Compensation Incentives and Clawback Provisions: DOJ Launches Pilot Program to Encourage Corporate Compliance Programs


Author(s) , ,

Eye on Enforcement

On March 3, the Criminal Division of the Department of Justice announced a two-part pilot program to encourage corporations to implement compliance programs with provisions for employee compensation incentives and clawbacks designed to prevent corporate crime. Last week, at the American Bar Association’s 38th Annual National Institute on White Collar Crime, Deputy Attorney General Lisa Monaco specifically described the two parts of this innovative pilot program: “First, every corporate resolution involving the Criminal Division will now include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system… Second, under the pilot program, the Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.”

The program is a three-year initiative on all corporate matters handled by the Criminal Division and goes into effect on March 15, 2023. The program does not modify but is in addition to the Criminal Division’s Corporate Enforcement Policy, the Evaluation of Corporate Compliance Programs, and the Principles of Federal Prosecution of Business Organizations. At the same ABA White Collar event, Assistant Attorney General Kenneth Polite made clear DOJ is doubling down on corporate compliance programs because “[c]ompensation structures that clearly and effectively impose financial penalties for misconduct can deter risky behavior and foster a culture of compliance. At the same time, positive incentives, such as promotions, rewards, and bonuses for improving and developing a compliance program or demonstrating ethical leadership, can drive compliance.”

A corporate resolution involving the Criminal Division of the Justice Department now must include a requirement that the resolving company implement criteria related to complaints in its compensation and bonus system. For example, Deputy Attorney General Monaco referenced how “as part of its plea agreement in December and in addition to forfeiting $2 billion, Danske, the largest bank in Denmark, agreed to revise its performance review and bonus system to include criteria related to compliance. So now, Danske executive[s] with a failing score for compliance will also fail to secure a bonus.” 

The policy centers around two key elements. The first is a forward-looking element that requires corporations to institute compliance-promoting criteria within their compensation structures as part of any criminal resolution with DOJ. Implementation of these efforts must be reported annually to DOJ, and the requirements will be within the discretion of DOJ prosecutors based on the facts, circumstances and applicable law. The criteria may include, but is not limited to, (1) a prohibition on bonuses for employees who do not satisfy compliance performance requirements; (2) disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and (b) knew of, or were willfully blind to, the misconduct; and (3) incentives for employees who demonstrate full commitment to compliance processes. Assistant Attorney General Polite stated that DOJ’s goal in implementing this requirement is to “ensure that the company uses compliance-related criteria to reward ethical behavior and punish and deter misconduct.”

The second part mandates that the Criminal Division of the Justice Department, which includes all U.S. Attorney Offices, will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers. The second part is a remedial element whereby corporations can receive a specific amount of credit from good-faith efforts to claw back compensation from individual wrongdoers within the corporation. The policy allows the company entering into a resolution to pay the applicable fine, minus a reserved credit for the amount of the money it is attempting to claw back. If the company is successful in clawing back the money, it can keep the money and does not need to pay the reserve amount to DOJ. Recognizing that clawback attempts may face fierce resistance and ultimately be unsuccessful, DOJ will give the company credit for good-faith efforts to claw back regardless of their ultimate success. Companies that actually recoup the compensation will receive a double benefit, but even those that fail to recoup may receive the benefit of a reduction in fines. 

Although this first part of the pilot program applies only to companies that have entered into a corporate resolution with the Criminal Division of the Justice Department, after misconduct has been identified and a resolution has been agreed to, DOJ clearly intends that corporations will be proactive and implement relevant compliance programs to deter misconduct before it occurs. In announcing this two-part pilot program, Deputy Attorney General Monaco specifically stated, “We intend this program to encourage companies who do not already factor compliance into compensation to retool their programs and get ahead of the curve… We believe the best way to combat corporate crime is to prevent it, or barring that, to surface it and address it head on. Now, these policies empower general counsels and compliance officers to make the case to company management, to make the case in the boardroom that investment in a robust compliance program, including a forward-leaning compensation system, is money well spent.”

Encouragement for companies to have robust compliance programs that include forward-leaning compensation systems and clawback provisions are now enumerated in this pilot program and other recent DOJ policy and program announcements on corporate crime. Nonetheless, many questions will remain. For example, what will DOJ consider robust enough, forward-leaning enough, or sufficient good-faith efforts by ethical leadership? What level of personal knowledge will be required to label an executive or employee a culpable party from whom good-faith efforts should be made to claw back compensation? Additionally, will DOJ consider the failure to implement such programs before misconduct is detected as a failure of the compliance program?  Finally, implementation of such programs could present conflicts with established employment agreements and other company policies.   

DOJ’s continued effort to push corporations to identify individual bad actors has now moved to pushing companies to punish individual bad actors. These efforts raise a number of legal and practical issues that companies subject to potential DOJ investigations should carefully consider.