Client Alerts
July 20, 2023

Reevaluating Your Company’s Compliance Program

Stites & Harbison Client Alert, July 20, 2023

by Michael Denbow, Brian Butler, and Rachel Gumbel, 2023 Summer Associate

The Department of Justice Announces Compensation Incentives and Clawbacks Pilot Program

The United States Department of Justice’s Criminal Division (“Division”) announced a new program—called the Compensation Incentives and Clawbacks Pilot Program (“program”)—that will shift the burden of corporate financial penalties away from shareholders and onto culpable corporate employees.1

Additionally, the program’s guidelines instruct prosecutors to consider possible fine reductions where companies seek to recoup compensation. Although the program’s guidelines do not modify the Division’s Corporate Enforcement Policy, the Evaluation of Corporate Compliance Programs, or the Principles of Federal Prosecution of Business Organizations, as best practice, many corporations will likely alter their compliance programs.

Program Guidelines

The program began on March 15, 2023, and will remain in effect for three years, at which time the Division will determine whether the program will be modified or extended. For the time being, however, the program will apply to all corporate criminal matters, focusing on compliance enhancements and deferred fine reductions.

The compliance enhancements require companies to report annually to the Division about their implementation of compliance criteria including, but 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.

The fine reduction guidelines accord fine reductions to companies that aim to recoup compensation from employees engaged in wrongdoing. At the outset of a resolution period, a company must pay the original fine minus 100% of the amount of compensation it will attempt to clawback. At the conclusion of the resolution period, a company must pay the difference between the amount of compensation it attempted to clawback and it actually recovered. In other words, the company will pay the complete fine if it does not actually recoup the attempted clawback amount.

If a company demonstrates a good faith attempt to recoup compensation but ultimately fails to recover the entire amount, prosecutors have the discretion to grant a fine reduction of up to 25% of the compensation the company attempted to clawback. The company must, however, make an additional fine payment of the amount of compensation it attempted to clawback minus the reduction percentage of the compensation sought.

Practical Considerations of Implementing a Clawback Program

Although implementing a clawback policy will only be mandatory for companies resolving a criminal matter with the Division, as best practice in compliance, many companies will likely adopt the program’s guidelines. The following components should be considered by a company seeking to implement a clawback policy:

  • Develop a written clawback policy: Because a company engaged in a resolution period will be required to share proof of an enforceable clawback agreement,2 developing a clear clawback policy (or other provision on compensation incentives and penalties) is imperative.
  • Share the clawback policy with employees: Documenting communications of the clawback policy and employees’ consent to follow its terms is crucial. The Division will monitor a company to determine whether its clawback policy is followed in practice. Additionally, recouping compensation from culpable employees places a company in a difficult position, so communicating the clawback policy clearly with employees from the outset of its implementation will help to avoid confusion and conflict. A company may consider sharing its clawback policy in hiring materials, employee handbooks, or in an easily accessed part of its intranet. Once employees have read the clawback policy, a company should collect each of its employees’ signatures to record their agreement to its terms.
  • Evaluate local and state laws to determine scope of policy: A company must thoughtfully consider the employees and the types of compensation that will be covered by a clawback policy. The Division’s guidelines provide little direction on the appropriate scope of a company’s clawback program. Local and state wage laws may, however, prohibit a company from withholding compensation or taking back wages already earned. Jurisdictional specific research (especially for a company with an international workforce) must, therefore, be completed before developing a clawback policy.

In summary, the increasing focus on holding individual wrongdoers accountable places a burden on companies to develop policies to monitor the compliance of employees. It is only mandatory for companies facing criminal investigation to develop and implement a clawback policy but, as best practice, a company should evaluate its risk for criminal investigation and the proficiency of its compliance policies in light of the Division’s newly released guidelines.

If you have further questions about the Division’s new clawback program, or seek assistance revising your compliance program, we invite you to contact an attorney at Stites & Harbison.

1Memorandum from the Department of Justice on the Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks (Mar. 3, 2023) (on file at the Department of Justice’s Corporate Enforcement, Compliance, and Policy Unit webpage).
2See Memorandum from The Deputy Attorney General, Lisa Monaco, on Further Revisions to Corporate Criminal Enforcement Policies Following Discussions with Corporate Crime Advisory Group (Sept. 15, 2022) (on file at the Department of Justice’s webpage).

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