DOJ launches Pilot Program on Compensation Incentives and Clawbacks: Top points for compliance professionals
In a speech at the American Bar Association’s 2023 National Institute on White Collar Crime (ABA conference), Deputy Attorney General Lisa Monaco announced the launch of a Pilot Program on Compensation Incentives and Clawbacks (Pilot Program) as a means for incentivizing corporate compliance.
The announcement of the new Pilot Program follows the US Department of Justice’s (DOJ) release of a memorandum, popularly dubbed the Monaco Memo, in September 2022 which detailed a shift of DOJ’s enforcement priorities, including a further emphasis on holding individuals accountable for misconduct. The Pilot Program, which will be in effect for three years, is one of several programs and policy changes announced by the DOJ in recent weeks designed to give compliance professionals another concrete tool to incentivize ethical behavior and punish misconduct.
But how will the Pilot Program be structured and how should compliance professionals respond in practice?
Pilot Program overview
The Pilot Program has two major components: compliance enhancements and deferred fine reduction.
First, over the course of the Pilot Program, any company entering into a corporation resolution with the Criminal Division will be required to develop compliance-promoting criteria within its compensation and bonus system, to the extent it has not already. These criteria may include such measures as denying bonuses for employees who do not satisfy certain compliance requirements; disciplinary measures for both employees who violate the law or company policy, and their supervisors and others who were willfully blind to the misconduct; and providing financial incentives for those who demonstrate commitment to compliance. Over the term of the resolution, the company must also report annually to the DOJ as to how it is implementing such criteria.
As Assistant Attorney General Kenneth Polite noted during a subsequent address at the ABA Conference, Division prosecutors will work with companies to fashion the appropriate requirements on a case-by-case basis, taking into account applicable laws and the company’s existing compensation programs. Polite also announced changes to the DOJ’s Evaluation of Corporate Compliance Programs (ECCP) to reflect prosecutors’ new focus on compensation structure and consequence management when evaluating compliance programs to make charging decisions, among other changes. Additional insight on the DOJ’s revisions to the ECCP and enhanced expectations when evaluating corporate compliance programs, including evaluation of clawbacks, compensation and the use of ephemeral messaging, can be found here.
Second, assuming a company has fully cooperated with the DOJ’s investigation and timely remediated misconduct, the Pilot Program contemplates fine reductions for those companies who also seek to claw back compensation from wrongdoers, their supervisors, and individuals who were willfully blind to the misconduct.
Specifically, the Pilot Program states that when a company has begun efforts to recoup compensation ahead of seeking to resolve the matter with the Division, a company will be permitted to reduce the payment of any applicable fines by 100 percent of the compensation the company is trying to recoup. At the close of the resolution period, the company will keep all compensation recovered. To the extent a company is not able to recoup all of the compensation it sought to recover, the company will pay the difference between the amount withheld and the amount actually returned.
Both Monaco and Polite acknowledged that recouping funds from executives and employees is not an easy or straightforward process; they explained that the Pilot Program will also ensure that those who pursue clawbacks in good faith, but are unsuccessful, will still be eligible for fine reductions. Division prosecutors may, at their discretion, grant a fine reduction of up to 25 percent of the amount of compensation the company attempted to recoup. The Pilot Program contemplates that such reductions may be warranted in situations where the company’s efforts to recover funds led to significant litigation costs or when the company can show that it is likely that it will be successful in recouping the compensation in the near future.
As Polite cautioned, the DOJ is not trying to incentivize waste. “To the contrary, companies should make an assessment about the potential cost to shareholders and prospect of success of clawback litigation, given any applicable laws, and weigh it against the value of recoupment – and proceed in accordance with their stated corporate policies on executive compensation.”
Practical considerations for compliance professionals
While the Pilot Program illustrates how Division prosecutors will give credit to companies who seek to recover funds as part of remedial efforts, there are several proactive steps compliance professionals can and should take now to incentivize ethical behavior. These measures include:
- Provide clear, consistent, and continual messaging to employees surrounding the company’s expectations surrounding compliance at all levels
- Partner with human resources to review performance criteria to ensure that compliance-promoting criteria are incorporated into employees’ key performance indices (KPIs)
- Develop programs to recognize and reward internal champions of compliance
- Ensure company compensation programs, where appropriate, reward employees who meet or exceed compliance KPIs, and penalize those who fail to meet expectations in line with the guidance provided in the revised ECCP
- Implement measures to track disciplinary actions and incentives related to compliance to ensure consistent application throughout the organization
- Incorporate education on potential compliance incentives and disciplinary actions into compliance expectations trainings to ensure transparency and
- Conduct periodic assessments surrounding the effectiveness of the company’s consequence management surrounding compliance violations.
The Pilot Program – and the related changes to the ECCP regarding compensation incentives and consequence management – give compliance professionals additional tools to help drive compliance throughout the organization. By taking practical measures now to incorporate the DOJ’s expectations into your program, you may be able to reduce the financial impact of future misconduct, or even prevent missteps entirely.
Find out more about the Pilot Program and the impact of the DOJ’s changes to the ECCP for your company by contacting any of the authors.