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Executive Compliance Comp and Compliance: From Incentives to Clawbacks

There are two problems that every company must deal with at the intersection of executive compensation and compliance. The first is the presence of perverse incentives within organizations, where executives are often encouraged to take excessive risks because they personally profit from them. This misalignment of incentives can lead to unethical behavior and non-compliance, ultimately harming the organization and its stakeholders. The second is both the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) mandates for executive clawbacks.

Incentives

To address this issue, companies need to tie positive incentives directly to senior executives. By holding them accountable for compliance failures, we can align their compensation with compliance objectives. This approach ensures that executives have a personal stake in maintaining ethical practices within the organization. What makes this approach unique is that it is a business response to a legal problem, rather than a government mandate. A business response is always a better way to go, as it allows organizations to take ownership of their compliance programs and tailor them to their specific needs.

Various proposals are discussed in the podcast to ensure senior executives are held personally accountable for compliance failures. One solution, suggested by William Dudley, former president of the Federal Reserve Bank of New York, is for senior management and material risk takers to forfeit their performance bond in the case of large fines. This not only disciplines individual behavior and decision-making but also incentivizes individuals to flag issues when problems arise.

Another approach, outlined in an article titled “Ties That Bind Codes of Conduct,” recommends automatic reduction of pay for officers, directors, and advisors for failures of corporate governance. Executives would agree to pay back a portion of their gross compensation for a set period before the beginning of any improprieties, regardless of their knowledge of misdeeds within the company.

While corporate leaders may not be enthusiastic about being held accountable, these proposals offer a business solution to a legal problem. Holding senior executives responsible for the conduct of others aligns with their obligations under Sarbanes-Oxley and ensures that they are not shielded from the consequences of non-compliance. Shareholders are also becoming less accepting of the argument that leaders should not be responsible for the actions of their employees.

Data from an article by Gretchen Morgenson titled “Ways to Put Your Boss’s Skin in the Game” further supports the need for accountability in executive compensation. The article explores how to make senior executives more responsible for corporate malfeasance, with implications that apply to compliance programs and compensation tied to compliance.  Creating accountability in executive compensation is a critical step towards promoting ethical business practices and compliance within organizations. By tying positive incentives to senior executives, we can ensure that they have a personal stake in maintaining compliance objectives. The proposals discussed in the podcast, such as forfeiting performance bonds and enforcing pay reductions for failures of corporate governance, offer practical solutions to address perverse incentives and drive ethical behavior.

Clawbacks

Clawbacks, often seen as a form of guarantee for businesses, play a vital role in addressing employee misconduct. These provisions, typically included in written contracts, serve as a deterrent and allow organizations to reclaim incentive or bonus funds from employees engaged in wrongful activities. It is important to note that clawbacks apply to compensation received as incentives or bonuses, rather than salary.

The SEC has provided guidance on constructing effective clawback provisions. In their final rule titled “Listing Standards for Recovery of Erroneously Awarded Compensation,” (the Rule) the SEC directs National Securities Exchanges and Associations to establish listing standards for issuers to develop and implement policies for recovering incentive-based compensation in the event of required accounting restatements.

The DOJ has also weighed in on subject of clawbacks, most recently in the 2023 Evaluation of Corporate Compliance Programs (ECCP), it stated “Are the terms of bonus and deferred compensation subject to cancellation or recoupment, to the extent available under applicable law, in the event that non-compliant or unethical behavior is exposed before or after the award was issued? Does the company have a policy for recouping compensation that has been paid, where there has been misconduct? Have there been specific examples of actions taken (e.g., promotions or awards denied, compensation recouped or deferred compensation cancelled) as a result of compliance and ethics considerations?”

In summary, both the SEC and DOJ have now laid out the foundations for both incentives and consequence management.

SEC: The SEC Rule encompasses a wide range of scenarios. Companies are required to claw back incentive compensation erroneously received by current or former executives during the three-year period preceding the required restatement date. The definition of “received” is broad, considering incentive compensation earned even if not yet paid. The recoverable amount may differ from what executives would have received based on the required restatement. The SEC rule prohibits companies from obtaining indemnity insurance to protect executives from clawbacks. This step ensures that executives are held personally accountable for their actions and fosters a culture of compliance within organizations.

