Superconductor Technologies, Inc. |
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General Management |
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Management Control Systems |
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Organizational Behavior |
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Intermediate |
9 |
Available.
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$9.00
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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?
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