Tag: financial incentives

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Compliance Tip of the Day

Compliance Tip of the Day: Leveraging Compensation to Drive Compliance

Welcome to “Compliance Tip of the Day,” the podcast where we bring you daily insights and practical advice on navigating the ever-evolving landscape of compliance and regulatory requirements.

Whether you’re a seasoned compliance professional or just starting your journey, our aim is to provide you with bite-sized, actionable tips to help you stay on top of your compliance game.

Join us as we explore the latest industry trends, share best practices, and demystify complex compliance issues to keep your organization on the right side of the law.

Tune in daily for your dose of compliance wisdom, and let’s make compliance a little less daunting, one tip at a time.

Today, your compliance program must fully incentivize compliance and impose consequences for negative actions by senior management.

 

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The Argentieri Speech: Mid-Point Reflections on the DOJ’s Compensation Clawback Pilot Program

Principal Deputy Assistant Attorney General Nicole M. Argentieri spoke at the Society of Corporate Compliance and Ethics 23rd Annual Compliance & Ethics Institute. ( A copy of her remarks can be found here.) She reiterated the long-stated policy that compliance professionals play a critical role in ensuring companies comply with the law and foster a culture of ethics and integrity. She noted that the Department of Justice (DOJ) has made it clear that companies are the first line of defense against corporate crime, and compliance officers are on the front lines of this defense. The 2024 update to the DOJ’s Evaluation of Corporate Compliance Programs (ECCP) and the introduction of new pilot programs in 2024 underscored the increasing importance of the roles of compliance professionals. This blog post will review her remarks on the DOJ Compensation Incentives and Clawbacks Pilot Program (Clawbacks Program).

The Early Impact: Changing Corporate Behavior

Argentieri believes that early indications suggest these innovations are changing corporate behavior. One notable example comes from a company under agreement with the Criminal Division that required adherence to compliance standards and reporting misconduct as part of its annual performance reviews. Coupled with a company-wide messaging campaign, these efforts have increased reporting of potential compliance issues—a clear sign that employees are responding to the new incentives.

Moreover, the DOJ has observed companies integrating assessments of how employees demonstrate core values into their performance reviews. For example, one company now evaluates employees across categories such as individual and team performance, goal accomplishment, and demonstration of core values. These metrics are then factored into both compensation and promotion decisions. This approach reinforces the importance of ethical behavior and embeds compliance into the fabric of corporate culture.

Dual Pillars of the Clawbacks Program

The program is built on two foundational pillars. The first involves mandating that every corporate resolution under the Criminal Division’s supervision include compliance-related criteria in its compensation and bonus systems. This mandate compels companies to establish metrics that reward compliance-promoting behavior and deter misconduct. While similar language has been included in some corporate resolutions, the pilot program has made it a requirement in every Criminal Division resolution since its inception. So far, this requirement has been incorporated into nine corporate resolutions spanning five industries: tech, finance, crypto, manufacturing, and energy.

This shift is a formality and a strategic realignment in how companies approach compensation. By linking financial incentives to ethical behavior, these nine companies set a precedent for others in their industries. They align compensation with financial performance and the broader goal of conducting business ethically. This is a significant move, one that has the potential to set a new tone across the marketplace.

The Second Pillar: Fine Reductions for Financial Accountability

The second part of the Clawbacks Program offers a tangible incentive for companies to hold individuals financially accountable for misconduct. Specifically, companies that recoup or withhold compensation from culpable employees—or those who had supervisory authority and were aware of or willfully blind to the misconduct—are eligible for a fine reduction. The reduction is equal to the amount of the withheld compensation, reflecting the DOJ’s commitment to promoting financial accountability as a cornerstone of corporate compliance.

Argentieri reviewed the two companies that have benefited from this aspect of the clawbacks program; both come from Foreign Corrupt Practices Act (FCPA) enforcement actions. Albemarle, for instance, implemented procedures to freeze future bonuses for those suspected of misconduct, those who directly oversaw employees involved in misconduct, or those who ignored red flags. As a result, Albemarle received a reduction in its criminal monetary penalty equal to the amount of the withheld bonuses. In recognition of its substantial cooperation and significant remediation efforts, Albemarle also received a 45% reduction from the low end of the applicable penalty range—the highest percentage reduction to date.

