As the Monaco memo puts it, employee compensation clawbacks can be an important part of a compliance program:
Corporations can best deter misconduct if they make clear that all individuals who engage in or contribute to criminal misconduct will be held personally accountable. In assessing a compliance program, prosecutors should consider whether the corporation's compensation agreements, arrangements, and packages (the "compensation systems") incorporate elements - such as compensation clawback 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 clawback measures, partial escrowing of compensation, or equivalent arrangements.
The Monaco memo continues by advising prosecutors to look at how a company puts its compliance-related compensation policies into practice. Prosecutors should determine whether the policies have been put into effect: “If a corporation has included clawback provisions in its compensation agreements, prosecutors should consider whether, following the corporation's discovery of misconduct, a corporation has, to the extent possible, taken affirmative steps to execute on such agreements and clawback compensation previously paid to current or former executives whose actions or omissions resulted in, or contributed to, the criminal conduct at issue.”
But clawbacks may be much more difficult to put into practice. During ACI’s 39th International Conference on the FCPA last week, various speakers from the Department of Justice were asked about this specific change in policy and how companies could take steps to integrate this into their compliance programs. The speakers did not outline a one-size-fits-all approach, but they acknowledged jurisdictional challenges in countries with employee-friendly laws that might prohibit such compensation clawbacks. They elaborated that this is just one of the new changes announced, which was designed to provide companies with an additional way to disincentivize unethical behavior.
Panelists and attendees raised concerns that some jurisdictions would not permit such compensation clawback policies under their legal systems. Other panelists raised practical considerations, such as how a company would be expected to retrieve these funds paid to terminated individuals. In some cases, litigation abroad might be the only forum to recoup such payments – and at that point, the cost and delay might outweigh the benefit of potential remediation credit. Speakers from the DOJ acknowledged that the Department was aware of these challenges. The DOJ speakers stated that the Department is working with a group of practitioners, including the defense bar, to roll out additional guidance regarding compensation clawbacks in the near term.
In a similar vein, compensation programs incentivizing and rewarding positive compliance behavior are also being taken into consideration by the DOJ. The Monaco memo posits:
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. When effectively implemented, such provisions incentivize executives and employees to engage in and promote compliant behavior and emphasize the corporation's commitment to its compliance programs and its culture.
Such positive incentives, although appearing noncontroversial at face value, are not without dissent in the compliance community. As one compliance expert has noted, ethical behavior by employees should be a baseline expectation, not the basis for a bonus, spot award, or pay increase. Suffice it to say, DOJ’s proposed compensation-based incentives and penalties need some additional thought and analysis.
Authored by Stephanie Yonekura, Peter Spivack, and Carina Tenaglia
