The Importance of Incentivizing Compliance

Human motivation is a complex issue. Many are motivated by altruistic values and beliefs. Others are motivated by financial rewards or public recognition. In truth, motivation is likely multi-factorial; no single incentive drives all behavior.

In business, we see sales personnel frequently incentivized with an opportunity to earn a commission with each sale. To help sales stick long-term, for example, some representatives get a commission for the sale but lose that commission (or a percentage of the commission) if the customer cancels shortly thereafter. This incentivizes sales personnel not just to sell, but to sell well. Some companies implement profit sharing so when the company does well financially, all employees benefit. This can incentivize employees at all levels to look for and avoid wasteful spending and innovate to help the company succeed.

But can these same principles apply to compliance? The answer is yes. Most mature compliance programs incentivize compliance to some degree.

The HCCA-OIG’s Compliance Effectiveness Resource Guide identifies multiple measures for incentivizing compliance. For example, measure 2.45 asks, “What is the company doing to drive compliance culture?”

Suggestions for measuring this include surveying:

1. what the company incentivizes,
2. what company culture promotes and looks down on, and
3. how compliance ties to the mission, vision, and values of the organization.

Another measure (2.51) suggests looking at the organization’s annual performance evaluations to determine whether there is proper alignment of compliance objectives with organizational performance incentives (e.g., promotions, performance appraisals, and bonuses).

Incentivizing compliance is an integral part of an organization's compliance culture and program.

Recently, the U.S. Department of Justice (DOJ) issued the “Monaco Memo.” It is a 15-page memo issued by Deputy Attorney General Lisa Monaco discussing revisions to DOJ’s heavily scrutinized Corporate Enforcement Policy. Many important principles are discussed in the memo, including evaluating a corporation’s compliance program. Prosecutors are charged with evaluating compliance programs to determine if they are generally effective. These determinations can potentially lead to granting some credit to the organization for efforts in preventing wrongdoing, even when some misconduct might have occurred.

Regarding incentives, the memo states:

“Prosecutors should evaluate the corporation's commitment to fostering a strong culture of compliance at all levels of the corporation - not just within its compliance department. For example, as part of this evaluation, prosecutors should consider how the corporation has incentivized or sanctioned employee, executive, and director behavior, including through compensation plans, as part of its efforts to create a culture of compliance.”

Many compliance professionals know that significant investigations and any resulting settlements often happen years after the conduct. In those intervening years, some individuals involved in the non-compliant activity may have left the organization. How does an organization hold an individual accountable if they are no longer with the organization?

The Monaco memo tries to address some of these issues with discussing “claw back” provisions in compensation systems. DOJ believes “compensation systems that clearly and effectively impose financial penalties for misconduct can incentivize compliant conduct, deter risky behavior, and instill a corporate culture in which employees follow the law and avoid legal ‘gray areas.’”

Prosecutors need to assess compensation systems to determine if they contribute to incentivizing compliance. According to the memo, one way to do this is for “prosecutors to consider whether the corporation's compensation agreements, arrangements, and packages (the "compensation systems") incorporate elements such as compensation claw back provisions that enable penalties to be levied against current or former employees, executives, or directors whose direct or supervisory actions or omissions contributed to criminal conduct. Since misconduct is often discovered after it has occurred, prosecutors should examine whether compensation systems are crafted in a way that allows for retroactive discipline, including through the use of claw back measures, partial escrowing of compensation, or equivalent arrangements.”   Positive incentives can also contribute to a culture of compliance by encouraging individuals to do what is right from the get-go. An organization can do this by rewarding executives and employees who promote compliance. To this end, the memo clarifies that “Prosecutors should therefore also consider whether a corporation's compensation systems provide affirmative incentives for compliance-promoting behavior. Affirmative incentives include, for example, the use of compliance metrics and benchmarks in compensation calculations and the use of performance reviews that measure and reward compliance-promoting behavior, both as to the employee and any subordinates whom they supervise.”

The importance of incentivizing compliance is not new. If your compliance program has not engaged in this area, it may be time to do so.

Some additional resources to consider include more measures from the previously mentioned HCCA-OIG’s Compliance Effectiveness Resource Guide. See measures 2.49, 2.50, 4.47, 5.52, 6.10, 6.11, 6.20 and 6.24. Another useful resource is Joseph Murphy’s “Using Incentives in Your Compliance and Ethics Program,” published by the Society of Corporate Compliance and Ethics.

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