Recently, the Department of Justice announced a slew of changes to how it will evaluate compliance programs when making charging decisions for companies. For me, the most interesting announcement was the “Pilot Program Regarding Compensation Incentives and Clawbacks” (Pilot Program) and some changes to the Evaluation of Corporate Compliance Programs in the same vein.
Under the Pilot Program, a company resolving with the DOJ will be required to “implement criteria related to compliance in its compensation and bonus system.” And then it will have to report annually about that implementation.
The Pilot Program suggests some possible criteria a company could implement:
- a prohibition on bonuses for employees who do not satisfy compliance performance requirements;
- disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and (b) knew of, or were willfully blind to, the misconduct; and
- incentives for employees who demonstrate full commitment to compliance processes.
If done correctly, introducing compliance criteria into compensation and bonus systems could help send a clear message to employees and business leadership that compliance is a key element of financial success.
For instance, ensuring that there are consequences such as withholding bonuses and disciplinary measures for non-compliant employees is an important part of building a culture of compliance. Showing employees that bad behavior will not be tolerated at any level bolsters a sense of institutional justice, a critical component of an ethical culture.
Just as employees who behave badly should face consequences, employees who behave well and contribute positively to their company’s culture should be rewarded, as the DOJ suggests in its third criteria about incentives.
However, companies should keep in mind that, while incentives can be powerful tools, they need to be wielded wisely. Social science research tells us that incentives don’t always lead to the outcomes we might expect.
Some individuals are motivated to do the right thing just because they believe it is the right thing. Research shows that, in some circumstances, providing a reward for good behavior can up end this internalized motivation by taking something that was once about an internal sense of right and wrong and turning it into a financial transaction or another box to tick. Thus, what form an incentive takes, when it is realized, and how long it lasts are all factors that influence the impact of an incentive, and need to be carefully considered.
Further, companies must consider how to measure compliant behaviors in order to sufficiently reward them. What does it mean for an employee to “demonstrate full commitment to compliance processes”?
Which brings me to the conclusion that there are two critical elements companies will need to implement criteria under this Pilot Program effectively: data and social science expertise.
As the Pilot Program states, “[c]ompensation systems that use affirmative metrics and benchmarks can reward compliance promoting behavior,” (emphasis mine) but the only way to know if they do, is to establish key performance indicators and track how they shift and change when incentives and disincentives are introduced. Indeed, the DOJ itself acknowledged that this program is a trial run pending empirical data and analysis. In a speech about the new program, Assistant Attorney General Kenneth A. Polite noted that the Pilot Program will be in effect for three years, allowing the DOJ “to gather data and assess its effectiveness.”
Once a company has data to work with, insights from knowledgeable social scientists will also be critical. Data will need to be interpreted in light of the vast (and often conflicting) research and literature in the field of behavioral science.
So, if you or your company are thinking of getting out ahead of DOJ’s expectations by putting in place a compliance incentives program, be sure to set yourself up for success. Think not just about what criteria to include in your compensation and bonus system, but also about what metrics you can use to measure whether those criteria are having the intended impact and what expertise you need to interpret that data.
If that sounds daunting, R&G Insights Lab’s behavioral and data scientists can help you think about how to build metrics into this type of program from the very beginning, and then analyze the data you collect based on sound research. Data analytics and behavioral insights are shaping the future of compliance and there is no better time to start building them into your program than now.