Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP 37 | Compensation, Compliance Incentives and Clawbacks – DOJ Pilot Program and the SEC Clawback Rule WHAT'S RIGHT FOR YOUR COMPANY? In light of enhanced enforcement engagement around individual accountability, companies should assess whether compensation programs are appropriately designed to incentivize corporate compliance and provide companies with the mechanisms to hold employees accountable in the event of a compliance breach. This includes ensuring an integrated compliance function across business lines and functions, and in doing so, involve the following considerations: analyzing whether compensation is designed to incentivize management to prioritize compliance; assessing whether there are appropriate internal controls for identifying compliance breaches and levers to hold responsible parties accountable; adopting a clawback policy that complies with the final SEC clawback rule; analyzing whether discretionary clawback policies include the appropriate recoupment triggers with respect to the Compensation Pilot Program; preparing disclosure and communications; and reporting to the board of directors. Identify Your Need Not all companies will find that their compensation programs must change in order to receive the benefits of the Compensation Pilot Program. To ensure the company is best positioned to mitigate against DOJ sanctions in the event of a compliance breach, companies should assess employment contracts, clawback policies and incentive compensation programs to see if there are any gaps between current practices and the circumstances that may arise under the Compensation Pilot Program. Adding compliance as a performance metric in an annual incentive program, or ensuring that discretionary clawback policies include both direct and indirect misconduct triggers (i.e., failure to supervise), can increase a company's likelihood of recognizing all benefits under the Compensation Pilot Program. It can also empower leaders who are not directly responsible for compliance to ensure proper oversight and sufficient resources are allocated to avoiding and detecting compliance breaches or misconduct. Questions to Consider • Who is responsible for directly and indirectly overseeing the compliance function? • Do those overseeing compliance have sufficient expertise? • How is compensation tied to compliance, not only in the compliance function but also in other functions? • Is there a greater need for cross-company collaboration regarding compliance oversight? • Is your Dodd-Frank clawback policy approved (or on the fall board agenda to be approved)? • Do you have a misconduct-based clawback policy that is not tied or connected to a financial statement error? • Does your board agenda include sufficient updates and discussion about corporate compliance and internal controls and is the person tasked with facilitating that discussion from management the right person? • Has the compensation committee of your board been briefed about the Compensation Pilot Program? • Has your company had a compliance breach before that has triggered DOJ scrutiny? Address Your Need Compliance risk management is intersectional and must be managed from the top down. For companies with a dedicated Chief Compliance Officer, it may be necessary for a board committee or manager responsible for setting compensation to ensure that the Chief Compliance Officer and the Chief Compliance Officer's team have compensation incentives that are sufficiently tied to ensuring corporate compliance. It may also be appropriate to analyze whether the chief executive officer and other members of senior leadership should have a portion of their compensation tied to compliance. Companies should consider whether the board or board committees, such as the audit committee, risk committee or compensation committee, should be briefed on the Compensation Pilot Program and the benefits to the company of tying compensation to compliance. Companies and compensation committees should also utilize compensation consultants to assess whether incentive compensation metrics for executive officers include (or should include) compliance-related performance metrics.