Similarly, SAP withheld compensation from culpable employees and defended this decision through litigation, reinforcing the message that misconduct would have individual financial consequences. SAP’s actions not only earned the company a fine reduction equal to the amount of the withheld compensation but also played a critical role in the DOJ’s decision to grant a 40% reduction in its overall fine.

Lessons for Compliance Professionals: The Power of Financial Incentives

The lessons from the DOJ’s clawbacks pilot program are clear and compelling for compliance professionals. First, integrating compliance into compensation structures is a powerful tool for driving ethical behavior and deterring misconduct. Companies that make compliance a critical factor in determining compensation send a strong message to their employees: engaging in ethical behavior is not just encouraged but essential for business success.

Second, the importance of financial accountability must be balanced. The DOJ’s willingness to reduce fines for companies that recoup compensation from culpable employees highlights the agency’s commitment to holding individuals responsible for their actions. This aspect of the pilot program is particularly significant as it underscores the role of individual accountability in fostering a strong culture of compliance.

Finally, continuous evaluation is key. The DOJ is urging companies to regularly assess the effectiveness of their compliance-linked compensation systems, seek feedback, and make necessary adjustments. This iterative process ensures compliance metrics remain relevant and effective, allowing companies to stay ahead of emerging risks and maintain a robust compliance culture.

As we move towards the second half of the DOJ’s pilot program, the early successes in promoting compliance through compensation-linked incentives and financial accountability are setting the stage for a new era in corporate governance. The evidence so far suggests that this approach is feasible and effective in driving meaningful change in corporate behavior.

For those in the compliance profession, this is a pivotal moment. Integrating compliance into compensation and emphasizing financial accountability are significant advancements in corporate ethics and governance. It’s an opportunity to champion these changes within your organization and to be part of a broader movement that aligns financial success with ethical business practices.

In the long run, this pilot program’s true test will be its enduring impact on corporate behavior. But if the early indicators are anything to go by, we are witnessing the beginning of a new chapter in compliance—one where doing the right thing is not just the ethical choice but also the smart one.

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Lessons on Incentives and Discipline from Star Trek: Mirror Mirror

Last month, I wrote a blog post on the tone at the top, exemplified in Star Trek’s Original Series episode, Devil in the Dark. Based on the response, some passionate Star Trek fans are out there. I decided to write a series of blog posts exploring Star Trek: The Original Series episodes as guides to the Hallmarks of an Effective Compliance program set out in the FCPA Resources Guide, 2nd edition. Today, I will continue my two-week series by looking at the following Hallmarks of an Effective Compliance Program laid out by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in the FCPA Resources Guide, 2nd edition. Today, we look at lessons on financial incentives and disciplinary measures in a best practices compliance program from the episode Mirror Mirror.

The episode Mirror, Mirror offers a unique and insightful perspective on the importance of financial incentives and disciplinary measures in shaping organizational culture. Through the lens of a parallel universe where the Federation’s values are inverted, this episode provides valuable lessons for compliance professionals on how incentives and disciplinary measures can influence behavior and promote ethical standards.

In Mirror, Mirror, Captain Kirk, Dr. McCoy, Scotty, and Uhura are accidentally transported to a parallel universe due to a transporter malfunction. A brutal Terran Empire stands for the United Federation of Planets in this “mirror universe.” Here, officers advance through assassination, and disobedience is met with severe punishment. The stark contrast between this universe and the ethical Federation highlights the significance of well-structured incentives and disciplinary measures in fostering a culture of compliance.

Lesson 1. The Role of Incentives in Promoting Ethical Behavior

Incentives motivate employees to adhere to compliance standards and ethical behavior. The episode illustrates the impact of perverse incentives and how they can drive unethical actions. You must work to align your financial and non-financial incentives with your organization’s ethical values. Businesses should design incentive structures that promote compliance and ethical behavior. This can include recognition programs, bonuses for ethical conduct, and career advancement opportunities for those who demonstrate integrity. Celebrating and rewarding employees who adhere to compliance standards reinforces the importance of ethical behavior and encourages others to follow suit.

