🥕Sticks & Carrots🏒 for Ethics & Compliance - navigating incentives and rewards for today's humans

Early March this year, the US Department Of Justice published revisions to its Evaluation of Corporate Compliance Programs. The main changes in this latest release relate to compensation structures and how we handle consequences of misconduct. Moreover, the DOJ unveiled its new Pilot Program, where the main focus is - again - on incentives vs. disincentives, and how we should approach them. It therefore comes as no surprise that, in this Friday Mood Post, I’d like to discuss what actually incentivises humans in today’s world.

What’s the change in the DOJ Evaluation of Corporate Compliance Programs?

We all know and use the DOJ’s Evaluation of Corporate Compliance Programs regularly, as it is a great way to know where to go and sense-check ourselves while we design and test our E&C Programs. It’s also a great tool to benchmark: where are we, what is the path forward to an increased maturity. I like it because it’s also super concrete and actionable. It’s a no b*s swiss-knife document.

As I am sure you know, it is organized based on three very relevant questions:

“1. Is the corporation’s compliance program well designed?
2. Is the program being applied earnestly and in good faith? In other words, is the program adequately resourced and empowered to function effectively?
3. Does the corporation’s compliance program work in practice?”

In asking whether the “corporation’s compliance program [is] adequately resourced and empowered to function effectively”, we need to examine 3 main points:

• “Commitment by senior & middle management”
• “Autonomy & resources”
• And, “compensation structures & consequence management

In this last part lie most of the changes and enhanced requirements articulated by the DOJ when it emphasizes that we need “incentives for compliance and disincentives for non compliance” (US DOJ, Evaluation of Corporate Compliance Programs, Updated March 2023).

Procedures, consistently enforced 

First, we should ensure to have “clear consequence management procedures” meaning that, as a company, we know how to handle violations of law or policy, and that this procedure is applied and enforced consistently throughout our organization.

How transparent is our disciplinary process? Once it is applied, to which extent do we communicate to all employees that “unethical conduct will not be tolerated and will bring swift consequences, regardless of the position or title of the employee who engages in the conduct”? We know that publishing disciplinary actions is a strong deterrent. Yet, why do so many companies shy away from telling their staff that this or that employee’s employment was terminated because of E&C Related concerns? The DOJ asks: “are the actual reasons for discipline communicated to employees in all cases? If not, why not?” (US DOJ, Evaluation of Corporate Compliance Programs, Updated March 2023). There can of course be legal and privacy reasons that prevent full transparency, however, we should not hide behind them as a pretext to avoid necessary communication. Anonymized annual reporting works well. 

Do we track data related to disciplinary actions to measure our effectiveness in not only managing investigations but also consequences of misconduct consistently across all business units and all levels of our organization? Are some cases treated differently, and if so, why?

Compensation schemes examined

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The Stick:  Compensation schemes can play a big role in deterring or incentivizing behavior. The DOJ asks straight up: is compliance “incentivized by designing compensation systems that defer or escrow certain compensation tied to conduct consistent with company values and policies”  (US DOJ, Evaluation of Corporate Compliance Programs, Updated March 2023). This means that some companies may enforce contractually recouping or reducing compensation if the recipient is found responsible or involved in the wrongdoing. Not sure this would work in all legal systems, but that’s definitely an interesting one. Give us your bonus back if you do wrong!

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The Carrot: on the other side of that coin lie incentives that foster a good culture: “promotions, rewards, and bonuses for improving and developing a compliance program or demonstrating ethical leadership”  (US DOJ, Evaluation of Corporate Compliance Programs, Updated March 2023). Is working on E&C matters a career move? Do we offer cool opportunities to become E&C Champions? Is E&C a metric for bonuses? 

General review of incentives: we should really examine “whether commercial targets are achievable if the business operates within a compliant and ethical manner”. Is E&C involved in designing and awarding incentives at senior management level? What is the % of compensation related to “to encourag[ing] enduring ethical business objectives” (US DOJ, Evaluation of Corporate Compliance Programs, Updated March 2023)?

The DOJ also launched a new 3 years Pilot program from 15 March 2023 during which the Criminal Division will require the implementation of E&C-promoting items in its compensation / bonus systems within the framework of resolution. Fine reductions may be received by a company if it initiated the process to recoup compensation from the wrongdoer (The Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks, 3 March 2023).

I have often seen companies stumble over the topic of incentives and bonuses. This topic forces us to ask the real tough questions, have the difficult conversations. The other side of that coin is that having these tough conversations enables the true operationalization of our E&C program. 

Money does make a difference to most people and is a fast and most probably effective way to get to some behavior and output. At the same time I find myself wondering: is that all there is in our modern times? 

What incentivises today's humans?

One of the most inspiring Ted Talks I have ever heard comes from Dan Pink. He examines from a social science standpoint what actually motivates people (Dan Pink, The puzzle of motivation). And it seems that in today’s business world we consistently tend to ignore what science knows and just keep doing what we have always done:

“Contingent motivators -- if you do this, then you get that -- work in some circumstances. But for a lot of tasks, they actually either don't work or, often, they do harm. This is one of the most robust findings in social science, and also one of the most ignored” (Dan Pink, The puzzle of motivation).

Dan Pink refers to LSE economists that looked at 51 studies of pay-for-performance plans within various companies, and who concluded "financial incentives can result in a negative impact on overall performance" (Dan Pink, The puzzle of motivation).

It seems money-based incentives block our creativity and even worse, make our thinking numb and limited. So, what should we do?

Dan Pink proposes to move away from rewards & punishments, towards a new and different operating system, inspired - of course-  by examples from new-age tech businesses. What makes people thrive with deep fueled energy is rather along the lines of:

• “Autonomy: the urge to direct our own lives. 
• Mastery: the desire to get better and better at something that matters. 
• Purpose: the yearning to do what we do in the service of something larger than ourselves” (Dan Pink, The puzzle of motivation).

Dare I say that Ethics & Compliance fits the above idea of a greater, meaningful purpose very well? 

Let’s take anti-corruption for example and set the scene by quoting one of the many IMF papers on the impact of corruption in the world: 

“the cost of corruption is greater than the sum of lost money: distortions in spending priorities, graft results in lost tax revenue, but it also takes a social toll and undermines the ability of the state to promote sustainable and inclusive growth. [Corruption] drain[s] public resources away from education, health care, and effective infrastructure—the kinds of investments that can improve economic performance and raise living standards for all" (Paolo Mauro, Paulo Medas, and Jean-Marc Fournier The Cost Of Corruption , IMF - FINANCE & DEVELOPMENT | September 2019).

Isn’t that motivation enough to promote anything we can do to prevent corrupt practices? Can we make people do things because they matter and because it's the right thing to do, and in doing so you contribute to the greater good? How can we best communicate to our people in order to enable them to feel autonomy, mastery and purpose in the promotion of ethics in our organizations. 

Maybe now is the time, while we think about how we work with sticks and carrots, to maybe trust social science and infuse a greater sense of purpose in what we do, our mission as Ethics & Compliance Officers, and how we enable organizations to do the right thing? Can we try to better share that greater sense of a higher purpose with the people in our organization? 

I’d say it’s worth a try, as it might work even better!

I hope these few points inspired you to think differently about the incentives of your Ethics & Compliance Program. Follow Upright Solutions on Linkedin for more inspiration!

Love from Copenhagen 💜