DOJ’s Pilot Program Regarding Compensation Incentives and Clawbacks

Key Takeaways

• On March 3, 2023, Kenneth A. Polite, Jr., the Assistant Attorney General (“AAG”) of the Criminal Division of the U.S. Department of Justice (“DOJ”), announced the launch of the Division’s Pilot Program on Compensation Incentives and Clawbacks (“Pilot Program”).
• Under the Pilot Program, DOJ (1) will reduce criminal fines if companies make good faith attempts to claw back compensation from employees who engaged in wrongdoing, even if those efforts are unsuccessful, and (2) will require companies entering into criminal resolutions to implement compensation-related measures as part of their enhanced compliance commitments.
• Given the complexity of executive compensation packages, implementing DOJ’s expectations will likely be challenging and will require careful consideration.

Background and Key Components of the Pilot Program

On March 3, 2023, AAG Polite announced the launch of the Division’s Pilot Program on Compensation Incentives and Clawbacks.

The Pilot Program comes less than six months after Deputy Attorney General (“DAG”) Lisa Monaco’s September 2022 announcement of changes strengthening DOJ’s corporate enforcement policy. As noted in our prior client alert on those policies, DOJ has stated that it wants to “empower” companies to “do the right thing” by rewarding companies that invest in compliance and that identify and voluntarily disclose misconduct in a timely manner. 

In September 2022, DAG Monaco highlighted that DOJ would credit companies that “claw back” compensation from, or impose financial penalties on, employees and executives who have engaged in misconduct. By emphasizing financial sanctions for individuals, DOJ has stated that it is trying to shift the burden of corporate financial penalties away from shareholders and onto those who are more directly responsible. Monaco also stated, during her September 2022 speech, that DOJ intends to credit companies that implement compensation programs intended to incentivize compliance.

The Pilot Program, which becomes effective March 15, 2023, provides in key part as follows:

• Every corporate resolution entered by DOJ’s Criminal Division will require companies to implement compliance-promoting criteria within their compensation and bonus system that may include prohibitions on employee bonuses, disciplinary measures for employees involved in violations of law, and incentives for employees who demonstrate a full commitment to the compliance process.
• If a criminal resolution is warranted, a company is otherwise receiving cooperation credit, and the company has implemented a policy to recoup compensation from employees engaged in wrongdoing, Criminal Division prosecutors shall award fine reductions equal to 100% of any compensation that a company recoups during a resolution period. Companies must first pay the difference between the original fine and the amount of compensation the company is attempting to claw back (“Possible Clawback Reduction”). If a company is unable to recoup the full amount of compensation it sought to claw back, the company will be required to pay the Possible Clawback Reduction minus 100% of the compensation actually recovered.
• If companies attempt in good faith to recoup compensation, Criminal Division prosecutors will have discretion to award a reduction of up to 25% of any amount the company was unsuccessful in clawing back.

On the same day that AAG Polite announced the Pilot Program, he also announced clawback-related changes to the Criminal Division’s Evaluation of Corporate Compliance Programs (“ECCP”). Originally published in February 2017, the ECCP sets out important topics and sample questions that prosecutors will ask in evaluating corporate compliance programs. According to AAG Polite, one of the “significant” changes being made to the ECCP is that “our prosecutors will consider more closely compensation structures and consequence management when evaluating compliance programs under the revised ECCP. They will consider numerous factors to determine how a company’s compensation system contributes to the presence – or lack – of an effective compliance program.” Of particular note here, the revised ECCP instructs prosecutors to ask whether the company has disincentivized non-compliance by recouping or reducing compensation if an employee engages in misconduct and whether the company has tracked clawback-related metrics, such as the number of times the company has attempted to clawback compensation and the amounts that have been recouped. Taken together with the Pilot Program, these revisions to the ECCP reflect the high importance DOJ is placing on compensation clawback efforts. (For more on the March 2023 revisions to the ECCP, see our client alert.)

The Pilot Program also parallels, and might have been inspired by, Section 304 of the Sarbanes-Oxley Act, which allows the U.S. Securities and Exchange Commission (SEC) to claw back or disgorge compensation from senior executives of public companies that have restated financial results, even when the senior executives did not engage in alleged misconduct.[1] SEC has signaled that it intends to increase its use of Section 304. DOJ’s approach is broader—reaching non-public companies and employees at multiple levels—and is likely intended, in part, to be a complement to the SEC’s efforts.

Conclusion

It remains to be seen whether the Pilot Program actually will further DOJ’s stated goal of individual accountability. Many executive compensation packages are complex, and it may be difficult to demonstrate to DOJ’s satisfaction that certain compensation has been recouped from employees engaged in wrongdoing. Nevertheless, at least as an initial matter, companies should consult with experienced executive compensation counsel to evaluate if compensation and bonus systems provide meaningful mechanisms to deter corporate wrongdoing and potentially to be able to clawback compensation under the appropriate circumstances. In light of the Pilot Program, as well as the guidance previously announced by DAG Monaco, companies should also evaluate their corporate compensation policies generally to determine how, to the extent practical, compliance can be incentivized.

[1] See 17 C.F.R. § 240.10D-1 (2023).