DOJ: In the ECCP has emphasized the significance of clawbacks in compliance programs. The ECCP directs companies to develop and apply compensation and clawback policies, shifting the burden of financial penalties away from innocent shareholders. The clear intent to prevent companies from shielding employees involved in illegal and unethical conduct. The DOJ will consider whether a company has incentivized compliance by designing compensation systems that defer or escrow certain compensation tied to conduct consistent with company values and policies. Enforcement of a contract provisions that permit the company to recoup previously awarded compensation if the recipient of such compensation is found to have engaged in or to be otherwise responsible for corporate wrongdoing is now a critical metric that prosecutors will consider. Finally, prosecutors may consider whether provisions for recoupment or reduction of compensation due to compliance violations or misconduct are maintained and enforced in accordance with company policy and applicable laws.

 Practical Steps

To create a robust compliance program that promotes ethical behavior and compliance, companies should consider the following practical advice:

  1. Documented Policies and Procedures: It is crucial for companies to document and reflect clawback policies and procedures in their compensation agreements. This documentation showcases a commitment to compliance and serves as a deterrent for potential misconduct.
  1. Clear Disciplinary Procedures: Companies should have appropriate and clear disciplinary procedures in place when enforcing a compliance program. Publicizing disciplinary actions internally and under local law can have a deterrent effect on employees, emphasizing the consequences of engaging in unlawful or unethical behavior.
  1. Personal Accountability: The DOJ and SEC prioritize holding individuals accountable for misconduct. Prosecutors evaluate whether a corporation’s compensation agreements incorporate clawback provisions that enable penalties to be levied against employees, executives, or directors involved in criminal conduct.

 Conclusion

Clawback provisions have become a crucial element in compliance programs, promoting ethical behavior and ensuring accountability within organizations. The SEC Rule, along with the DOJ’s emphasis on clawbacks from the Monaco Memo to the ECCP, highlights the significance of these provisions in the business world. By implementing well-documented clawback policies, companies can create a culture of compliance that rewards ethical behavior and protects innocent shareholders. Both initiatives prioritize ethical practices and compliance to build a better business environment for all stakeholders.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 13 – Compliance Performance Appraisal Review

One of the ways to operationalize compliance and to drive it into the DNA of an organization is through a performance review. Indeed, the 2023 ECCP stated:
Incentive System…Have there been specific examples of actions taken (e.g., promotions or awards denied) as a result of compliance and ethics considerations? Who determines the compensation, including bonuses, as well as discipline and promotion of compliance personnel?
Most HR experts will opine that properly executed performance appraisals are crucial to organizational productivity as well as the development of employee skills and employee morale. Moreover, they can serve a couple of different functions for a best practices compliance program. First, and foremost, they communicate to each employee their job performance from a compliance perspective.

However, one key is not to approach the performance appraisal review as an isolated event but rather a continual process. This means that instead of trying to play catch-up at the last minute, supervisors should provide feedback and assess job performance throughout the year so annual reviews are grounded in a year’s worth of experience. This includes the compliance component of each job. The second area performance appraisals impact is compensation. The DOJ expect that your compliance program will have both discipline and incentives. But those incentives need to be based upon something. The score or other performance appraisal metrics will provide to you a standard which you can measure and use to evaluate for other purposes such as employee promotion or advancement to senior management going forward.
Three key takeaways:

  1. To incentivize compliance, you must be able to accurately appraise senior managers and employees around compliance.
  2. Clearly communicate your compliance expectations, then fairly evaluate employees on them.
  3. Consider conducting an ongoing review.

For more information, check out The Compliance Handbook, 4th edition here.

 

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 12 – Succession Planning Around Compliance

Another area where Human Resources can help to more fully operationalize compliance is in succession planning. Succession planning is just as important as governance, enterprise risk management and strategic oversight. In other words, it is just as important. Sadly, many companies fail to give it the attention it requires. A PricewaterhouseCoopers (PwC) survey, found nearly one-half of the more than 1,000 directors gauged reported dissatisfaction with their companies’ succession plans. Imagine what that number would be if they took into account the compliance aspect of succession planning. Some of the questions you might consider are the following. How did you fully operationalize compliance into the business unit that you managed? What controls did you put in place? And then what did you do when you found out about it?

