<PAGE>   1


                                                                     Exhibit 4.1


                           DEFERRED COMPENSATION PLAN
                         OF CAPSTONE TURBINE CORPORATION


                                    ARTICLE I
                                     PURPOSE

        Capstone Turbine Corporation (the "Company") hereby establishes the
Deferred Compensation Plan of Capstone Turbine Corporation (the "Plan"),
effective as of August 1, 2001. The purpose of the Plan is to provide a means
for the payment of unfunded, deferred compensation to a select group of key
management executives of the Company and Related Employers (collectively
referred to as the "Employer") in recognition of their substantial contributions
to the operation of the Employer, and to provide those executives with
additional financial opportunity as an inducement to remain in the employment of
the Employer.

                                   ARTICLE II
                      DEFINITIONS AND RULES OF CONSTRUCTION

        Section 2.1. Definitions. As used in the Plan, the following words and
phrases, when capitalized, have the following meanings, except when used in a
context that plainly requires a different meaning:

                (a) "Accounts" means the Deferral Account and the Employer
        Contribution Account.

                (b) "Beneficiary" means the beneficiary or beneficiaries
        designated by a Participant in writing to receive the payment of
        benefits provided under this Plan following the Participant's death. In
        the absence of a designation, the Beneficiary shall be the Participant's
        spouse, if the spouse survives the Participant, or if the spouse does
        not survive the Participant or the Participant is not married, then the
        Participant's estate.

                (c) "Board of Directors" means the Board of Directors of the
        Company.

                (d) "Change of Control" means the occurrence of any of the
        following events:

                        (i) If the Company's rights under the Plan are
                transferred to an Unaffiliated Entity;

                        (ii) If an Unaffiliated Entity acquires, during any
                consecutive twelve (12) month period, all or substantially all
                of Company's operating assets;

                        (iii) In the event of a reorganization, merger, or
                consolidation of Company, unless at least 60% of the shares or
                membership interests and at least 60% of the voting power of the
                resulting entity are beneficially held, directly or indirectly,
                by the legal entities who were the beneficial holders of the
                shares or


<PAGE>   2


                membership interests and of the voting power of Company
                immediately before the reorganization, merger, or consolidation;

                        (iv) In the event of a complete liquidation or
                dissolution of Company;

                        (v) If within a twelve (12) month period, the
                individuals who constitute the voting membership of the Board of
                Directors cease to constitute at least a majority of the voting
                membership of the Board of Directors.

                (e) "Company" means Capstone Turbine Corporation.

                (f) "Compensation" means, with respect to an Eligible
        Participant, compensation (as defined in paragraph 415(c)(3) of the
        Internal Revenue Code of 1986, as amended) paid by the Employer to an
        Eligible Participant during the Plan Year, plus election deferrals to
        any Company 401(k) plan and salary reduction contributions under the
        Company's Flexible Benefits Plan, and any amounts deferred by an
        Eligible Participant under this Plan.

                (g) "Deferral Account" means the bookkeeping entry which
        accounts for the cumulative amount of Compensation, which an Eligible
        Participant has deferred in accordance with Section 4.1, adjusted for
        any earnings.

                (h) "Deferral Agreement" means the written agreement between the
        Employer and the Participant pursuant to which the Participant elects to
        defer Compensation under the Plan.

                (i) "Earnings Rate" means prime interest rate plus one percent
        per annum, except as provided for in Section 6.2(b). Prime interest rate
        shall be that set by Wells Fargo Bank.

                (j) "Eligible Participant" means, with respect to a Plan Year, a
        Participant who is eligible to have his Account credited with
        contributions for that Plan Year pursuant to Articles IV and V.

                (k) "Employer Contribution" means the contributions, if any,
        credited by the Employer pursuant to Sections 5.1 and 5.2.

                (l) "Employer Contribution Account" means the bookkeeping entry
        which accounts for each Participant's total Employer Contributions,
        adjusted for any earnings or losses attributable to such account.

                (m) "Executive" means a key management employee of the Employer
        who has the opportunity to impact significantly the annual operating
        success of the Company or a Related Employer.


                                       2
<PAGE>   3

                (n) "Participant" means an Executive selected by the Board of
        Directors to participate in the Plan pursuant to Section 3.1.

                (o) "Plan Year" means August 1, 2001, to December 31, 2001, and
        thereafter, the calendar year.

                (p) "Related Employer" means a subsidiary of the Company.

                (q) "Retirement" means the voluntary Termination of Employment
        by a Participant who has reached at least age 65.

