The U.S. Department of Justice is eyeing new guidance for how prosecutors should assess employee compensation packages when determining whether a company’s compliance efforts warrant favorable treatment in the resolution of criminal investigations.
Acting Principal Deputy Assistant Attorney General Nicole Argentieri said Thursday that the Criminal Division is considering new guidance that would help companies structure their employee compensation packages to better position themselves in potential criminal investigations. Prosecutors may give favorable treatment to companies whose compensation structures reward compliant behavior and penalize misconduct. Argentieri forecasted that additional guidance would be forthcoming for evaluation of compensation clawback policies and/or bonuses that reward or deter compliant behavior.
This new guidance would supplement the so-called Monaco Memo — a memorandum released by Deputy Attorney General Lisa Monaco in September 2022 that instructs federal prosecutors to assess employee compensation structures when evaluating company compliance programs. The Monaco Memo states:
Compensation systems that clearly and effectively impose financial penalties for misconduct can incentivize compliant conduct, deter risky behavior, and instill a corporate culture in which employees follow the law and avoid legal “gray areas.” When conducting this evaluation, prosecutors should consider how the corporation has incentivized employee behavior as part of its efforts to create a culture of ethics and compliance within its organization.
DOJ officials have increasingly stressed the importance of effective corporate compliance programs this past year. In March 2022, a top-ranking official in DOJ’s Criminal Division warned companies: “Support your compliance team now or pay later.” A few months later, Monaco stated: “Resourcing a compliance department is not enough; it must also be backed by, and integrated into, a corporate culture that rejects wrongdoing for the sake of profit.”
While we wait for this forthcoming guidance from DOJ, companies should assess their internal policies to understand how their compensation models relate to their compliance efforts. Below are five actions a company can take to better position itself in case DOJ launches a criminal investigation into its corporate dealings:
- Pay particular attention to compensation arrangements for positions that pose higher risks of compliance issues: (1) senior executives; (2) sales professionals whose compensation levels may be linked to sales volume; and (3) employees who frequently interact with government officials.
- Implement compensation structures that reward and incentivize compliant behavior. For example, a company may consider employees’ compliance efforts in promotion and compensation decisions. A company may also consider compliance-promoting behavior during employee performance reviews.
- Implement compensation structures that penalize compliance failures. For example, a company may claw back the compensation of employees whose actions or omissions contributed to criminal conduct. Additionally, when defining what conduct justifies terminating an employee for “just cause,” a company may include violations of criminal law in the definition.
- Look for areas to integrate compliance efforts into company functions, such as compensation committees and employee performance evaluations.
- Ensure that these compliance efforts are performed in practice — not just listed on paper. The mere existence of a compliance program is not enough. Compliance programs must be sufficiently resourced, supported by company executives, and integrated into the company at large.
It may be difficult for companies to address all of DOJ’s compensation directives. Compensation decisions — particularly those for top executives — are driven by competitive market dynamics, and they intersect extensively with employment law. Nonetheless, companies that ignore DOJ’s increasing focus on employee compensation and compliance do so at their own peril. Companies should take proactive steps to enhance their compliance programs and optimize their positions with the government.