Through this episode’s ‘mirror’ structure, we can use examples of perverse incentives to gain insight into the incentives that will work in 2024.  In the mirror universe, officers are incentivized to commit acts of violence and treachery to earn promotions and power. This system rewards unethical behavior and creates a toxic environment of fear and mistrust. Now, contrast these actions with the universe, which encompasses the United Federation of Planets (UFP) and promotes values of cooperation, integrity, and mutual respect. This contrast emphasizes aligning incentives with ethical standards to foster a positive organizational culture.

Lesson 2. Fair and Consistent Discipline

Disciplinary measures are essential for maintaining accountability and addressing non-compliance. However, they must be implemented fairly and consistently to avoid creating a culture of fear. Every compliance function must ensure that disciplinary actions are consistent, fair, and proportionate to the severity of the violation. This approach helps maintain trust in the compliance program and encourages accountability. Moreover, it creates an environment where employees feel comfortable reporting non-compliance without fear of retaliation. This requires clear communication about the disciplinary process and assurance of confidentiality.

Once again, in the alternative universe our Enterprise crew finds itself in, we can learn from the converse of that from the UFP. In the mirror universe, there is severe punishment, and discipline is maintained through fear and harsh punishment. As a result, people develop a toxic culture where self-preservation takes precedence over commitment to moral behavior. Our universe’s Enterprise’s approach to discipline emphasizes accountability and correction rather than punishment, illustrating how fair disciplinary measures can support a healthy compliance culture.

Lesson 3. The Influence of Leadership on Incentives and Discipline

Leadership is critical in shaping the effectiveness of incentives and disciplinary measures. Leaders set the tone for organizational culture and can influence employee behavior through actions and decisions. Top management should lead by example.  Business leaders should model ethical behavior and demonstrate a commitment to compliance through their actions and decisions. This sets a positive example for employees and reinforces the organization’s values. In addition to leading by example, the C-Suite and Board of Directors should actively support compliance initiatives, including developing and promoting incentive and disciplinary systems that align with ethical standards.

In both universes, Captain Kirk’s leadership style is a key factor in influencing the behavior of his crew. In the prime universe, his commitment to ethical standards and fair treatment promotes a culture of integrity. In the mirror universe, the universe’s leadership at all levels encourages treachery and violence, demonstrating how leaders can perpetuate a toxic culture through negative incentives and harsh discipline.

Lesson 4. Designing Effective Incentive and Disciplinary Systems

To create a culture of compliance, organizations must carefully design their incentive and disciplinary systems to align with ethical standards and organizational values. First and foremost, your incentives and discipline must align with your organizational values and goals. This helps reinforce the importance of compliance and ethical behavior. When it comes to incentives, they are not simply financial but non-financial incentives. Your organization should offer a variety of incentives, such as financial rewards, recognition programs, and career development opportunities, to appeal to different motivations and preferences.

To design appropriate incentives and discipline, you should start with clear and transparent policies governing the incentive and disciplinary program. These policies should be well-defined, communicated, and easily accessible to all employees. This includes the specific rewarded or penalized behaviors, the criteria for determining appropriate incentives or disciplinary actions, and the appeal and review processes.

Lesson 5. Continuous Monitoring and Improvement

Your compliance team should continuously solicit employee feedback on the effectiveness and fairness of the incentive and disciplinary programs. This is a part of any Speak Up culture, as you want to encourage open communication channels for employees to raise concerns or suggest improvements. Metrics are a part of every system used to track the program’s performance, including incident rates, consistency and fairness of disciplinary actions, and employee satisfaction and trust in the program. Benchmarking against industry trends can also be a critical piece of information.

Always remember that unintended consequences can negatively impact every compliance program. Therefore, you should proactively identify and address any unintended consequences or perverse incentives that may arise from the program. Finally, adjust and improve your program to mitigate potential negative impacts on employee behavior or organizational objectives.

Mirror, Mirror provides a powerful illustration of the impact of incentives and disciplinary measures on organizational culture. By learning from the stark contrasts between the mirror and the prime universe, compliance professionals can design systems that promote ethical behavior and foster a culture of compliance. Incorporating these lessons into your compliance strategy can help ensure that your organization is prepared to navigate the complexities of today’s regulatory environment while upholding the highest ethical standards. As the episode demonstrates, the right incentives and disciplinary measures can make all the difference in creating a positive and compliant organizational culture.

