Money talks. Based on this principle, the Department of Justice is implementing new efforts to tie employees’ compensation to compliance to confront corporate corruption with a clear focus: no company or person is above the law.
This new approach seeks to prevent business crimes before they occur, transferring responsibility directly to companies. Through effective compliance programs and solid corporate governance, employers must prevent bad practices and—in the event that corruption occurs—detect, sanction and report them to the corresponding regulatory entity. This, in turn, will earn the company a reward.
One of the measures by the DOJ encourages companies to implement compensation systems into their compliance programs. The measures seek to persuade companies to prevent and prosecute crimes by directly threatening their pocketbooks. This means that companies must fully understand the importance of implementing these compensation systems that measure and evaluate the rewarding of bonuses or incentives for fulfilling goals or performance indicators while ensuring that no violations of the internal policies or controls established by the company took place.
Therefore, companies that develop solutions encouraging ethical practices will be rewarded. On the other hand, those whose compliance programs prove to be just words on paper will be punished with large fines for not having detected the bad practices, or not having reported themselves or cooperated with the investigation.
Last March, the Criminal Division’s pilot program regarding compensation incentives and clawbacks came into effect, establishing the criteria that companies must now adopt for their compensation programs, which they must report annually to the division. These criteria include:
- Prohibition of bonuses for employees who do not meet the compliance requirements.
- Disciplinary action against employees who violate the law, as well as those responsible for supervising those employees (or the business area where the misconduct occurred) who did not do so, or knew of the misconduct and deliberately ignored it.
- Incentives for employees who demonstrate full commitment to compliance processes.
When evaluating these plans, prosecutors will take into account the structure of the existing compensation program, hence its relevance.
It is key that compensation programs include money recovery policies, in the event of having given a bonus to an employee who is later found to have incurred in malpractice.
In this sense, if a company cooperates with the prosecutors, corrects its bad practices, and demonstrates that it has implemented a program to recover any improper bonuses, it will be eligible for an additional reduction in fines.
If all or part of the compensation is recovered before the resolution period ends, the entire recovered amount will be deducted from the fine. Meanwhile, if the resolution is in the process of being reached, and the company is making efforts (even if the compensation has not yet been effectively recovered), the company must pay the original fine, deducting the amount they plan to recover. Thus, when the resolution is complete, the company must pay what it has managed to effectively recover. And if those efforts are not fruitful but made in good faith, they can discount up to 25%.
In order for companies to take advantage of these benefits, they must review their compensation programs as soon as possible, and not wait until they are involved in a bonus irregularity. They also need to constantly monitor the implementation of their compliance program to ensure no compliance gaps are exposing the company to unnecessary risks.
Along these lines, the March 2023 edition of the DOJ’s guide on the evaluation of corporate compliance programs emphasizes a special item dedicated to “compensation structures and management of consequences.” This section highlights how important it is that these systems, from their very design and through their application, link the economic incentive to conduct that is consistent with corporate values and policies. In addition, prosecutors should assess whether the company has consequence-management procedures in place to detect and rectify violations of laws, regulations, or policies. They will also review that policies are applied consistently throughout the organization, the procedures are proportionate to the violations, and there are metrics to reward bonuses to managers.
Prosecutors will also assess whether the company has adequately instilled in its employees zero tolerance for unethical conduct and communicated to them that there will be consequences, regardless of the position or title of the person responsible for the misconduct.
This measure aligns incentives with behavior, fostering an ethical culture and bringing compliance to life, because it shows that it is not just about obeying policies and successfully achieving goals, but that what is being evaluated is how business is done.
Por Susana Sierra is CEO of BH Compliance, which gathers real-time evidence about a corporate compliance program’s performance using Blockchain.
Publicada en Daily Business Review