Performance bonuses are always an exciting upside. But what about compliance officers? Does incentive pay work for them? There are ways to measure performance and match it to rewards for most C-suiters, managers, and professional staff — sales targets, production goals, hiring matrixes, and so on. But can you do that for compliance?
Success in compliance is finally measured by things that don’t happen. Foreign officials aren’t handed cash, unqualified princelings aren’t hired, doctors aren’t invited to fake symposia.
So, should compliance officers enjoy performance awards when bad things don’t happen? That sounds sensible, but there’s a problem. It would point compliance officers in the wrong direction. They’d have an incentive not to detect and report problems.
Beyond problems with paying for things that don’t happen, there’s the issue of autonomy. According to the DOJ’s Evaluation of Corporate Compliance Programs, prosecutors should ask: “How does the company ensure the independence of the compliance and control personnel?”
While the feds don’t directly discuss compensation for compliance personnel, pay plans have to be weighed against the requirement to “ensure the independence of compliance and control personnel.” So, for example, if compliance personnel receive bonuses because the company makes more money or its stock price goes up, would that jeopardize their independence?
Asked another way, if there’s a prosecutable compliance problem, would a compliance officer’s incentive pay or performance bonuses be defensible? Or, would the DOJ conclude the compliance officer’s independence had been compromised?
The requirement for autonomy gives us another way to test incentive pay. It starts with the idea that compliance officers need autonomy because they’re like fiduciaries. But in their case, their duty of care runs not just to their employer but also to stakeholders and the wider public.
Could the fiduciary analogy work? Black’s Law Dictionary defines a fiduciary as one having a “duty to act for someone else’s benefit, while subordinating one’s personal interests to that of the other person.” That description fits the compliance officer’s gatekeeper role.
In practical terms, fiduciaries-at-law must avoid conflicts of interest that might cause them to breach their duties of loyalty and care to another. If we think of compliance officers as having a duty to protect their company, stakeholders, and the public from illegal and unethical behavior, is incentive pay based on their company’s performance a conflict of interest and form of self-dealing?
There’s not much empirical evidence to look at, and what there is, is now dated and not exactly on point. A 2003 article in the Journal of Managerial Issues examined whether stock ownership and incentive compensation impacted the independence of internal auditors. “Results revealed that stock ownership did not affect the reporting decisions, but when incentive compensation was tied to stock prices, internal auditors’ reporting decisions were affected.”
A 2016 paper in another professional publication looked from the viewpoint of external auditors and had a slightly different take. “We posit that external auditors will view IBC [incentive-based compensation] as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk.”
So, where are we?
There’s nothing in the research or case law I’ve seen or in any DOJ or SEC guidance that’s conclusive or legally binding about incentive pay for compliance officers. But anyone considering a pay plan that involves performance awards or incentive compensation for compliance personnel should go slow. They should at least ask if the plan might create disincentives to find and report compliance problems and whether the plan could compromise the requirement for autonomy and result in a conflict of interest.
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