Every time I perform a risk assessment and speak to the company’s HR lead, they immediately understand the role than can play in moving forward a company’s compliance program. Even if the HR role is limited in the hiring process, they can ask potential candidates their views to determine underlying business ethics. HR can also begin the compliance inculcation process, even pre-hiring, by talking about the company’s values in the interview process. This sets an expectation that can be built upon if a candidate is selected and in every HR touch point going forward, including looking at employees in the succession planning process.
Three key takeaways:

  1. Succession planning is just as important as governance, enterprise risk and strategic oversight.
  2. Do not begin your succession planning when a senior manager announces their retirement.
  3. You are always being evaluated (or you should be).

For more information, check out The Compliance Handbook, 4th edition here.

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The Power of Compensation: Building a Culture of Compliance

The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have repeatedly emphasized the importance of aligning compensation plans with compliance goals. According to Tom Fox, aligning the compensation plan of salespeople can have a greater impact on compliance revenue than other forms of communication. By incentivizing ethical behavior, companies can reinforce the message of compliance and create a culture that prioritizes adherence to regulations.

To maximize the impact of compensation structures, immediate implementation is crucial. Waiting too long can dilute the message and hinder the desired behavioral changes. Employees should clearly see the connection between their actions and the incentives they receive. This immediate feedback loop motivates them to align their behavior with the goals of the compliance program.

While transparency is important in the incentive system, it should not solely be a democratic process where salespeople design the program around their own needs. However, involving employees in the process can help them appreciate changes that may not be favorable to their individual situations. Transparency fosters a sense of trust and accountability, leading to better acceptance and adherence to the compensation structure.

Compensation can be a powerful motivator for salespeople to act in ways that support the company’s evolving business model and strategy. By integrating compliance incentives into the compensation program, companies can make compliance an integral part of their organizational values. This not only drives compliant behavior but also ensures that employees understand and support the company’s overall strategy.

If your company has not yet integrated compliance incentives, it’s time to catch up. The DOJ and SEC recognized the importance of compliance incentives over 15 years ago, so companies without them are lagging behind. A practical way to start is by allocating a percentage of the discretionary bonus program to compliance. Even a small percentage can demonstrate the company’s commitment to ethical conduct and encourage employees to prioritize compliance.

Compliance incentives play a crucial role in shaping the behavior and mindset of employees within an organization. While disciplinary actions are essential, incentives provide a positive reinforcement mechanism that encourages individuals to embrace compliance as an integral part of their work. Tom Fox emphasizes that compliance incentives need not be elaborate or groundbreaking; what matters most is their consistent implementation.

There are six core principles that form the foundation of successful compliance incentives.

  1. Consistency is Key. Compliance incentives must be consistently applied throughout the organization. By doing so, companies can create a sense of fairness and predictability, reinforcing the message that compliance is non-negotiable.
  1. Supporting Systems. To ensure compliance incentives are followed, it is crucial to have supporting systems in place. These systems can include regular training, clear guidelines, and robust reporting mechanisms, enabling employees to understand and adhere to compliance standards.
  1. Transparency. Making compliance incentives transparent within the organization is essential. By showcasing the recognition and rewards associated with compliance, companies can inspire others to embrace ethical behavior and create a positive ripple effect.
  1. Overcoming Competing Goals. If safety is No.1 within an organization, doing business ethically and in compliance should be goal 1A. But often challenges can arise when competing goals, such as financial pressures, overshadow compliance incentives. To counterbalance this, a strong counterweight is necessary to ensure that compliance remains a priority, even during financial downturns.
  1. Rewarding Performance. Compliance incentives can be used to hold leaders accountable for their performance, aligning their goals with the company’s compliance objectives. This approach ensures that compliance is not sacrificed for short-term financial gains.
  1. Non-Linear Alignment. Compliance incentives should align work in an oblique, non-linear way, allowing employees to choose their own pathways while still adhering to compliance standards. This flexibility empowers individuals to contribute to compliance efforts in a manner that suits their strengths and preferences.

