By Joe Murphy, CCEP
It is becoming clearer and clearer that DOJ, in assessing compliance programs, expects us to include coverage of incentives. This should not be a surprise, since this has been part of the Sentencing Guidelines since 2004.
Here is one important way to do this. In Murphy, 501 Ideas for Your Compliance and Ethics Program: Lessons from 30 Years of Practice 70 (SCCE; 2008) , one of the recommendations is to have compliance and ethics professionals review all incentive and reward plans. This can help avoid adopting incentives that drive employees toward improper conduct. If there is any question about the need for this, the Wells Fargo case offers a powerful lesson on why this is so important.
How might this work? Picture yourself as the compliance officer at a bank in a meeting discussing a planned incentive plan. Bank employees are told that their objective is to have each customer also buy into 8 additional products and services from the bank. Each employee’s success or failure will hang on this objective. And when you ask how they came up with the number “8” here is the reason: “It rhymes with great.” That way the sales campaign can use the catchy phrase “Eight is great.”
In the room at Wells Fargo where this happened there was a desperate need for an adult – someone whose job was to challenge dumb ideas, or ideas whose ramifications had not been thought through. Someone with the clout to stand up and object. Someone who, if a dangerous idea was to proceed against their advice, would be obligated to report the concern to the board of directors.
If you are that compliance person, would your job simply be to ask questions? Certainly you would be expected to think about questions such as: “if we do this, what’s the worst that could happen?” If you can get others thinking that might help people to step back from bad or overly aggressive ideas.
If the idea is clearly illegal and you cannot get people to stop, then your recourse has to be escalation, to senior management and ultimately to the board. But suppose the idea is not illegal but very aggressive. Your approach then may be to focus on measurement and safeguards. In the Wells Fargo case you might push for a more reasonable number as the sales target. But you would also push adjusting to the risk raised by such an aggressive sales objective. You would point out the need for closely monitoring the impact of the program, looking for warning signs. You could talk about additional controls so that the company can eliminate or cut down the chances of fraud. You could arrange a system to look for anomalies through data analytics.
In other words, if it is illegal, you either stop it or escalate to someone who will. If it is dumb, you look for ways to fix it. If it is legal but aggressive you look for ways to assess the risks, build in strong controls, and closely monitor it when it is being implemented.
As I heard this once expressed, there is nothing wrong with having a strong engine, but the stronger the engine the better the brakes have to be. Of course, you also can address what the costs will be for the extra controls. Now you are giving management a practical choice. Yes, they can shoot for a high performance number, but also recognize there will be a real cost in implementing appropriate controls. For example, you may project headcount increases necessary to monitor and control the strong incentive system. Understand, you are never saying, “sure, go ahead and break the law, just be sure you can pay the fines.” It is never acceptable to do that. But you are saying that there will be costs for the aggressive sales program because the company does not accept lawbreaking or unethical conduct.
Companies can use incentives and rewards designed to achieve important objectives. They can reward those who increase sales and those who reduce costs. We use incentives because they work. But because they do drive behavior we also need to be on our guard, and to be part of the process. Sometimes we may have to say no, with the understanding that if others proceed the board will need to be informed. But sometimes it is just the practical step of having people focus on the risks associated with the incentive program and then addressing what will be required to control those risks and prevent misconduct.
My advice to compliance people is this: Be in the room where it happens, where the incentive system is being developed. Make sure you are independent and empowered enough to have a strong voice. Advise where you can and escalate where you must. If you do this you can make a real difference, and keep your company from becoming the next textbook case of incentives gone wrong.
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