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Superconductor Technologies, Inc.
Author(s):
Merchant, Kenneth A.
Van der Stede, Wim A.
Functional Area(s):
   General Management
   Management Control Systems
   Organizational Behavior
Setting(s):
   For Profit
Difficulty Level: Intermediate
Pages: 9
Teaching Note: Available. 
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First Page and the Assignment Questions:
In October 2003, Martin (Marty) McDermut, Senior VP, CFO, and Secretary of Superconductor Technologies, Inc. (STI) was reflecting on some issues related to his company's compensation and incentive systems. He had multiple concerns. Marty knew that STI's most important asset was its people, and he was worried about employee retention. STI's stock price was stuck far below its historical highs, so most of the options that had been granted to employees were “underwater.” Without the prospects of significant rewards, some of the company's key people might be “ready to bolt.” He wondered, “What can we do so that these things that we have put in place don't vanish?”

Marty also worried that some of the incentive system elements might motivate some behaviors that were not in the shareholders' best interest. One specific concern of this type was that top management would be too motivated to try and sell the company to cash in the large numbers of options that they had been granted. He sighed:

These things have tremendous motivational effects, but they can really get you in trouble if you don't think the issues all the way through.

COMPANY HISTORY AND STRATEGY

Superconductor Technologies, Inc. (STI) was founded in Santa Barbara, California, in 1987 by Nobel Prize winner Dr. J. Robert Schrieffer, who teamed up with three venture capitalists to form a company to capitalize on a scientific breakthrough known as high-temperature superconductivity (FTEs) technology. In the mid-1990s, STI managers decided to focus their application of FTEs technology on the wireless communications industry. In 1997, STI began the transformation to an operating company with the launch of its first commercial product, the SuperFilter®. M. Peter Thomas, a wireless industry veteran, was hired as CEO.

By 2003, STI was the global leader in developing, manufacturing, and marketing FTEs products for wireless communication networks. STI's products incorporated patented technologies that extended network coverage, increased capacity utilization, improved both the uplink and downlink radio frequency signals, thus lowering the incidence of dropped and blocked calls. They also enabled higher wireless transmission data rates while reducing operators' capital and operating costs. Over 3,000 STI systems had been installed worldwide, making STI the clear leader in the FTEs wireless network optimization technology marketplace. STI's successes stemmed largely from its technological developments, including patented thin-film technologies and unique software design and simulation tools. It planned to exploit its management, engineering, and manufacturing expertise to maintain and expand its market leadership in radio frequency enhancement solutions.

In 2003, STI, which had nearly 300 employees, was organized into two main operating entities. One was located in Sunnyvale, California, at the former site of Conductus, a company acquired in December 2002. People at the Sunnyvale location were primarily involved in research, some of which was funded by the federal government on a cost-plus basis. The other operating entity was located in Santa Barbara, California. Personnel at the Santa Barbara location were responsible for the company's commercial applications.

Assignment

1.    Assume that you, as an STI employee, were awarded options on 1,000 shares of STI stock today at the current market price.

a.    Without doing a detailed numerical calculation, make your best-guess estimate as to the economic value of this option grant. What factors did you consider in making your estimate?
b.    Would this option grant likely affect any of your behaviors? If so, how?

2.    Evaluate the performance measurement and incentive system that STI uses for its top-30 managers. Among the questions you should consider:

a.    Will the system attract managers' attention and influence behavior in the desired ways?
b.    Is the system achieving other (non-motivational) purposes which it is also intended to serve?
c.    Is each of the elements worth the cost?
d.    Is the mix of rewards optimal?
e.    What changes would you recommend, if any?

3.    Should the accounting rule change requiring the immediate expensing of the value of stock options granted (which has now happened) cause STI to make any changes to its system? If so, which?

4.    Will STI have to make changes to its system when it expands internationally and employs managers in locations such as London and Shanghai? If so, which?