All of these guidelines mean that you must align compliance as an integral part of your company’s DNA. Regularly communicate the importance of compliance and the benefits it brings to the organization and its stakeholders. It is critical to implement compliance incentives at all levels of the company. Division or business unit heads can define pro-social goals and establish supporting structures and systems. Even lower-level employees should have their own version of the compliance incentive process.

There must be tangible incentives offered to employees;  both financial and hierarchical, to those who consistently demonstrate ethical behavior and compliance within your Code of Conduct and relevant laws. These rewards can range from cash awards to certificates, plaques, or even coffee mugs and t-shirts. Obviously Document Document Document is critical. Just as all other parts of your compliance program are documents, so should your incentive program.

Document compliance actions to demonstrate to regulators, if necessary, that your organization takes compliance seriously. This documentation showcases your commitment to ethical business practices and provides evidence of your compliance efforts. There must be support systems in place to reinforce the message of compliance, even during challenging times.

Creating a culture of compliance requires a multifaceted approach, and compliance incentives play a vital role in driving ethical behavior within organizations. By consistently implementing these incentives, aligning employees around compliance goals, and leveraging tangible rewards, companies can foster a sustainable culture of compliance. Remember, compliance is not just a checkbox; it’s an integral part of your organization’s success.

Incorporating compensation systems into compliance programs is a vital step towards building a culture of compliance within organizations. By aligning salespeople’s compensation plans with compliance goals, implementing immediate and transparent structures, and involving HR in the process, companies can reinforce ethical behavior, promote compliance, and drive the success of their compliance programs. Remember, simplicity, alignment with company values, and immediate impact on behavior are key factors to consider when designing your compensation structure. Finally always remember to prioritize compliance and create a workplace culture that values integrity and ethics.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 11 – Institutional Justice and Institutional Fairness

Companies have finally come to realize that institutional justice and fairness are perhaps the most basic tenet of any successful workplace. If employees believe they will be treated fairly, it will engender a level of trust that can work to not simply motivate employees but lead to a more successful workplace and, at the end of the day, a more profitable company. This encompasses the entire lifecycle of the employment relationship, from hiring through separation. It works in areas as seemingly disparate as compensation and incentives, discipline, promotion, and internal reporting.

On this final point, Kyle Welch and Stephen Stubben, in their 2019 paper entitled “Evidence on the Use and Efficacy of Internal Whistleblowing Systems”, noted that a robust whistleblower reporting system speaks to a functioning and ethical corporate culture. Employees who can report issues, in a fair manner, without fear of retaliation are more empowered to make the company run more efficiently and profitably. Yet an equally interesting finding was where there was robust internal reporting, employees were more likely to speak up to improve overall business processes, thereby making the company more profitable.

An often-overlooked role of any CCO or compliance professional is to help provide employees with institutional justice. If your compliance function is seen to be fair in the way it treats employees, in areas as varied as financial incentives, to promotions, to appropriate and consistent discipline meted out across the globe; employees are more likely to inform the compliance department when something goes array. If employees believe they will be treated fairly, it will go a long way to more fully operationalizing your compliance program.
Three key takeaways:

  1. The DOJ and SEC have long called for appropriate and consistent application of both incentives and discipline.
  2. The Fair Process Doctrine will help set institutional justice as the norm in your organization.
  3. Inconsistent application of discipline will destroy your compliance program credibility.

For more information, check out The Compliance Handbook, 4th edition here.

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Mary Shirley’s new book “Living Your Best Compliance Life”

Today, we are diving into the world of compliance with a focus on enhancing compliance programs. We’ll be exploring the key takeaways from my recent conversation with well-known compliance maven Mary Shirley and Tom Fox, where we discuss Mary’s first solo book, “Living Your Best Compliance Life: 65 Hacks and Cheat Codes to Level Up Your Ethics and Compliance Program.” This book offers valuable insights and practical advice for compliance professionals, emphasizing authenticity, engagement, and continuous improvement. Let’s discover some innovative ways to level up your ethics and compliance program!