                (r) "Termination of Employment" means the cessation of the
        relationship of employer and employee between the Employer and the
        Participant by reason of death, resignation or discharge. A Participant
        shall not be treated as having incurred a Termination of Employment
        until the employment relationship between the Participant and all
        Related Employers has terminated.

                (s) "Total Disability" means the individual has been found by
        the insurance company providing the group long-term disability policy
        for the Company to be entitled to benefits as a result of Total
        Disability, as therein defined.

                (t) "Total Disability Date" means the date upon which a
        Participant's Total Disability benefits under the Company's group
        long-term disability policy commence.

                (u) "Unaffiliated Entity" means an individual, entity, or group
        (within the meaning of section 13(d)(3) or 14(d)(2) of the Securities
        Exchange Act of 1934), except the Company, a legal entity of which the
        Company owns at least 60% of the beneficial ownership, or an employee
        benefit plan maintained by the Company.

                (v) "Unforeseeable Emergency" means, with respect to a
        Participant or Beneficiary, a severe financial hardship to the
        Participant or Beneficiary resulting from a sudden and unexpected
        illness or accident of the Participant, Beneficiary, or his or her
        dependents; loss of the Participant's or Beneficiary's property due to
        casualty; or other similar extraordinary and unforeseeable circumstances
        arising as a result of events beyond the Participant's or Beneficiary's
        control.

        Section 2.2. Rules of Construction. The following rules of construction
shall govern in interpreting the Plan:

                (a) The provisions of the Plan shall be construed and governed
        in all respects under and by the internal laws of the State of
        California, to the extent not preempted by federal law.


                                       3
<PAGE>   4

                (b) Words used in the masculine gender shall be construed to
        include the feminine gender, where appropriate, and vice versa.

                (c) Words used in the singular shall be construed to include the
        plural, where appropriate, and vice versa.

                (d) The headings and subheadings in the Plan are inserted for
        convenience of reference only and are not to be considered in the
        construction of any provision of the Plan.

                (e) If any provision of the Plan shall be held to be illegal or
        invalid for any reason, that provision shall be deemed to be null and
        void, but the invalidation of that provision shall not otherwise impair
        or affect the Plan.

                (f) The Plan is intended to be an unfunded deferred compensation
        plan for a select group of management or highly compensated employees
        that is exempt from Parts 2, 3, and 4 of Subtitle B of Title I of the
        Employee Retirement Income Security Act of 1974.

                                   ARTICLE III
                                  PARTICIPATION

        Section 3.1. Commencement of Participation. The Company shall designate
each Executive who is to become an Eligible Participant by resolution of the
Board of Directors and by identifying the Executive as an Eligible Participant
on the attached Appendix.

        Section 3.2. Termination of Participation. At any time, the Company may
determine that an Executive shall cease to be an Eligible Participant. In that
event, the Executive shall not receive further contributions to his Account, but
he shall continue as a Participant and shall continue to have earnings allocated
to his Account, until his Accounts have been distributed or forfeited in full.

                                   ARTICLE IV
                            DEFERRAL OF COMPENSATION

        Section 4.1. Election to Defer Compensation. For the Plan Year beginning
on August 1, 2001, and each January 1 thereafter, and before the Participant's
Termination of Employment, a Participant may make separate elections to defer up
to 90% of his base Compensation and 90% of his bonus, if any, for such Plan
Year.

        Section 4.2. Deferral Agreement. Filing a completed Deferral Agreement
with the Company before the first day of that Plan Year completes a
Participant's deferral election for the Plan Year. The Company shall provide
each Participant with a Deferral Agreement within a reasonable period of time
before the beginning of each Plan Year. An election made pursuant to this
Section shall be effective as of the first day of the Plan Year following the
Company's receipt of the election and shall be irrevocable for the Plan Year.


                                       4
<PAGE>   5

        Section 4.3. Taxes and Recordkeeping.

                (a) Notwithstanding any of the foregoing, a Participant must be
        entitled to receive sufficient Compensation to pay any and all taxes
        incurred as a result of his deferral, including, but not limited to,
        social security taxes.

                (b) At the end of each calendar quarter, the Employer shall
        credit to the Participant's Deferral Account all amounts deferred by him
        during such period.

                                    ARTICLE V
                             EMPLOYER CONTRIBUTIONS

        Section 5.1. Matching Contribution. The Company may, in its sole
discretion, establish an Employer match for a Plan Year and the basis upon which
such match shall be calculated and credited to the Participant's Employer
Contribution Account.

