SEARCH
Search within CPAB

Assessing compliance incentives

There are two types of incentives that typically should be reviewed in a C&E program assessment.
The first concerns the extent to which a company’s general incentive structure has the effect (presumably unintentional) of promoting non-compliance. The second concerns incentive measures directly aimed at promoting compliance.
The two overlap to some degree but are conceptually and operationally distinct, and they warrant separate discussions in an assessment report. Indeed, the consideration of general incentives is often part of the risk-assessment component of a report (at least for engagements that have such a component), rather than appearing in the incentives section.
Regardless of where the discussion of incentives is located in a report, properly framing the nature of the inquiry concerning general incentives is key. The question here is not – we believe – whether an incentive structure creates a risk of wrongdoing. That would be said of virtually any results-based compensation structure. Rather, the inquiry should be whether an incentive structure creates an undue risk of wrongdoing.
Note that this is largely a subjective determination, and there is no universally accepted definition of “undue” to be applied in this context. Indeed, assessing whether compensation creates undue risks in any given setting turns on a variety of factors beyond the specifics of the compensation itself – particularly culture-related ones. But, in our experience, the undue risk formulation works well enough in assessment interviews, with the discussion typically turning on whether a) the performance targets upon which compensation decisions are partly based are realistic or can be met by some employees only through illegitimate means and b) the consequences of failing to meet the targets are overly harsh.
It is also important to consider the extent to which senior leaders, HR and others consider the risks created by compensation when setting goals. Is there an effort to understand the level of pressure created by various employee objectives and goals, and the extent to which performance goals create compliance risks?
Also relevant to assessing this sort of risk are incentives vis a vis third parties. While this aspect of risk assessment is becoming routine with respect to FCPA risks (e.g., ensuring that a distributor’s margins are reasonable), companies should also consider incentives and risks for other areas of legal exposure involving third parties (such as antitrust and fraud).
The second type of incentive to be assessed is – as noted above – incentive measures directly aimed at promoting compliance. These, in turn, consist of both tangible and intangible incentives.
The most commonly used tangible C&E incentive is inclusion of C&E criteria on performance evaluations. Some of the indicia of efficacy here are:
– Having examples in evaluation materials of different levels of C&E-related behavior generally (e.g., outstanding, strong, needs improvement).
– Having these examples tailored for different levels in the corporate hierarchy (e.g., what is outstanding for a leader, manager, other).
– Reinforcing the importance of the C&E component of personnel evaluations through appropriate discussion of this topic in the code of conduct, training and other communications.
Note that the other side of the tangible incentives coin is penalizing behavior that is undesirable but doesn’t rise to the level of being an appropriate subject of discipline. An example is denying bonuses or other forms of compensation to those who fail to take mandatory C&E training. In assessing this sort of incentive, one might make sure that the company actually does what it says it will do (e.g., withhold bonuses) in these instances.
Intangible incentives are, for the most part, recognition programs. What makes them successful is:
– In cases of awards, using the process of selecting nominees to educate employees about the C&E program. Companies should create a real campaign around the effort, including having as much senior management involvement as is reasonably possible.
– For more everyday forms of recognition, train managers to identify and (where appropriate) laud others in the work group employees for ethically exemplary behavior.
Finally, one should be alert to unintended consequences for compliance-directed incentive measures. For instance, providing bonuses for having no workplace accidents could have the unintended consequence of suppressing reporting of accidents.

Posted in Personnel measures
2 comments on “Assessing compliance incentives
  1. Jason L Lunday says:

    Another thoughtful piece by Jeff Kaplan. Compliance officers would be wise to understand Jeff’s points and come to the leadership table at work with this understanding in mind. It can help legitimize the compliance function if it understands how incentives can undermine the strategic objectives. It’s this sort of thinking that makes elevates compliance beyond a mere support function focused on its own goals to one that is mindful of how it contributes to the organization’s overall success.

  2. Kaplan Walker says:

    Thanks, Jason, and want to add that all pieces on the CPAB are co-authored by Rebecca and me.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

  • Assessment mandates and benefits
  • Methodologies
  • Risk assessment
  • Program structure
  • Standards and procedures
  • Training and communications
  • Auditing, monitoring, and other “checking”
  • Reporting procedures, including helplines
  • Investigations
  • Discipline and other remedial measures
  • Personnel measures
  • Culture
  • Guest Posts
  • Uncategorized

Sign up for our mailing list