I asked Mary about her writing style. She began by saying that she had not been confident about her writing skills. She tended to write as she spoke, which served her well for public speaking but not so well in written works. She said she had “tried very hard to improve my writing and part of that has been challenging myself to do things like publish articles because if I didn’t work on it, then it wouldn’t get addressed. The first thing I’d say about writing style is just doing my best with what I have and knowing that it’s not a predominant strength of mine but consciously working on it, listening to feedback from others.”

She added that “as cute as it sounds really being authentic.” For me, speaking in a conversational tone rather than making things legalistic is how I’ve been able to survive as a compliance officer, and it’s how I’m able to survive when talking to other compliance officers as well. We are naturally a stuffy sort of a function, and I’m not really a stuffy person, and so why hide that?”

I asked her about how she wrote, and she said that during the pandemic, she had a bit of extra time since she worked from home and did not have to commute. “Whenever the mood took me, really, I always had in the back of my mind to be thinking about things and conversations with friends and colleagues in the space to note things down as they came to me and to remember to probe people more if they shared an idea that was interesting that I thought could be featured in the book.” She also related that she had  “no kids, no pets, no plants, which I think gives me the unique opportunity to be able to leverage some of my time in ways that I appreciate that others are not necessarily able to. So for me it was, any kind of time. My weekends, I spent a lot of time doing the drafting then.”

We then turned to the chapters of her book, beginning with the first chapter, The Foundation of a Strong Compliance Program. In it Mary highlights the significance of program assessments as the foundation of a compliance program. These assessments help direct compliance programs and provide guidance to new compliance personnel. To make the process more effective, Mary suggests utilizing the free resource guide with customizable worksheets available on Corporate Compliance Insights’ dedicated page for the book. These worksheets help structure and organize ideas, making them adaptable for different environments, organizations, and cultures.

The next chapter is Team Building: Building Stronger Connections, Especially in Remote Work Settings. In the era of remote work, team building has become even more crucial. Mary emphasizes the need for dedicated team building in compliance programs, especially for remote teams. By fostering stronger connections and collaboration, compliance professionals can enhance their program’s effectiveness. Mary’s book offers valuable insights on various team building strategies that can be implemented, even with limited resources.

We next reviewed her chapter entitled, Culture and Communications: Fostering a Culture of Integrity. Creating a culture of integrity within compliance programs is essential for success. Mary’s book delves into the chapter on culture and communications, providing practical guidance on how to foster such a culture. By challenging traditional perceptions of compliance and adopting a more authentic and human-centered approach, compliance professionals can create an environment that promotes ethical behavior and compliance.

In the burgeoning age of AI in compliance, Mary’s next chapter entitled, A Humane Compliance Function: Embracing Authenticity is all the more topical. Gone are the days of a strict and robotic approach to compliance. Mary’s book encourages compliance professionals to embrace a more authentic and humane compliance function. By prioritizing compassion and authenticity, compliance programs can foster trust, engagement, and employee satisfaction. Mary provides cost-effective solutions and practical guidance on how to implement this approach effectively.

It will not surprise compliance professionals to find the next chapter, Unlocking the Power of Compliance Week: Engagement and Feedback. In this chapter Mary focuses on the celebration of Corporate Compliance and  Ethics Week as a powerful tool that is often underutilized. We discussed how Compliance Week can be used as a two-way feedback mechanism to better serve internal clients. Mary shares her experience of using fun and unconventional methods to engage employees during Compliance Week, such as games that require answering compliance questions to earn tools or rewards. This not only tests the absorption of compliance training but also identifies gaps in knowledge.

Compliance Week can provide valuable insights into areas where more work is needed. Mary suggests using Compliance Week to test basic knowledge, such as knowing where to find compliance policies or the name of the chief compliance officer. She even shares an example from her book where people got the answer wrong about the name of the chief compliance officer. By incorporating low-tech methods like easels and whiteboards, compliance professionals can gather information effectively during Compliance Week.

