Implementing Compliance Incentives In Your Company

This article was republished with permission from Tom Fox’s FCPA Compliance and Ethics Blog.

Several readers have asked why I have not written anything about the Houston Astros this year. The answer is two-fold: first, I really do not care; second, they are not relevant. Just how irrelevant are the bumbling hometown (former) loveables? Last week they achieved the noteworthy accomplishment of obtaining a Nielson rating of 0.00 for a second consecutive season. I am not aware of any other major league team with televised games that no one was recorded as having watched from beginning to end.  For two straight seasons. Pretty amazing when you think about it.

On the subject of relevance, one thing that is relevant in the context of any best practices anti-bribery compliance program is incentives. The Department of Justice (DOJ) and Securities Exchange Commission (SEC) could not have been clearer in the FCPA Guidance about their views on the need for incentives to help drive behavior that is ethical and in compliance with the Foreign Corrupt Practices Act (FCPA) when they stated, the “DOJ and SEC recognize that positive incentives can also drive compliant behavior.” In the Guidance, the SEC cited the following:

“[M]ake integrity, ethics and compliance part of the promotion, compensation and evaluation processes as well. For at the end of the day, the most effective way to communicate that “doing the right thing” is a priority is to reward it. Conversely, if employees are led to believe that, when it comes to compensation and career advancement, all that counts is short-term profitability, and that cutting ethical corners is an acceptable way of getting there, they’ll perform to that measure. To cite an example from a different walk of life: a college football coach can be told that the graduation rates of his players are what matters, but he’ll know differently if the sole focus of his contract extension talks [about] or the decision to fire him is [based on] his win-loss record.”

A recent article in the Spring 2014 issue of the MIT Sloan Management Review, entitled “Combining Purpose with Profits,” by authors Julian Birkinshaw, Nicolai J. Foss and Siegwart Lindenberg, presents some interesting steps on how a company might work toward achieving the goals articulated by the DOJ and SEC. The key thesis of the authors is that purpose is crucial to motivating employees. In their article, they presented case studies from three entities: the Tata Group, Handelsbanken and HCL Technologies. From these three cases studies they came up with six core principles, which I have adapted for the compliance function in an anti-corruption compliance program:

1. Compliance incentives don’t have to be elaborate or novel. The first point is that there are only a limited number of compliance incentives that a company can meaningfully target. Evidence suggests the successful companies are the ones that were able to translate pedestrian-sounding compliance incentive goals into consistent and committed action.
2. Compliance incentives need supporting systems if they are to stick. People take cues from those around them, but people are fickle and easily confused, and gain and hedonic goals can quickly drive out compliance incentives. This means that you will need to construct a compliance function that provides a support system to help staff operationalize their pro-incentives at different levels, and thereby make them stick. The specific systems supporting incentives can be customized to your company, but the key point is that they are delivered consistently, because it signals that management is sincere.
3. Support systems are needed to reinforce compliance incentives. One important goal of a supporting system for compliance incentives “is to incorporate tangible manifestations of the company’s pro-social goals into the day-to-day work of employees.” Make the rewards visible. As stated in the FCPA Guidance, “beyond financial incentives, some companies have highlighted compliance within their organizations by recognizing compliance professionals and internal audit staff. Others have made working in the company’s compliance organization a way to advance an employee’s career.”
4. Compliance incentives need a “counterweight” to endure. Goal-framing theory shows how easy it is for compliance incentives to be driven out by gain or hedonic goals, so even with the types of supporting systems, it is quite common to see executives bowing to short-term financial pressures. Thus, a key factor in creating enduring compliance incentives is a “counterweight,” by which we mean any institutional mechanism that exists to enforce a continued focus on a nonfinancial goal. This means that in any financial downturn, compliance incentives are not the first thing that gets thrown out the window, and if my oft-cited hypothetical foreign Regional Manager misses his number for two quarters, he does not get fired. So the key is that the counterweight has real influence; it must hold the leader to account.
5. Compliance incentive alignment works in an oblique, not linear, way. The authors believe that “in most companies, there is an implicit belief that all activities should be aligned in a linear and logical way, from a clear end point back to the starting point. The language used — from cascading goals to key performance indicators — is designed to reinforce this notion of alignment. But goal-framing theory suggests that the most successful companies are balancing multiple objectives (pro-social goals, gain goals, hedonic goals) that are not entirely compatible with one another, which makes a simple linear approach very hard to sustain.”

   What does this mean in practical terms for your compliance program? If you want your employees to align around compliance incentives, your company will have to “eschew narrow, linear thinking, and instead provide more scope for them to choose their own oblique pathway.” This means emphasizing compliance as part of your company’s DNA on a consistent basis — “the intention being that by encouraging individuals to do “good,” their collective effort leads, seemingly as a side-effect, to better financial results. The logic of “[compliance first], profitability second” needs to find its way deeply into the collective psyche of the company.”

6. Compliance incentive initiatives can be implemented at all levels. Who at your company is responsible for pursuing compliance incentives? If you head up a division or business unit, it is clearly your job to define what your pro-social goals are and to put in place the supporting structures and systems described here. But what if you are lower in the corporate hierarchy? It is tempting to think this is “someone else’s problem,” but actually there is no reason why you cannot follow your own version of the same process. We have seen quite a few mid-level managers make a real difference, and often quite quickly, using the principles outlined here.

The authors have set out several steps that you can implement into your compliance program to enhance incentives to facilitate anti-corruption. There have been many who have criticized the FCPA Guidance. While I am certainly not one of them, I do not think there can be any argument that it does not present the DOJ and SEC views on a minimum best practices compliance program. So, if the DOJ and SEC think incentives in your compliance program are important, I suggest to you, they are important. The article, which is the basis of this blog post, provides an excellent start for the exploration of some ways to inculcate anti-bribery and anti-corruption incentives into not only your compliance regime but also, more importantly, the DNA of your company.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business advice, legal advice or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The author gives his permission to link, post, distribute or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.