The US Department of Justice recently announced a compensation clawback pilot program as well as changes to the corporate compliance program evaluation criteria in the latest of a flurry of policy updates.
On March 2, Deputy Attorney General Lisa Monaco announced the launch of a significant pilot program on compensation incentives and clawbacks during a speech at the ABA White Collar Crime Conference in Miami. Under the “first-ever” three-year pilot program, companies will be able to reduce criminal fines by attempting in good faith to claw back compensation from individual wrongdoers—even if those efforts are unsuccessful—and the companies will be able to retain any recovered funds.
In addition, the US Department of Justice (DOJ) will require every company that reaches a criminal resolution to restructure its compensation and bonus programs to incentivize compliance. On March 3, Assistant Attorney General Kenneth Polite provided more details about the pilot program and advised that the Criminal Division made significant revisions to its Evaluation of Corporate Compliance Programs (ECCP), including additions that more explicitly consider whether a company’s compensation and bonus program is designed to incentivize compliance.
These announcements come roughly a week after DOJ announced a formal voluntary self-disclosure policy for all US attorney offices nationwide—thereby “eliminating geographic disparities and uncertainties”—and is part of a broader effort to induce companies to improve their corporate compliance programs, self-report issues, and hold individuals accountable for misconduct.
During the announcement, Monaco referenced her speech at the New York University School of Law in September 2022, during which she announced a series of changes meant to strengthen DOJ’s corporate enforcement policy. One of the more notable announcements was that DOJ would examine corporate compensation programs with an eye toward shifting the costs of corporate crime from shareholders to wrongdoers.
Monaco explained that, going forward, DOJ would require companies to show how they are linking compensation to compliance, including by “clawing back” compensation or perks given to individual wrongdoers. At the time, her remarks were DOJ’s clearest and most public pronouncement that a healthy corporate culture is tied to compensation. Additionally, her comments reflected DOJ’s renewed and intensified focus on holding individuals accountable and incentivizing companies to devise robust corporate compliance programs.
At Monaco’s direction in connection with her September 2022 announcement, DOJ’s Criminal Division consulted with regulators and practitioners to examine how best to implement a compensation clawback and incentive policy. Based on that study, the Criminal Division developed DOJ’s “Pilot Program on Compensation Incentives and Clawbacks,” a program meant to help companies promote a healthy culture of compliance through compensation models.
The pilot program has two components:
Polite cautioned that, to be eligible for the credit, companies also must fully cooperate with DOJ and remediate the misconduct and any compliance issues in a timely manner.
In an interesting twist, whatever compensation the resolving company successfully recoups from a responsible executive or employee, it gets to keep. The company does not have to pay DOJ the amount it recovered and is still entitled to the full amount of the fine reduction.
Recognizing the profound difficulties that companies face in pursuing clawbacks—particularly from employees or executives located outside the United States—prosecutors will have discretion to award a fine reduction (up to 25% of the compensation sought) to companies that pursue in good faith but do not succeed in recouping the money. In other words, it is the effort that counts.
The pilot program aligns closely with, and gives effect to, DOJ’s recent emphasis on individual accountability. It rewards—in a material fashion—a company that attempts to punish individual wrongdoers through clawing back compensation, regardless of whether the company is ultimately successful. Although the use of clawbacks to punish misconduct is not new (the SEC adopted clawback requirements last year) DOJ has not previously formally incentivized their use in this manner, nor has it so strongly encouraged companies to take action against individuals in exchange for discounted corporate penalties.
As Monaco explained, "Our goal is simple: to shift the burden of corporate crime away from shareholders who frequently play no role in the misconduct and onto those who are directly responsible.” She reiterated DOJ’s focus on holding individual wrongdoers accountable, “no matter how prominent or powerful they are.”
Polite echoed Monaco’s focus on individual accountability and explained that the pilot program is part of DOJ’s ongoing efforts to target individuals. He also explained that the Criminal Division has revised the ECCP to provide prosecutors with additional, structured guidance on evaluating a company’s compensation system and whether it is designed to reward ethical behavior and deter and punish misconduct.
Concurrently, Polite announced changes to the ECCP with respect to the collection of data from third-party messaging applications, noting that companies would not be eligible for cooperation credit unless they appropriately preserve data on third-party applications, communicate their policies to employees, and enforce them on a consistent basis.
Over the past several months, DOJ has announced several new or revised policies, all of which are meant to incentivize companies to enhance their corporate compliance policies and to punish individual wrongdoers. The pilot program and ECCP changes are the latest, but certainly not the last, in this line of announcements. The pilot program is unique among these policies because it offers clear guidance on DOJ’s expectations and potentially meaningful, quantifiable benefits. Additionally, it seemingly recognizes the real-world difficulties of implementing clawbacks by crediting good faith—albeit unsuccessful—efforts to go after individual compensation.
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