        Section 5.2. Discretionary Contribution. The Company, in its discretion,
may credit an additional amount to a Participant's Employer Contribution Account
at any time or times during a Plan Year.

                                   ARTICLE VI
                             PARTICIPANTS' ACCOUNTS

        Section 6.1. Accounts. The Company shall create and maintain adequate
records to disclose the interest in the Plan of each Participant and
Beneficiary. Records shall be in the form of individual bookkeeping accounts.
Each Participant shall have a separate Deferral Account and Employer
Contribution Account.

        Section 6.2. Earnings.

                (a) At the end of each calendar quarter, each Participant's
        Deferral and Employer Contribution Accounts, including any amount
        credited on the last day of such year, shall be credited with the
        Earnings Rate.

                (b) Notwithstanding the foregoing, the Company may, from time to
        time, offer investment options, the performance of which will be deemed
        to be the Earnings Rate, to the extent selected by a Participant. The
        deemed investment of a Participant among the investment options is
        solely a measure of the investment performance of the Account. It does
        not give the Participant any ownership interest in any investment
        option, nor does it bind the Company or the trustee, if applicable, as
        to the investment of any Rabbi Trust or any other amounts represented by
        the Account. The Company shall adopt procedures to administer such
        investment options.


                                       5
<PAGE>   6

        Section 6.3. Valuation of Accounts. The value of a Participant's
Accounts as of any date shall equal the dollar amount of the Participant's
deferrals made pursuant to Section 4.1 and the Employer's credits pursuant to
Sections 5.1 and 5.2, adjusted pursuant to Section 6.2, and decreased by the
amount of any payments made from the respective Accounts to the Participant or
his Beneficiary.

        Section 6.4. Annual Report. Within 90 days following the end of each
Plan Year, the Company shall provide to each Participant a written statement of
the amount credited to each of his separate Accounts as of the end of that year.

                                   ARTICLE VII
                                     VESTING

        Section 7.1. Vesting.

        (a) A Participant shall always be 100% vested in his Deferral Account.

        (b) Subject to Article VIII, a Participant shall vest in his Employer
Contribution Account as follows:

<TABLE>
<CAPTION>
       Years of Vesting Service                   Vested Percentage
<S>                                               <C>
              3 or less                                    0%
              3 or more                                  100%
</TABLE>

        Section 7.2. Accelerated Vesting. Subject to Article VIII, in the event
of death, Retirement, Total Disability, Change of Control or termination of the
Plan, any unvested portion of Employer Contribution Account shall become 100%
vested.

        Section 7.3. Year of Vesting Service. A Participant shall be credited
with one Year of Vesting Service for each complete Plan Year he is actively
employed by the Employer and is a Participant in the Plan.

                                  ARTICLE VIII
               AGREEMENT AGAINST UNFAIR COMPETITION AND FORFEITURE

        Section 8.1. Agreement Against Unfair Competition. Notwithstanding
anything to the contrary contained herein, a Participant must execute an
Agreement Against Unfair Competition (the "Agreement") prior to the distribution
of any amount from the Employer Contribution Account, substantially in the form
attached hereto as Exhibit "A." The Company, in its sole discretion, will
determine the "Area of Unfair Competition," in Paragraph 2 of the Agreement on
the date of such Participant's termination. The Company reserves the right to
modify the Agreement on an individual basis. In the event a Participant fails to
execute the Agreement within fifteen (15) days of his Termination of Employment
for any reason other than death, his entire Employer Contribution Account


                                       6
<PAGE>   7

shall be immediately forfeited. If the Company, in its sole discretion,
determines that the Participant has breached the Agreement at any time after its
execution by the parties, any remaining amount in the Participant's Employer
Contribution Account shall be forfeited.

        Section 8.2. Forfeiture For Cause. If a Participant is terminated "For
Cause," as herein defined, any and all amounts credited to his Employer
Contribution Account shall be immediately forfeited. "For Cause" means any
termination by the Company for any civil or criminal conduct that causes harm,
financial or otherwise, to the Company. The Company has the sole discretion to
determine what acts or omissions constitute For Cause. In the event the Company
determines that it had grounds to terminate For Cause, it shall notify the
Participant of the funding and forfeiture of his account.

                                   ARTICLE IX
                        PAYMENT OF DEFERRED COMPENSATION

        Section 9.1. Termination of Employment or Total Disability Benefit.

                (a) Upon a Participant's Termination of Employment or his Total
        Disability Date, his vested Accounts shall be distributed in five (5)
        annual installments as provided in Subsection 9.1(b). The first annual
        installment shall be paid as soon as administratively possible, but in
        no event later than ninety (90) days following the Participant's
        Termination of Employment or his Total Disability Date, and subsequent
        annual installments shall be paid on the anniversary of the initial
        payment.

