DOJ’s Pilot Program Regarding Compensation Incentives and Clawbacks
DOJ’s Pilot Program Regarding Compensation Incentives and Clawbacks
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:
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.
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).