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?

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. Add of course that whatever approach you come up with it must be documented. A good starting place is a 2015 Harvard Business Review (HBR) article, entitled “The Right Way to Use Compensation”, by Marc Roberge that discussed the design and redesign of an employee’s compensation system to help drive certain behaviors. The piece’s subtitle, To shift strategy, change how you pay your team”, echoed Cutler’s 2004. The article lays out a framework for a 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 a third-parties such as agents, representatives, channel ops partners and even 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 2019 Guidance, 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 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.

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