The Department of Justice Criminal Division announced a “Pilot Program Regarding Compensation Incentives and Clawbacks” (the “Program”) this week with broad implications for corporations and their individual executives operating within the Department’s jurisdiction. During two keynote speeches delivered at the American Bar Association’s National Institute on White Collar Crime, Deputy Attorney General Lisa Monaco (remarks here) and Assistant Attorney General Kenneth A. Polite, Jr. (remarks here), outlined the Program’s two key pillars. First, moving forward, any corporate resolution with the Department’s Criminal Division must include a requirement that the company develop compliance-promoting criteria within its compensation and bonus system. Second, Criminal Division prosecutors are instructed to provide fine reductions to companies who either successfully claw back compensation from corporate wrongdoers or undertake good-faith efforts to do so.
This initiative dovetails with the Department’s September 2022 “Monaco Memo” which outlined new, uniform DOJ policies on corporate crime, including enforcement that prioritized individual accountability and compensation structures aimed at preventing or correcting misconduct. McGuireWoods wrote about the Monaco Memo in detail here.
Monaco’s remarks this past week underscored that the Program will help achieve the Department’s goal of “zealously pursu[ing] corporate crime,” and identifying and prosecuting individual bad actors within corporate organizations. Monaco emphasized that the Department’s “goal is simple: to shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in the misconduct, onto those directly responsible.” With the implementation of the Program, Polite echoed the same sentiment, indicating that the Department’s “highest priority … and one of the most pressing challenges [it] face[s] …in investigating and prosecuting white collar cases is ensuring individual accountability.”
The Program is a three-year initiative applicable to all corporate matters handled by the Department’s Criminal Division and will become effective on March 15, 2023.
Compliance Enhancements. With respect to the Program’s effect on negotiations of corporate criminal resolutions, after March 15, 2023, every “corporate resolution entered into by the Division shall include a requirement that the resolving company implement criteria related to compliance in its compensation and bonus system.” And although this will become the new norm, this requirement was imposed in at least one recent corporate resolution involving anti-money laundering concerns that predated announcement of the Program.
The Program also imposes annual reporting requirements on companies during the corporate negotiation process, to assess how it is implementing such criteria. Those criteria include (but are not limited to): (1) a prohibition on bonuses for employees who do not satisfy compliance performance requirements; (2) disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and (b) knew of, or were willfully blind to, the misconduct; and (3) incentives for employees who demonstrate full commitment to compliance processes.
Deferred Fine Reduction. In assessing the fine amount and potential credits related to a criminal resolution, prosecutors may consider if a company:
- fully cooperates,
- timely and appropriately remediates, and
- demonstrates it has implemented a program to recoup compensation from:
- employees who engaged in wrongdoing in connection with the conduct under investigation, or
- others, who both
- (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and
- (b) knew of, or were willfully blind to, the misconduct, and has in good faith initiated the process to recoup such compensation before the time of resolution.
The total fine reduction a company can receive under the Program turns on the degree of success it has in clawing back compensation from the culpable employee(s). Specifically, upon entering into a corporate resolution, the company will be required to pay the full amount of the guideline fine less the amount of compensation the company is attempting to claw back. When the resolution term concludes, if the company has not recouped the full amount of compensation it sought to claw back, the company will be required to pay the possible clawback reduction minus the total amount of compensation actually recovered. In the event the company is unsuccessful in recouping the compensation from the culpable employee(s), prosecutors have discretion to accord a reduction of up to 25% of the amount of the total compensation unsuccessfully sought, so long as the company can demonstrate clawback efforts were made in good faith. This structure recognizes that once paid, it can be difficult to clawback compensation from employees who have engaged in wrongdoing and, in many cases, are no longer with the company.
The Program regarding compensation incentives and clawbacks is a key part of the Department’s instruction to prosecutors not only in assessing how companies incentivize compliant behavior and ethical culture, but also whether companies use compensation structures to deter misconduct. While many companies do, and should, use affirmative incentives to promote compliant behavior, the Department’s clawback policy is focused on penalizing employees, including executives, who engage in misconduct. By directly linking compliance metrics to compensation calculations, companies can point to programs designed to recoup compensation to clearly demonstrate an effort to reward compliance and deter misconduct when facing a corporate criminal resolution.
We will continue to monitor developments in this area over the coming months. If you have questions or wish to discuss strategies for implementing or managing corporate clawback policies, please contact one of the authors or your McGuireWoods relationship attorney. For more information about the breadth and capabilities of our practice, please contact the authors of this article.