Join us tomorrow as we consider the lessons from the Star Trek episode The Omega Glory on dealing with third parties.

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Compliance Tip of the Day

Compliance Tip of the Day: Compensation Incentives and Clawbacks

Welcome to “Compliance Tip of the Day,” the podcast where we bring you daily insights and practical advice on navigating the ever-evolving landscape of compliance and regulatory requirements.

Whether you’re a seasoned compliance professional or just starting your journey, our aim is to provide you with bite-sized, actionable tips to help you stay on top of your compliance game.

Join us as we explore the latest industry trends, share best practices, and demystify complex compliance issues to keep your organization on the right side of the law.

Tune in daily for your dose of compliance wisdom, and let’s make compliance a little less daunting, one tip at a time.

In this episode, we consider what the DOJ has done in terms of emphasizing financial incentives and penalties for compliance.

 

For more information on the Ethico ROI Calculator and a free White Paper on the ROI of Compliance, click here.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 6-Six Core Principles for Compliance Incentives

In these podcast episodes, Tom Fox discusses the importance of incorporating incentives and support systems into a company’s compliance program. He presents six core principles for effective compliance incentives, emphasizing the need for simplicity, visibility, and institutional mechanisms to ensure their longevity. Fox also highlights the role of human resources in implementing compliance programs and the positive impact it can have on organizations. By understanding and implementing these principles, companies can create a culture of compliance, reduce the risk of unethical behavior, and enhance their credibility.

I have developed six core principles for incentives, adapted from a MIT Sloan Management Review article, entitled “Combining Purpose with Profits”, and formulated them for the compliance function in an anti-corruption compliance program.

1.     Compliance incentives don’t have to be elaborate or novel.

2.     Compliance incentives need supporting systems if they are to stick.

3.     Support systems are needed to reinforce compliance incentives.

4.     Compliance incentives need a “counterweight” to endure.

5.     Compliance incentive alignment works in an oblique, not linear, way.

6.     Compliance incentive initiatives can be implemented at all levels.

Obviously, this list is not exhaustive. Yet it is now more important than ever that you demonstrate tangible incentives for your employees to gain benefits, both financial and hierarchical, through doing business ethically, in compliance with your own Code of Conduct and most certainly in compliance with relevant anti-bribery laws. It is also a requirement that such actions be documented so they can be demonstrated to the regulators, if they come knocking.

Three key takeaways:

  1. Compliance incentives do not have to be elaborate or novel.
  2. You must create support systems for your compliance incentives.
  3. Compliance incentives should be implemented at all levels.
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The Week That Was in Compliance – The ECCP: Part 1 – Incentives

In addition to the speeches presented at the ABA’s 38th Annual National Institute on White Collar Crime, by Deputy Attorney General Lisa Monaco (2023 Monaco Speech) and Assistant Attorney General Kenneth A. Polite (Polite Speech); there was the release of the 2023 U.S. Department of Justice Criminal Division Evaluation of Corporate Compliance Programs (ECCP). Today we will begin a multi-part review of this document by considering financial incentives.

This section begins with a new introduction which makes clear the seriousness in which the Department of Justice (DOJ) views incentives, both financial and other types of incentives. The ECCP states, “The design and implementation of compensation schemes play an important role in fostering a compliance culture. Prosecutors may 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. Some companies have also enforced 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. 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. Compensation structures that clearly and effectively impose financial penalties for misconduct can deter risky behavior and foster a culture of compliance.”

However, the DOJ reiterated that “providing positive incentives, such as promotions, rewards, and bonuses for improving and developing a compliance program or demonstrating ethical leadership, can drive compliance. Prosecutors should examine whether a company has made working on compliance a means of career advancement, offered opportunities for managers and employees to serve as a compliance “champion”, or made compliance a significant metric for management bonuses. In evaluating whether the compensation and consequence management schemes are indicative of a positive compliance culture.”

Neither of these concepts for incentives are new. Financial incentives were a part of the original 10 Hallmarks of an Effective Compliance Program, as delineated in the 2012 edition of the FCPA Resource Guide. It was brought forward in the 2020 2nd edition. Promotions, rewards and bonuses were also discussed in both of those documents as well as other DOJ pronouncements and formulations over the years. However, this is the first time the DOJ has specifically spelled out the role of the ‘compliance champion’ as both an indicia of a best practices compliance program as well as a mechanism to demonstrate a ‘positive compliance culture.’

