On March 3, 2023 the US Department of Justice unveiled The Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks. The pilot begins March 15 and is set to last three years.
There are two sections of the short, not even three-page, document that stand out:
During the Program, every corporate resolution entered into by the Division shall include a requirement that the resolving company implement criteria related to compliance in its compensation and bonus system. The company must also report to the Division annually during the term of the resolution about its implementation of such criteria. These criteria may include, but are not limited to: (1) a prohibition on bonuses for employees who do not satisfy compliance performance requirements; (2) disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and (b) knew of, or were willfully blind to, the misconduct; and (3) incentives for employees who demonstrate full commitment to compliance processes. Division prosecutors will use their discretion in fashioning the appropriate requirements based on the particular facts and circumstances of the case, including, but not limited to, applicable foreign and domestic law. In making this determination, prosecutors will be mindful of, and afford due consideration to, how the company has structured its existing compensation program.
Division prosecutors shall accord, in addition to any other reduction available under applicable policy, a reduction of the fine in the amount of 100% of any such compensation that is recouped during the period of the resolution. Any fine reduction afforded under the Program does not affect any applicable restitution, forfeiture, disgorgement, or other agreed-upon payment by the company.
In a nutshell: If you have a settlement, you need to strengthen your compliance incentives and penalties for non-compliance. Implement clawbacks, and you get the money back you paid out, plus you pay us less of a fine.
These provisions will likely get a lot of attention and provide an incentive for organizations to seek to recoup incentive compensation that had been paid to individuals involved in wrongdoing.
While these provisions will likely encourage organizations to pursue wrongdoers, they fall short in one critical area: they come too late. Both address how things must change post-incident, after Elvis has already left the building.
Organizations would be wiser to heed the wisdom of the DOJ’s Evaluation of Corporate Compliance Programs’ language on incentives, which asks questions about how the incentive program was managed before the incident occurred.
Has the company considered the impact of its financial rewards and other incentives on compliance? Has the company evaluated whether commercial targets are achievable if the business operates within a compliant and ethical manner? What role does the compliance function have in designing and awarding financial incentives at senior levels of the organization? How does the company incentivize compliance and ethical behavior? What percentage of executive compensation is structured to encourage enduring ethical business objectives?
These questions recognize that company incentive programs are a roadmap for potential organizational risk. If you tell people they will be paid $x for achieving objective y, they will do what they can to reach that goal. Most will do so within the lines; some will not and pose enormous risk to the organization. They are the ones who find the “workarounds” and other “innovative thinking” that eventually lead to an enormous settlement.
Unfortunately, it’s rare for the compliance teams to have a say in or even see the incentive plans for the organization. As a result, compliance doesn’t have the opportunity to build in the necessary controls.
Imagine if compliance had seen the Wells Fargo incentive plan that called for eight relationships per customer, or if the Volkswagen compliance team had known of the plan to increase diesel mileage. I’m guessing they didn’t, and, as a result, no one started asking the questions, “What controls do we need in place to ensure that our people aren’t cheating to get to eight accounts per client?” or “How would our engineers cheat to get the mileage up, and where in the process do we have to ensure there are controls in place?
Setting goals and creating employee incentive programs is something for the business to do. But, just like everything else the business does, if compliance is involved early and often, it can help ensure that the goals don’t turn into a recipe for disaster.