Financial Incentives for Compliance Management: Show Me the Money

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Originally appeared in The Compliance Handbook and republished with permission from Tom Fox


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, former 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 Evaluation under Prong 8, Incentives and Disciplinary Measures:

How has the company incentivized compliance and ethical behavior? How has the company considered the potential negative compliance implications of its incentives and rewards? Have there been specific examples of actions taken (e.g., promotions or awards denied) as a result of compliance and ethics considerations?”

In his 2015 Harvard Business Review article “The Right Way to Use Compensation,” author Marc Roberge discussed a company’s design and redesign of its employee’s compensation system to help drive certain behaviors. The piece’s subtitle indicated how the company fared in this technique as it read, “To shift strategy, change how you pay your team.” The article lays out a framework for the chief compliance officer or compliance practitioner to operationalize compensation as a mechanism in a best practices compliance program.

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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 ethics and compliance officers 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 with 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 effective on behavior immediate due to the change?

The simplest way to incentive employees is to create metrics that they readily understand and are achievable in the context of the compliance program. 

Simplicity

Keep the compensation plan simple and even employ KISS, keep it simple sir, when designing your program. If you do not do so, your employees might fall back on old behaviors that worked in the past. Roberge notes, “It should be extraordinarily clear which outcomes you are rewarding.” The simplest way to incentive employees is to create metrics that they readily understand and are achievable in the context of the compliance program. This can start with attending Code of Conduct and compliance training. Next might be a test to determine how much of that training was retained. It could be follow up, online ethics and compliance training. It could mean instances of being a compliance champion in certain areas, whether with your employee base or third-party sales force.

Download Guide: Definitive Guide to Your Code of Conduct

Alignment

As the CCO or compliance practitioner, you need to posit 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. If your sales channel is employee-based, then their direct compensation can be used for alignment. However, such alignment also works with a third-party sales force such as agents, representatives, channel ops partners and even distributors. You can even introduce clawbacks, which would come into play at some point in the future for who might violate your compliance program.

Immediacy 

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

To these points, a panel at a previous Compliance Week conference, entitled “The Unsolvable Problem: Performance, Pay, Pressure and Misconduct” focused on variable compensation. The panel had some interesting thoughts around compensation, including the amount of your variable compensation relative to risk; What does your discretionary bonus program consist of? Is it corporate performance based? Group performance based? Solely personal (i.e., “eat what you kill”)? Or is it some combination of all of the above?

The panel provided three examples of which might lead to compliance failures. (1) Lofty goals but no direction for employees on how to get there; (2) A paucity of communication between management and line employees, meaning there was raw fear from employees to inform their immediate supervisor of bad news. Conversely, it could be the supervisors who do not want to hear such bad news; and (3) If your company has singular focus on numbers, meaning that is the single judge of your worth as an employee. Answering some of these questions if they arise can help you to understand the design of incentive plans and allow monitoring of incentive plans to identify underlying links that may arise through compliance violations.


Tom Fox is the author of sixteen books including “The Compliance Handbook,” in which you can learn more about the 10 Hallmarks of an Effective Compliance Program and the DOJ’s Evaluation of Corporate Compliance Program.

You can learn more about and purchase "The Compliance Handbook" here.


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