The ECCP also added a new section on financial incentives which directs prosecutors to specifically evaluate how a company designs and applies financial incentives. It states:

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 ethicsconsiderations? Who determines the compensation, including bonuses, as well as discipline and promotion of compliance personnel?

Rephrasing these questions, a compliance professional might consider them in the following manner:

  1. How does the company incentivize compliance and ethical behavior?
  2. Has the company considered the implications of its incentives and rewards on compliance?
  3. Who determines the compensation, including bonuses, as well as discipline and promotion of compliance personnel?
  4. Have there been specific examples of actions taken (g., promotions or awards denied) as a result ofcompliance and ethics considerations?

These four questions basically breakdown into the following continuum: (1) Assessment, (2) Analysis, (3) Implementation; and (4) Monitoring.

Incentive program assessment. Here you need to review your corporate incentive program for all employees, most particularly the discretionary bonus program but also your non-financial incentives such as promotion. Is your bonus program only related to individual sales, division sales or other similar metric or overall company performance? You can begin with some questions suggested by the ECCP: What role does the compliance function have in designing and awarding financial incentives at senior levels of the organization? Has the company evaluated whether commercial targets are achievable if the business operates within a compliant and ethical manner?

If you do not have any component for doing business ethically and in compliance, your entire compliance program is probably falling short at this point. You should also see if this is a query for promotion and not simply does an employee.

Incentive program analysis. Here you need to see what perverse incentives may exist in your organization. Obviously if meeting your target numbers is the sole criteria, your program is once again falling short. On the promotion front, you need to analyze patterns of promotion to (1) see if any employees with ethical or compliance program violations have been promoted; and (2) also determine if employees are promoted simply for NOT have any ethical violations. This would lead to a review of whether or not promoted employees have been actively participated in improving or maintaining a culture of compliance. How does the company incentivize compliance and ethical behavior? What percentage of executive compensation is structured to encourage enduring ethical business objectives?

Incentive program implementation. After implementation of the incentive program, it must be monitored. The ECCP suggests an inquiry into the following area: Has the company considered the impact of its financial rewards and other incentives on compliance? Additionally, what role, if any, did the corporate compliance function have in advising on the bonus program or participating in setting the bonus and promotion structures?

Incentive program monitoring. Here there needs to be ongoing monitoring of the incentive program, including has the company ensured effective management of the incentive program? The ECCP suggests a review of how much compensation has in fact been impacted (either positively or negatively) on account of compliance-related activities?

Join me tomorrow where I take a deep dive into discipline or the new formulation, “consequence management.”

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31 Days to More Effective Compliance Programs

Day 12 – Financial Incentives for Compliance

One of the areas that many companies have not paid as much attention to in their compliance programs is compensation and incentives. However, the DOJ and SEC have long made clear that they view monetary structure for compensation, rewarding those employees who do business in compliance with their employer’s compliance program, as one of the ways to reinforce the compliance program and the message of compliance.

This was made clear again in the Monaco Memo, which stated, “Corporations can help deter criminal activity if they reward compliant behavior and penalize individuals who engage in misconduct. Compensation systems that clearly and effectively impose financial penalties for misconduct can incentivize compliant conduct, deter risky behavior, and instill a corporate culture in which employees follow the law and avoid legal “gray areas.”

Moreover, the Monaco Memo tied compensation to a company’s culture of compliance. It stated, “Similarly, corporations can promote an ethical corporate culture by rewarding those executives and employees who promote compliance within the organization. Prosecutors should also consider whether a corporation’s compensation systems provide affirmative incentives for compliance-promoting behavior. Affirmative incentives include, for example, the use of compliance metrics and benchmarks in compensation calculations and the use of performance reviews that measure and reward compliance-promoting behavior, both to the employee and any subordinates whom they supervise. When effectively implemented, such provisions incentivize executives and employees to engage in and promote compliant behavior and emphasize the corporation’s commitment to its compliance programs and culture.”

Yet compensation incentives have long been key to any best practices compliance program. As far back as 2004, then SEC Director of Enforcement Stephen M. Cutler noted that integrity, ethics, and compliance needed to be part of promotion, compensation, and evaluation processes: “At the end of the day, the most effective way to communicate that “doing the right thing” is a priority, is to reward it.”

