Tag: financial incentives

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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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Blog

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