation systems to look like at that time? Why?