The 2020 FCPA Guidance, 2nd edition, stated the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms, such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership.” The Monaco Memo takes it a step further by asking more broadly has your company, “incentivized employee behavior as part of its efforts to create a culture of ethics and compliance within its organization.”

Three key takeaways:

  1. The DOJ and SEC have long advocated compensation as a way to motivate employees into ethical and compliant behaviors
  2. Keep the compliance aspects of your compensation structure simple and easy for your employees to understand
  3. Have full transparency in the framework of your compensation structure
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Incentives in Compliance: Part 1 – Financial Incentives

One of the areas that many companies have not paid as much attention to in their compliance programs is compensation and incentives. However, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have long made clear that they view monetary structure for compensation, rewarding those employees who do business in compliance with their employer’s compliance program, as one of the ways to reinforce the compliance program and the message of compliance.

This was made clear once again in the Monaco Memo which stated, “Corporations can help to deter criminal activity if they reward compliant behavior and penalize individuals who engage in misconduct. Compensation systems that clearly and effectively impose financial penalties for misconduct can incentivize compliant conduct, deter risky behavior, and instill a corporate culture in which employees follow the law and avoid legal “gray areas.””

Moreover, the Monaco Memo tied compensation to a company’s culture of compliance. It stated, “Similarly, corporations can promote an ethical corporate culture by rewarding those executives and employees who promote compliance within the organization. Prosecutors should therefore also consider whether a corporation’s compensation systems provide affirmative incentives for compliance-promoting behavior. Affirmative incentives include, for example, the use of compliance metrics and benchmarks in compensation calculations and the use of performance reviews that measure and reward compliance-promoting behavior, both as to the employee and any subordinates whom they supervise. When effectively implemented, such provisions incentivize executives and employees to engage in and promote compliant behavior and emphasize the corporation’s commitment to its compliance programs and its culture.”

Yet compensation incentives have long been seen as a key element of any best practices compliance program. As far back as 2004, then SEC Director of Enforcement Stephen M. Cutler noted that integrity, ethics and compliance needed to be part of promotion, compensation and evaluation processes: “At the end of the day, the most effective way to communicate that “doing the right thing” is a priority, is to reward it.”

The 2020 FCPA Guidance, 2nd edition, stated the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership.” The Monaco Memo takes it a step further by asking more broadly has your company, “incentivized employee behavior as part of its efforts to create a culture of ethics and compliance within its organization.”

The 2020 Update, in the section entitled “Incentives and Disciplinary Measures”, provided some key questions for a company to ask about its incentive system:

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?

The first question posed in the 2020 Update requires you to start with the basic question of what does your employee compensation consist of? Is it a straight salary? Is it variable? If so, what does the variable component consist of? Is it a discretionary bonus based upon the overall success of the entire business enterprise or some small subset, such as a business unit or geographic region? Is it solely personal? Or is it some combination of all of the above?

Under the second question, you need to demonstrate that you have thought through this issue. The DOJ does not mandate one solution or formula, only that it be well considered. And, of course, the approach you come up with must be documented. A good starting place is Marc Roberge’s 2015 Harvard Business Review (HBR) article, entitled “The Right Way to Use Compensation”, that discusses the design and redesign of an employee’s compensation system to help drive certain behaviors. The article’s subtitle, “To shift strategy, change how you pay your team”, echoed Cutler’s message from 2004. The article lays out a framework for a Chief Compliance Officer (CCO) or compliance practitioner to operationalize compensation as a mechanism in a best practices compliance program.

As your compliance program matures and your strategy shifts, “it’s critical that the employees who bring in the revenue—the sales force—understand and behave in ways that support the new strategy. The sales compensation system can help ventures achieve that compliance.” The prescription for you as the compliance practitioner is to revise the incentive system to focus employees on the goals of your compliance program. This may mean that you need to change the incentives as the compliance programs matures; from installing the building blocks of compliance to integrating anti-corruption compliance within the DNA of your company.

There are three key questions you should ask yourself in modifying your compensation structure. First, is the change simple? Second, is the changed aligned with your company values? Third, is the effect on behavior immediate due to the change?