                (b) Each annual installment shall be equal to the remaining
        vested Account, determined as of the first day of the month preceding
        the distribution date, multiplied by the following respective percent:

               First Annual Installment 20%
               Second Annual Installment 25%
               Third Annual Installment 50%
               Fourth Annual Installment 75%
               Fifth Annual Installment 100%


                (c) Notwithstanding the foregoing, if, and only if, a
        Participant's balance in his Accounts is less than $100,000 on his
        Termination of Employment or Total Disability Date, then the entire
        balance shall be paid in a single lump-sum as soon as administratively
        feasible, but in no event later than ninety (90) days after such date.


                                       7
<PAGE>   8

        Section 9.2. Distribution Upon Death.

                (a) In the event a Participant dies prior to the commencement of
        benefits under the Plan, his Beneficiary shall receive benefits as
        follows:

                        (1) If the Participant's Accounts are less than One
                Hundred Thousand Dollars ($100,000.00) as of the date of his
                death, the Accounts shall be distributed in full as soon as
                administratively feasible, but in no event later than ninety
                (90) days after the date that the Company was notified of his
                death.

                        (2) In the event the Participant's Accounts are in
                excess of One Hundred Thousand Dollars ($100,000.00) as of the
                date of his death, the Beneficiary shall receive a distribution
                in accordance with Subsection 9.1(b).

                (b) In the event a Participant has commenced receiving benefits
        and subsequently dies, his Beneficiary shall be entitled to receive the
        remainder of the annual installments in accordance with the schedule set
        forth in Section 9.1(b).

        Section 9.3. Change of Control. In the event a Participant is terminated
within twelve (12) months of a Change of Control, a Participant's entire Account
shall be distributed to him within sixty (60) days after the later of his
Termination of Employment or the Change of Control.

        Section 9.4. Distribution Upon Unforeseeable Emergency. A Participant or
Beneficiary, upon written petition to the Company's chief financial officer, may
withdraw some or all of the balance of the Participant's Deferral Account if the
chief financial officer, in its sole discretion, determines that the requested
withdrawal is on account of an Unforeseeable Emergency and that the amount to be
withdrawn does not exceed the amount necessary to satisfy the Unforeseeable
Emergency. Withdrawals under this Section shall not be permitted to the extent
that the Unforeseeable Emergency may reasonably be relieved through (a)
reimbursement or compensation by insurance or otherwise, (b) liquidation of the
Participant's or Beneficiary's assets (to the extent liquidation would not
itself cause a financial hardship), or (c) suspension or cessation of elective
deferrals under this Plan or the Profit Sharing Plan.

        Section 9.5. Distribution Alternatives. The Board of Directors
authorizes and empowers the President of the Company to establish such other
distribution alternatives for Deferral Accounts, as he deems desirable;
provided, however, that the Board of Directors reserves the right to modify or
revoke such alternatives. Such distribution alternatives shall be set forth in
an addendum to the Plan and distributed to members of the Board of Directors at
least thirty (30) days prior to their effective date. The distribution
alternatives shall supersede any conflicting provision of this Article IX.


                                       8
<PAGE>   9

                                    ARTICLE X
                                 ADMINISTRATION

        Section 10.1. Administrator. The Company shall be the Administrator of
the Plan.

        Section 10.2. Powers and Duties of the Administrator . Subject to the
specific limitations stated in this Plan, the Administrator shall have the
following powers and duties:

                (a) to carry out the general administration of the Plan;

                (b) to cause to be prepared all forms necessary or appropriate
        for the administration of the Plan;

                (c) to keep appropriate books and records;

                (d) to determine amounts to be disbursed to Participants and
        others under the provisions of the Plan;

                (e) to determine, consistent with the provisions of this
        instrument, all questions of eligibility, rights, and status of
        Participants and others under the Plan;

                (f) to exercise all other powers and duties specifically
        conferred upon the Administrator elsewhere in this instrument;

                (g) to interpret, with discretionary authority, the provisions
        of this Plan and to resolve, with discretionary authority, all disputed
        questions of Plan interpretation and benefit eligibility;

                (h) to incur reasonable expenses in the performance of its
        duties; and

                (i) to delegate any of its powers and/or duties, including its
        discretionary authority, to the Company.

        Section 10.3. Correction of Defects. The Administrator may correct any
defect or supply any omission or reconcile any error or inconsistency in its
previous proceedings, decisions, orders, directions, or other actions in such
manner and to such extent as it shall deem advisable to carry out the purposes
of the Plan.