In conclusion, Mary Shirley’s book, “Living Your Best Compliance Life,” offers compliance professionals valuable insights and practical advice for enhancing compliance programs. By focusing on authenticity, engagement, and continuous improvement, compliance officers can create a culture of integrity and foster stronger connections within their teams. Additionally, Compliance Week provides a powerful opportunity for engagement and feedback. By utilizing this tool effectively, compliance professionals can identify areas for improvement and continuously enhance their programs. So, let’s embrace these practical tips and data-driven insights to level up our ethics and compliance programs!

Remember, Mary’s book will be released on August 15th in both Kindle and paperback formats. You can find it on Amazon.com.

You can also reach Mary at the following:

LinkedIn

Book: 65 Hacks & Cheat Codes to Level Up Your Ethics & Compliance Program | from CCI Press | Compliance Communication Handbook (corporatecomplianceinsights.com)

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PCAOB Proposed Rule on Compliance Audits

In the realm of auditors intersecting compliance and fraud risk audits, a fierce battle of perspectives rages on. Compliance professionals yearn for a bigger role, a seat at the table to tackle potential compliance violations. Yet, as the storm brews, the audit community hesitates, fearing the unfamiliar waters of becoming compliance and legal violation experts. Brace yourselves, for the unexpected outcome lies just beyond the horizon.

Compliance professionals are generally accepting of the idea that audit firms might look for compliance violations, as long as the proposal includes meeting with the chief ethics and compliance officer and reviewing the state of the compliance program with the audit committee. Many auditors do not want the additional responsibility, claiming it is outside their area of expertise and the requirement will increase audit costs.

Other trade and industry groups have weighed in as well. The American Bankers Association said in a letter “With respect to the legal function, auditors may be put into a position to second-guess a company’s own legal counsel regarding whether noncompliance may have occurred.  “With respect to the management function, the requirement that auditors perform ‘enhanced risk assessment procedures’ could result in auditors second-guessing how management allocates the company’s financial and human resources. This would not only blur responsibility between the legal, management and audit functions, but would also divert auditors’ time, attention and resources away from auditing financial statements.”

The group went on to note that  “Various federal and state regulatory authorities in the United States have a responsibility to examine, monitor and, where appropriate, bring enforcement actions against companies that do not adhere to laws and regulations. Moreover, given the many and varied private rights of action available against corporations in the United States, companies are subject to even further scrutiny and liability for noncompliance.”

Stephen Foley, writing in the Financial Times, said that some companies have objected that the implementation of the proposal might negatively impact the attorney/client privilege. He wrote “companies said the new rules could mean more correspondence with their lawyers would have to be shared with auditors, with the result that it loses its legal privilege and could become evidence in litigation.” He cited to Ronald Edmonds, controller at the chemicals group Dow, that “Company personnel could be more hesitant to disclose legal violations to their counsel if they fear that the communication will not be privileged. Attorneys may also hesitate to prepare written analysis for their clients for fear that it would end up non-privileged and ultimately in the hands of a legal adversary.”  Amy Johnson, controller at RTX said “The broad scope and volume of information that would be required to be shared with auditors is likely to encompass sensitive attorney advice.”

Conversely, PCAOB Chair Erica Williams told the FT, “Companies’ non-compliance with laws and regulations, including fraud, can really have devastating consequences for investors. This proposal is simply making sure that the protection investors think they’re getting today matches what the standard requires.” Foley cited to Brandon Rees, the AFL-CIO deputy director who said “All too often when a fraud is exposed, it rarely comes to light from the auditors. Auditing standards should require auditors to have uncomfortable conversations with management.”

The PCAOB will have to consider this feedback from its consultation period before deciding whether to push ahead with the proposal, or to amend or scrap it. Two of the five board members have said they are opposed to the new rules, but a simple majority is all that is needed. What are some of the issues that auditors may face if the proposed rule is enacted?

If auditors are mandated to assume more compliance responsibilities as per the proposal, there may be several challenges to address. One of the primary concerns is whether auditors have the requisite knowledge and training to identify and manage compliance violations efficiently. Furthermore, the elevated costs associated with hiring legal experts, coupled with the increased liability facing auditors can potentially create a barrier to the rule’s successful implementation.

