May 8, 2023 | By Mary Kohler in Bloomberg Law
Attorney Mary Kohler analyzes the DOJ’s financial incentives and clawbacks pilot, and JPMorgan’s move to recoup compensation from Jes Staley in the Jeffrey Epstein cases. She assesses whether money is always an effective incentive for compliance.
Money isn’t everything. Or is it? That’s the question raised by the Department of Justice’s new pilot on incentives.
For the next three years, DOJ corporate criminal resolutions will require incentive compensation systems to have compliance-promoting criteria. The DOJ also promises dollar-for-dollar fine reductions for clawbacks. In the process, the DOJ’s getting tactical about compliance.
Deputy Attorney General Lisa Monaco introduced the pilot, saying “nothing grabs attention or demands personal investment like having skin in the game, through direct and tangible financial incentives.”
Carrots and Sticks
To advance an ethical culture, the DOJ wants companies to reward compliant behavior with affirmative metrics. This may be easier said than done. Setting goals is simple enough. But factoring compliance into bonus calculations can be subjective and difficult.
How do companies conclude employees “demonstrate full commitment to compliance processes?” Investigation and audit data is available. But that path leads to clawbacks. And while top and bottom performers might stand out, the middle is vast. So, managers turn to observation, feedback, and staff self-assessment. Ultimately, they end up trying to prove a negative. And guesstimating the dollars.
For deterrence, the pilot suggests two key sticks—bonus clawbacks and punishment for misconduct. The DOJ assumes the threat of these will promote risk avoidance.
The DOJ’s goals are understandable, but do financial incentives prompt ethical decision-making?
The Epstein Aftermath
By many accounts, financier Jeffrey Epstein was a predator with allegations of a trail of victims—from the women he exploited and financial systems he manipulated, to the men he hooked up and later silenced.
Recently, the US Virgin Islands settled sex-trafficking allegations with Epstein’s estate. Now USVI and a class of Epstein victims both claim JPMorgan missed red flags and facilitated the operation. Central to the story is Jes Staley, a former executive who had close personal ties with Epstein. Based on emails, the plaintiffs claim Staley may have seen Epstein’s alleged abuses.
What if Money Isn’t the Motivator?
Six days after Monaco’s announcement, JPMorgan sued Staley to claw back eight years of salary and bonuses. The bank claims Staley misled it about Epstein and violated its code of conduct.
Staley says the bank is trying to deflect blame, can’t get indemnification, and the conduct alleged was outside the scope of his employment. Regardless of how this story unfolds, it appears to be the type of dispute the DOJ pilot intends to spur on. It may be the tip of the iceberg.
Clawbacks following misconduct can help compliance efforts by showing institutional justice—no one is above the rules. Even so, it’s less clear whether the threat of them is an effective deterrent. Or how broadly the deterrence can reach.
How well does the threat of financial consequences work when someone is considering a decision that’s not motivated by money? And at what point does motivating with sticks tip a hard-won culture of trust and collaboration toward fear?
Deeper Drivers
Behavioral experts argue human motivation is complex, and financial incentives may have little impact on conduct. And examples of non-financial motivators abound.
While commissions motivate sales professionals, building relationships is often a deeper driver. When companies reined in business meals, sales teams groused about the limits, but got in line.
Eliminating gifts, however, met with unrelenting resistance. What if my customer’s a friend? How about a baby gift? A grocery store birthday cake? For some, token gifts are fundamental expressions of appreciation. Banning them cuts against deeply ingrained drivers.
Fixes that fit internal motivators usually work better. Scientists prize reputation and credibility. When biopharma companies identified ghost-writing issues, medical writers didn’t see the conflict. They perceived their assistance as helping busy collaborators. Once writers understood their help could impair academic integrity, they quickly self-governed.
Founders who are laser-focused on mission can find regulations trivial. Until they understand how non-compliance might threaten their goals.
Effective compliance depends on internal drivers. Ironically Epstein, who allegedly studied his victims and targeted his methods to groom and exploit them, seems to have understood this concept innately.
Assistant Attorney General Kenneth Polite said the DOJ will “assess what works, and what does not, all to improve our policies even further.” That’s encouraging. But the DOJ’s not a regulator. And this is not rulemaking. So, compliance leaders are left to make decisions based on what’s written in both the pilot and the DOJ’s updated Evaluation of Corporate Compliance Programs now.
What Next?
Importantly, companies should use clawbacks and implement financial incentives where they make sense. Misconduct requires consequences. Reduce bonuses for those who push the envelope inappropriately. Communicate that compliance means business. And publicly commend the stars.
But if the goal is to create a culture where staff can assess novel issues—i.e., show up daily and reliably make good decisions. In addition, make sure they’re engaged, understand the why behind compliance requirements, and figure out what makes them tick. Swimming against the current of employees’ natural motivators will feel like a slog for business and compliance partners alike.
Collaborating with HR can help compliance leaders identify organizational dynamics. Social science experts are another option. Marketing may also have expertise.
Designing effective incentives is hard work. Tailoring for different groups may be needed. And financial carrots and sticks have their place. But investing the energy in aligning program-related incentives with employees’ natural drivers might get better results.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information Mary Kohler is founder and principal of Kohler Health Law, where she advises life science companies on health care law and compliance matters.
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Reproduced with permission. Published May 8, 2023. Copyright 2023 Bloomberg Industry Group 800-372-1033. For further use please visit https://www.bloombergindustry.com/copyright-and-usage-guidelines-copyright/
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