                                       9
<PAGE>   10

                                   ARTICLE XI
                                     FUNDING

        Section 11.1. Plan Unfunded. The obligation to pay benefits under the
Plan represents only a contractual obligation of the Company to make payments
when due. The Company's obligation to pay benefits shall not be secured in any
way, and neither shall set aside assets beyond the reach of their general
creditors for the purpose of paying benefits under the Plan.

        Section 11.2. Insurance Contracts. The Company may determine, in its
sole discretion, to purchase one or more life insurance contracts on the
Participant's life as a means of reserving assets to pay its obligations under
the Plan. In that event, the Participant shall, as a condition to receiving any
benefits under the Plan, consent to the purchase of that insurance, execute any
application or other forms that the insurer reasonably requires, and make other
reasonable efforts to permit the Company to obtain that insurance. A Participant
or Beneficiary shall not have any interest in, or claim to, any such life
insurance policy.

        Section 11.3. Rabbi Trust. The Company may determine, in its sole
discretion, to establish a Rabbi Trust. In such event, the Company may, from
time to time, transfer assets to the trust, but shall not be required to
transfer funds if it so decides.

                                   ARTICLE XII
                                  MISCELLANEOUS

        Section 12.1. Relationship. Notwithstanding any other provision of this
Plan, this Plan and action taken pursuant to it shall not be deemed or construed
to establish a trust or fiduciary relationship of any kind between or among the
Employer, the Participant, the Beneficiary, or any other persons. The right of
the Participant and the Beneficiary to receive payment of deferred compensation
is strictly a contractual right to payment, and this Plan does not grant nor
shall it be deemed to grant the Participant, the Beneficiary, or any other
person any interest in or right to any of the funds, property, or assets of the
Employer other than as a general creditor of the Employer.

        Section 12.2. Other Benefits and Plans. Nothing in the Plan shall be
deemed to prevent the Participant from receiving, in addition to the deferred
compensation provided for under the Plan, any funds that may be distributable to
him at any time under any other present or future retirement or incentive plan
of the Employer.

        Section 12.3. Alienation of Benefits. Neither the Participant nor any
Beneficiary shall have the power to transfer, assign, pledge, alienate, or
otherwise encumber in advance any of the payments that may become due under the
Plan, and any attempt to do so shall be void. Any payments that may become due
under the Plan shall not be subject to attachment, garnishment, or execution or
be transferrable by operation of law in the event of bankruptcy, insolvency, or
otherwise.


                                       10
<PAGE>   11

        Section 12.4. Benefit. This Plan shall be binding upon and inure to the
benefit of the Employer and its successors and assigns.

        Section 12.5. No Employment Guarantee. Except as otherwise expressly
provided, neither the Plan nor any action taken hereunder shall be deemed to
give a Participant the right to be retained as an Employee of the Employer or to
interfere with the right of the Employer to alter the responsibilities and
duties or to discharge the Participant at any time.

        Section 12.6. Tax Withholding. The Employer may withhold from any
payment due hereunder any taxes required to be withheld under applicable
federal, state, or local tax laws or regulations.

        Section 12.7. Tax Liability. The Employer does not expressly or
impliedly guarantee the federal, state and local tax consequences of
participation in the Plan.


                                  ARTICLE XIII
                            AMENDMENT AND TERMINATION

        Section 13.1. Amendment. The Company, by a duly authorized action of the
Board of Directors or a designated committee, reserves the right to amend the
Plan at any time, including the right to modify the Earnings Rate on a
prospective basis. No amendment shall reduce any benefits accrued under the Plan
prior to the date the amendment was duly authorized.

        Section 13.2. Termination. The Company reserves the right to terminate
the Plan at any time, as it deems appropriate. Upon termination of the Plan, no
further Participant deferrals or Employer contributions shall be made to the
Plan. Distribution shall be made in a single, lump sum distribution, within
fifteen (15) days of the Plan's termination date.


                                       11
<PAGE>   12

        Capstone Turbine Corporation has caused this Plan to be executed by its
duly authorized officers, as of the 31st day of July, 2001.




                                           By: /s/ JEFFREY WATTS
                                              ----------------------------------
                                                     Signature

                                               Senior Vice President, Chief
                                                 Financial Officer and Secretary
                                              ----------------------------------
                                                     Office


ATTEST:

/s/ BILL TREECE
-------------------------------
     Signature

Senior Vice President
-------------------------------
     Office





                                       12