The proposal has the potential to shape how audit firms approach their investigations into client companies, particularly with regard to compliance and legal violations. By requiring auditors to look more closely at non-compliance with laws and regulations, the proposal is intended to deliver more comprehensive audits and prevent financial fraud. However, the incorporation of duties usually performed by legal professionals into the auditing process could complicate the auditors’ role, potentially raising costs and increasing liability.

The proposed rule generates divided opinions between compliance professionals and the audit community. Compliance executives generally support the proposal, provided it includes engagement with the chief ethics and compliance officer, and necessitates a comprehensive review of the compliance program with the audit committee. On the contrary, most auditors, represented by the PCAOB, argue against the implementation of this rule, citing a lack of necessary expertise to identify compliance violations, and increased burden of audit fees.

If auditors are mandated to assume more compliance responsibilities as per the proposal, there may be several challenges to address. One of the primary concerns is whether auditors have the requisite knowledge and training to identify and manage compliance violations efficiently. Furthermore, the elevated costs associated with hiring legal experts, coupled with the increased liability facing auditors can potentially create a barrier to the rule’s successful implementation.

Compliance professionals and the audit community clash over a proposed rule on auditors reporting compliance violations. As tensions rise and perspectives collide, can these two groups find common ground or will they remain at odds, leaving the fate of the proposal uncertain?

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 10 – Sales Incentives and Compliance

In the DOJ’s 2023 ECCP, Incentives and Disciplinary Measures it stated:
Incentive System – Has the company considered the implications of its incentives and rewards on compliance? How does the company incentivize compliance and ethical behavior? Have there been specific examples of actions taken (e.g., promotions or awards denied) as a result of compliance and ethics considerations? Who determines the compensation, including bonuses, as well as discipline and promotion of compliance personnel?
When considering how a company could use incentives to further a compliance program and the role of HR in this process, we should also consider how incentives might lead to the converse, as they did in the now-infamous Wells Fargo fraudulent-accounts scandal. When you misalign these two concepts with a faulty sales strategy it can lead to a catastrophic failure, literally costing the company millions of dollars in fines, loss of business and depreciation of shareholder value. Whatever your incentive structure, there will be employees who try to game the system. Some will do it with the tacit or explicit approval of management. You, as the CCO, may be required to act.

Three key takeaways:

  1. Even a benign sales incentive program came become skewed.
  2. A sales incentive program can become high risk or illegal if not properly monitored.
  3. If there is alignment between the strategy, purpose and structure of an incentive system, it often makes the difference between a good and a bad one.

For more information, check out The Compliance Handbook, 4th edition here.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 9 – Clawbacks

In this podcast series, host Tom Fox explores the growing emphasis on clawback provisions in compliance programs and employee compensation.

Tom Fox delves into the crucial topic of clawback provisions in compliance programs and employee compensation. In light of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) prioritizing individual accountability for misconduct, clawbacks have become essential in promoting ethical behavior and ensuring compliance. So, let’s dive in and explore the significance of clawbacks in today’s evolving compliance landscape.

Understanding Clawbacks and Incentive-Based Compensation:

Clawbacks, as discussed in the podcast, are provisions that enable organizations to reclaim incentive or bonus funds from employees engaged in misconduct. They serve as a powerful deterrent and hold individuals accountable for their actions. Previously, clawbacks were not seen as necessary, but the DOJ now mandates their inclusion in compensation agreements.

The DOJ’s Focus on Ethical Business Practices:

The DOJ, in its pursuit of punishing officers and employees who fail to conduct business ethically, has made clawbacks a part of best practices compliance programs. To evaluate a company’s compliance program, the DOJ and SEC consider whether the organization has appropriate disciplinary procedures in place. Publicizing disciplinary actions internally and under local law can have a deterrent effect, emphasizing the importance of transparent consequences for misconduct.

The Role of Clawbacks in Compliance Programs:

Having clawback provisions is now seen as a crucial aspect of a good corporate compliance culture. It promotes compliant behavior and demonstrates a company’s commitment to its compliance program. The DOJ investigates whether corporations have included clawback provisions in their compensation agreements and taken steps to execute on such agreements. This highlights the significance of documenting and reflecting these policies and procedures in a company’s own compensation practices.