Simplicity. Keep the compensation plan simple when designing your program. The simplest way to incentivize employees is to create metrics that they readily understand and are achievable in the context of the compliance program.

Alignment. You need to state the most important compliance goal your entity needs to achieve. From there you should determine how your compensation program can be aligned with that goal. The beauty of this alignment is that it works with your sales force throughout the entire sales cycle, whether employee-based or through third parties such as agents, representatives, channel ops partners or distributors.

Immediacy. It is important that such structures be put in place “immediately” but in a way that incentivizes employees. As a part of immediacy, there must be sufficient communication with your employees. In the world of employee compensation incentives, there should be transparency as to the expectations.

Under the third question from the 2020 Update, you need to have documented examples where additional compensation or promotions were made to employees who did business ethically and in alignment with the corporate compliance program. The fourth question goes in a different direction by asking who in the organization is evaluating and then setting the compensation of the CCO and compliance personnel?

Obviously, the power of a compensation plan is to motivate employees to not only sell more but to act in ways that support your company’s business model and overall culture and values. For the compliance practitioner, one of the biggest reasons is to first change a company’s culture to make compliance more important, and then integrate it into the DNA of your organization. But you must be able to evolve in your thinking and professionalism to recognize the opportunities to change and then adapt your incentive program to make the doing of compliance part of your company’s everyday business process. The Monaco Memo makes it clear that the bottom line is the “use of financial incentives to align the interests of the C-suite with the interests of the compliance department can greatly amplify a corporation’s overall level of compliance.”

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31 Days to More Effective Compliance Programs

Day 12 | Financial Incentives for Compliance


One of the areas that many companies have not paid as much attention to in their compliance programs is compensation. However, the DOJ and SEC have long made clear that they view monetary structure for compensation, rewarding those employees who do business in compliance with their employer’s compliance program, as one of the ways to reinforce the compliance program and the message of compliance. As far back as 2004, then SEC Director of Enforcement Stephen M. Cutler noted that integrity, ethics and compliance needed to be part of promotion, compensation and evaluation processes: “At the end of the day, the most effective way to communicate that “doing the right thing” is a priority, is to reward it.”
The 2020 FCPA Resources Guide stated the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership.”
Obviously, the power of a compensation plan is to motivate employees to not only to sell more but to act in ways that support your company’s business model and overall culture and values. For the compliance practitioner, one of the biggest reasons is to first change a company’s culture to make compliance more important, and then integrate it into the DNA of your organization. But you must be able to evolve in your thinking and professionalism to recognize the opportunities to change and then adapt your incentive program to make the doing of compliance part of your company’s everyday business process.
Three key takeaways:

  1. The DOJ and SEC have long advocated compensation as a way to motivate employees into ethical and compliant behaviors
  2. Keep the compliance aspects of your compensation structure simple and easy for your employees to understand
  3. Have full transparency in the framework of your compensation structure
Categories
31 Days to More Effective Compliance Programs

Day 12 | Financial Incentives for Compliance

One of the areas that many companies have not paid as much attention to in their compliance programs is compensation. However, the DOJ and SEC have long made clear that they view monetary structure for compensation, rewarding those employees who do business in compliance with their employer’s compliance program, as one of the ways to reinforce the compliance program and the message of compliance. As far back as 2004, then SEC Director of Enforcement Stephen M. Cutler noted that integrity, ethics and compliance needed to be part of promotion, compensation and evaluation processes: “At the end of the day, the most effective way to communicate that “doing the right thing” is a priority, is to reward it.”

The 2012 FCPA Guidance stated the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership.”
This same concept around compensation and incentives was brought forward in the 2019 Guidance – Incentives and Disciplinary Measures, which read:
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?
The first question posed in the 2019 Guidance requires you to start with the basic question of what does your employee compensation consist of? Is it a straight salary? Is it variable? If so, what does the variable component consist of? Is it a discretionary bonus based upon the overall success of the entire business enterprise or some small subset such as a business unit or geographic region? Is it solely personal? Or is it some combination of all of the above?
Three key takeaways:

  1. The DOJ and SEC have long advocated compensation as a way to motivate employees into ethical and compliant behaviors
  2. Keep the compliance aspects of your compensation structure simple and easy for your employees to understand
  3. Have full transparency in the framework of your compensation structure