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, the then SEC Director of Enforcement, Stephen M. Cutler, said “[M]ake integrity, ethics and compliance part of the promotion, compensation and evaluation processes as well. For 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, where it stated, “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?”
A Harvard Business Review (HBR) article, entitled “The Right Way to Use Compensation”, 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.
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 your 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 burning anti-corruption compliance into 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?
Keep the compensation plan simple and even employee 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 program training. Next might be a test to determine how much of that training was retained. It could be follow up, online training. It could mean instances of being a compliance champion in certain areas, whether with your employee base or third-party sales force.
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.
Finally, under 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.
A panel at Compliance Week 2016, 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? Only 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.
Obviously, the power of a compensation plan to motivate salespeople 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 but to then burn it into the fabric of your organization. But you must be able to evolve in your thinking and professionalism as a compliance practitioner 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
This month’s podcast sponsor is Convercent. Convercent provides your teams with a centralized platform and automated processes that connect your business goals with your ethics and values. The result? A highly strategic program that drives ethics and values to the center of your business. For more information go to Convercent.com.