The SEC’s Final Rule on Clawbacks:

The SEC’s final rule, titled “Listing Standards for Recovery of Erroneously Awarded Compensation,” directs issuers to establish policies for recovering incentive-based compensation in the event of required accounting restatements. This rule applies to both Big R and Little R restatements and provides guidance in the anti-corruption world. Companies are now required to claw back incentive compensation erroneously received by current or former executives during the three-year period preceding the required restatement date.

Ensuring Compliance with Clawbacks:

It is essential for companies to construct well-documented clawback programs that align with the SEC’s guidance. The recoverable amount may differ from what executives would have received based on the required restatement, emphasizing the need for clarity and transparency in compensation agreements. Additionally, the SEC’s final rule prohibits companies from obtaining indemnity insurance to protect executives from clawbacks, further reinforcing the importance of accountability.

Conclusion:

As we’ve explored in this episode, clawbacks play a vital role in promoting ethical behavior and compliance within organizations. The DOJ’s emphasis on individual accountability and the SEC’s final rule on clawbacks demonstrate the evolving landscape of compliance. By implementing well-documented clawback provisions, companies can deter misconduct, hold individuals accountable, and showcase their commitment to ethical practices. Remember, incorporating clawbacks into your compliance program is not just a regulatory requirement but a practical step towards fostering a culture of integrity and responsibility.

 Three key takeaways:

1. The DOJ now mandates clawbacks in a compliance program.

2. The SEC has passed a clawback rule apart from the Monaco Memo.

3. Your clawback program should be well-documented.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 8-Executives and Compliance Compensation Incentives

The lack of personal consequences for senior executives responsible for corporate malfeasance is explored in this podcast episode. Executives are incentivized to take excessive risks, knowing they won’t have to pay any fines, while shareholders bear the brunt of penalties. Proposed solutions include the concept of “skin in the game,” where executives contribute a portion of their compensation to a pool of money that can be used to pay penalties. Another suggestion involves forfeiting the performance bond of senior management in the case of large fines. A third approach suggests creating a contract that would enforce a reduction in pay for failures of corporate governance. These proposals aim to hold senior executives personally accountable for compliance failures and align executive compensation with compliance objectives. HR professionals play a crucial role in designing and implementing positive incentives to foster a culture of compliance and ethical conduct within organizations.

When it comes to compliance failures, the penalties are usually paid by shareholders, leaving senior executives largely untouched. This lack of personal accountability creates a disconnect between executive actions and the consequences of those actions. It’s high time we bridge this gap and ensure that senior executives are held personally responsible for compliance failures. What are some proposed solutions:

1. “Skin in the Game”. One proposed solution, advocated by William Dudley, former president of the Federal Reserve Bank of New York, suggests that senior management and material risk takers should forfeit their performance bond in the case of large fines. This approach would discipline individual behavior and decision-making, incentivizing individuals to flag issues when problems arise.

2. Automatic Pay Reductions. Another approach, proposed in an article titled “Ties That Bind Codes of Conduct,” suggests automatic reduction of pay for officers, directors, and advisors for failures of corporate governance. Executives would agree to pay back a portion of their gross compensation for a specified period before the beginning of any improprieties, regardless of their knowledge of misdeeds within the company.

Benefits of Accountability for Senior Executives:

1. Aligning Incentives. Corporate leaders cannot afford to turn a blind eye to compliance failures anymore. Holding senior executives accountable ensures that their compensation is directly tied to compliance objectives, aligning incentives and promoting ethical business practices.

2. Addressing Perverse Incentives. Perverse incentives in corporate pay, such as additional compensation based on company performance, can lead to unethical behavior and non-compliance. By implementing accountability measures, we can address these perverse incentives and create a culture of ethical behavior within organizations.

3. Driving Positive Change. Creating positive incentives within organizations is crucial to driving ethical behavior and compliance. HR professionals play a pivotal role in designing and implementing these incentives, ensuring that they are effective in promoting a culture of compliance.

Three key takeaways:

1. Perverse incentives are named that for a reason; they really are bad.

2. How can you create positive incentives in your organization?

3. There is a business response to this legal issue. Employ it.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.