Renewed DOJ Emphasis on the Compensation/Compliance Connection
- October 13, 2023
- Michael W. Peregrine , McDermott Will & Emery LLP
The Department of Justice (DOJ) is re-emphasizing its expectation that companies use compensation to incentivize good corporate behavior. The board’s audit and compliance and executive compensation committees should take note. In particular, these committees should evaluate the steps, if any, made to date by the company in implementing new compensation-based compliance measures.
This renewed emphasis is expressed in part by two separate, recent speeches by senior DOJ officials on DOJ’s continuing focus on corporate fraud enforcement.
A critical element of this focus is the extent to which a company’s compliance program emphasizes good behavior and deters wrongdoing. The ultimate message to health care boards is that the government expects that compliance measures will in some manner be incorporated into a company’s compensation arrangements.
In March, DOJ directed its Criminal Division to implement a two-part pilot program on compensation incentives and clawbacks.
The first part provides that every corporate resolution involving the Criminal Division will require the resolving company to include some form of compliance-promoting criteria within its compensation and bonus program. This is to underscore DOJ’s view that companies should adopt compensation programs that reward behavior consistent with compliance values. The ultimate compensation criteria should be tailored to the company’s existing executive compensation program and be consistent with relevant labor and employment laws.
The second part provides “clear and predictable monetary incentives” (e.g., reduced criminal penalties) to companies when they attempt in good faith to claw back or withhold compensation otherwise due “wrongdoers” (even if those efforts are unsuccessful). This part of the pilot program applies to (i) employees who engaged in suspected wrongdoing in connection with the conduct under investigation, as well as (ii) those who had supervisory authority over those who engaged in the misconduct and knew of, or were willfully blind to, the misconduct [emphasis added].
The new DOJ officials’ speeches are notable from three key perspectives:
First is the fact that DOJ has chosen to speak out in public again on its commitment to incorporating compliance measures into compensation arrangements. It is clearly an important theme of its corporate fraud enforcement program and thus deserves significant attention from corporate leadership; the focus is just not going away.
A related point is the very clear message sent with respect to the government’s expectations regarding a company’s use of executive compensation-based compliance incentives:
“We expect companies to find innovative, effective, and targeted ways to use compensation to incentivize good corporate behavior and deter misconduct, using their own mix of carrots and sticks.”
To that point, the DOJ speeches make direct reference to what the government views as corporate leadership’s role in addressing the issue: “[C]orporate executives and board members have a responsibility to take note.”
Third is the extent to which the DOJ speeches provide “concrete” examples of how companies may be incentivized (financially and as to its resolution of charges) to implement compliance-based incentives and to pursue clawbacks. They also serve as a reminder of the value attributed to compliance program changes that are consistent with DOJ’s recently updated Corporate Enforcement and Voluntary Self-Disclosure Policy, or CEP. The CEP identifies the benefits available to organizations that voluntarily self-disclose misconduct, fully cooperate with DOJ investigations, and timely and appropriately remediate misconduct.
The examples also underscore the importance DOJ attributes to changes to a company’s business model and risk management process to reduce corruption risk and to embed compliance in the business. It also reflects the specific financial savings incurred by the company in cooperating with DOJ towards the resolution.
DOJ has offered that such compensation measures should be tailored to fit the company’s existing compensation program and may include elements such as:
- Prohibitions on bonuses for employees who do not satisfy compliance performance requirements;
- Incentives linked to the demonstration of full commitment to compliance processes; and
- Disciplinary measures and clawbacks for employees who violate applicable law and executives who had supervisory authority over the employees engaged in the misconduct, and who knew of, or were willfully blind to, the misconduct.
In particular, DOJ continues to encourage regular deployment of clawback policies (i.e., “paper policies” won’t “move the needle”). It also recommends periodic review of clawback policies and employment contracts to assure that they are fit for purpose.
The extent to which companies across industry sectors have accepted and implemented the DOJ policy is unclear. This is particularly the case with respect to clawbacks and similar arrangements, which can often be politically difficult to negotiate and implement. Yet given the latest DOJ public comments, the pressure to do so in some form is more apparent.
The impact on the board is particularly significant, given both its fiduciary obligation to assure an effective corporate compliance program and its responsibilities for oversight of executive compensation. The government appears committed to the use of compensation systems to align executives’ financial interests with a company’s broader interests in good corporate citizenship. Corporate leadership is in turn prompted to re-evaluate the extent to which the organization is positioned to address the government’s interest.
Board and executive leadership should also be aware of several collateral issues, including:
- The renewed emphasis on the compliance/compensation connection requires greater coordination between HR, Legal and Compliance officers to develop appropriate compliance criteria within the compensation system.
- The need for greater coordination between the Executive Compensation Committee and the Audit & Compliance Committee with respect to the intersection between compensation and compliance.
- The potential for the CLO, CCO, and SVP/HR to be called upon to reduce tension between the board and senior executives rising from efforts to implement compensation-based compliance incentives and disincentives for those executives.
The ultimate recommendation arising from the renewed DOJ emphasis is for the board/its key committees to consider this new guidance and confirm that compliance is qualitatively included in employment agreements and compensation structures in a manner that would allow for clawbacks and other disciplinary action should there be lack of performance in promoting compliance.
About the Author
Michael Peregrine is a partner in the law firm of McDermott Will & Emery, where he represents health industry clients on corporate governance matters. He is a Fellow of the American Health Law Association. His views do not necessarily represent the views of McDermott Will & Emery and/or its clients. He thanks his colleagues Justin Murphy and Sarah Walters for their contributions to this article.