On this episode of the Crime, Corruption and Compliance podcast, host Michael Volkov discusses the Department of Justice’s recent focus on incentives and disincentives as part of an effective ethics and compliance program. This includes awards for ethical conduct, clawbacks, and deferred payment schemes to hold officers and employees accountable for misconduct, and requirements for executives to be evaluated on their compliance with laws and regulations. Michael also talks about how companies can create appropriate policies and procedures to incentivize and monitor compliance, and how to design and implement a compensation system that ensures compliance.
Key ideas you’ll hear in this episode:
- DOJ stresses the need for positive incentives for ethical conduct, including awards and annual employee performance reviews.
- Companies already have a strong disincentive for engaging in misconduct, which is termination.
- Recent enforcement actions against companies like Novartis and Wells Fargo have highlighted the gap in the incentive-disincentive framework.
- DOJ is examining the efficacy of clawbacks and deferred payment schemes as an important alternative to massive criminal fines against companies. This will hold the bad actors accountable, as well as those who had supervisory responsibilities and failed to act.
- Clawbacks and punishments for bad actors will need to be incorporated into settlements and terminations. Company policies will need to include more protections and discretion to pull back benefits from bad actors.
- There are a number of issues to consider when implementing a clawback program, including who it applies to, how it is triggered, and how much of the company’s bonus payments should be subject to clawback.
- DOJ anticipates requiring a wide clawback program that extends to senior management level. Crafting these measures will require a collaborative process within the company involving legal and business representatives, human resources, ethics and compliance, senior management, and potentially union representatives or work councils.
- Danske Bank is the first to implement a compliance compensation requirement in their settlement papers with the Justice Department. The settlement includes a provision that executives will be evaluated on their compliance efforts and a failing score will make them ineligible for bonuses.
- Companies need to design and implement compensation systems to incentivize compliance behavior and create disincentives for non-compliant conduct.
KEY QUOTES:
“Your company policies are going to have to incorporate more protections and more discretion for the company to pull back on benefits to bad actors. Bad actors here, I mean not just the actual bribe payer or scheme designer, but also those people who failed to conduct proper oversight and monitoring of the department that engaged in the misconduct.” – Michael Volkov
“In practice, companies need to formulate appropriate policies and procedures, document their system, and demonstrate commitment to enforcement of the policies to incentivize compliance behavior and create clear disincentives for noncompliant conduct.” – Michael Volkov
“A compliance-oriented compensation system has to be implemented along with other clawback and deferred payment systems.” – Michael Volkov
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