Day 22 of One Month to Operationalizing Your Compliance Program

The Evaluation of Corporate Compliance Programs, Prong 6, Incentives and Disciplinary Measures states: 

Incentive System – 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?

How can you measure compliance in senior management or evaluate it for the purposes of a bonus calculation? This issue has often been difficult to sustain in a company because the compliance evaluation of whether a senior manager or company leader is often viewed as too subjective. An article entitled, “Integrating Your Compliance Programme Into the Variable Compensation of Executives, addressed these issues and concerns. 

The article was built around a case study of the Sorin Group, a healthcare multinational, and the company’s incentive program for its compliance regime. The company created such an incentive program to “influence actual behaviors, and not merely the consequences of any wrong doing that may occur.” Compliance has been made an integral part of each manager’s performance objectives. Members on the company’s Executive Leadership Team (ELT) and the other leaders of all its corporate functions and “business units are directly responsible for the culture, understanding, observance and adoption of the Sorin Code of Conduct, the Sorin United States and international compliance policies and procedures” and their respective health industry codes of practice.

Each of the different functions within the Sorin Group has adopted individual performance objectives specifically regarding compliance. The individualized “compliance objectives are agreed and documented every year for each function and senior manager, and form part of the process of continuous performance review (written reviews twice yearly) managed by Sorin’s human resources team. The responsible executive of each function or group is required to cascade each of the compliance obligations to those employees under them. This ensures that the whole company has compliance integrated into their variable remuneration.” 

The company’s evaluation process includes the staff that report to each senior executive who are interviewed by the General Counsel (GC) or other member of the compliance function “to determine their adherence to the compliance objectives.” Additionally, “An assessment is performed alongside line managers and a member of the human resources team to determine whether the obligations have been met, and to what extent.” Lastly, this same system applies to the company’s Board of Directors and Chief Executive Officer (CEO). 

The variable compensation awarded at the end of each year can be affected in two ways by this compliance evaluation. The first is for an entire group and “If a group fails to meet expectations for the specific objectives the executive and their whole team will miss out on the entire variable pay for that year.” But “If a group meets some expectations for the compliance objectives they will receive payment of the variable, with the amount dependent on the amount of objectives that have been met.” The same holds true for the individual within the group so that “if an employee fails to meet his or her compliance objectives, the whole bonus for that employee will remain unpaid.” 

Some examples of compliance obligations that are measured and evaluated include the following: 

For the ELT

• Lead from the top – in your own conduct (lead by example) and in the decisions you take, to the resources and time you commit to compliance;
• Facilitate and proactively practice in day-to-day activities the key compliance competencies, both internally and externally; and
• Support specific initiatives from the CCO, compliance function.

 

For Department Heads

• Demonstrate, facilitate and proactively practice in day-to-day activities the key compliance competencies, both internally and externally;
• Support specific initiatives from the compliance function;
• Ensure that all employees, agents and contractors directly or indirectly reporting to you fully complete all required training and communications in a timely manner;
• Provide full cooperation with investigations conducted by the compliance or legal functions of any alleged violation of compliance policies;
• Include the Chief Compliance Officer or another legal or compliance function representative in your management meetings at least twice per year, per geography;
• Identify instances of non-compliance and support compliance monitoring and reporting systems; and
• Partner with compliance in resolving compliance issues.

For Country Heads of Sales

• Certify that all employees, agents and contractors directly or indirectly reporting to you have fully reported all sales and marketing interactions with all government officials or employees of state-owned enterprises in a timely manner and
• Certify that all employees, agents and contractors directly or indirectly reporting to you have fully, promptly and accurately reported all expenses with government officials or employees of state-owned enterprises on ERP. 

The article also speaks of five things to consider when developing such a compliance incentive program.  (1) The program needs to be cascaded down the organization so that it applies to all levels in the company. (2) Include both a 360 degree review and mid-year review. (3) To truly incentive senior management, the compliance objectives should be at least 25% of the overall discretionary bonus program. (4) Do not have simply ‘tick-the-box’ incentives but include subject incentives. 

As the final item to consider, is you need to have SMART compliance objectives, which are defined as: 

• Specific: A specific objective has a much greater chance of being accomplished than a general objective (e.g don’t just say “ensure training has been completed by your team”, say;
  • Who: who needs to be trained?
  • What: what training objectives do you want to accomplish?
  • Where: identify a location for the training
  • When: establish a time frame for the training to be completed
  • Which: identify requirements and constraints for any training
  • Why: provide specific reasons, purpose or benefits of accomplishing the training objective.
• Measurable: Establish concrete criteria for measuring progress toward the attainment of each objective you set.
• Aggressive but attainable: When you identify objectives that are most important to the compliance function and the relevant business, employees are more likely to see the value in making them come true.
• Realistic: To be realistic, an objective must represent something which you are both willing and able to work toward.
• Timely: An objective should be grounded within a timeframe. 

The article ends with some insights into lessons learned, including the following: 

• Top down: If your ELT is truly on board you can make big leaps and not limit your compliance ambitions to incremental steps.
• Personalize: The objectives should be more personal to each function and more granular.
• Balance: Have qualitative judgments but couple them with concrete and - most importantly - objective and measurable key performance indicators.
• Publicize: Talking about the real company examples of its people make the difference.
• Be positive: Focus your company’s efforts on positive incentive behaviors. In other words, use both the stick and carrot.
• Just do it: Stop talking the talk and start walking the walk. 

The Evaluation makes clear that the Department of Justice expects incentives to be operationalized into your compensation structure. While there may always be subjectivity built into any compensation incentive system, that does not mean financial incentives cannot be written into the evaluation of any senior management to help guide ethical business practices. 

Three Key Takeaways

1. The Evaluation requires not only carrots around compliance but metrics to justify compensation.
2. Provide metrics for each level of employee to hit as a part of a discretionary bonus evaluation.
3. Up to 25% of a discretionary bonus should be based on compliance or an ethical component. 

This month’s podcast series is sponsored by Oversight Systems, Inc. Oversight’s automated transaction monitoring solution, Insights On Demand for FCPA, operationalizes your compliance program. For more information, go to OversightSystems.com.