New DOJ Focus on Executive Compensation in Resolving Criminal Investigations

Key Points

• The DOJ recently announced several policy updates tethering resolution of criminal investigations to a company’s compensation and bonus programs.
• These updates include executive compensation focused revisions to the DOJ’s ECCP memorandum, which details the factors prosecutors should consider during criminal investigations of a company, when determining whether to bring charges and when negotiating plea or other agreements.
• The updates also include a new Pilot Program Regarding Compensation Incentives and Clawbacks, which requires companies entering into resolutions with DOJ’s Criminal Division to implement compliance-related criteria in their compensation and bonus programs and to report the status of such implementation to the Division during the resolution term.
• The Pilot Program also reduces fines levied on companies by the amount of compensation a company recoups from employees engaged in wrongdoing and gives prosecutors discretion to reduce fines by up to 25% of the amount a company has attempted to clawback, even if clawback is unsuccessful.
• Companies may benefit from considering DOJ’s new policies when evaluating executive compensation programs and arrangements. Compliance personnel should consider their company’s enforcement risk when determining whether to document this consideration.

DOJ Updated Memorandum

The Department of Justice’s (DOJ) Evaluation of Corporate Compliance Programs (ECCP) memorandum details the factors prosecutors should consider in conducting criminal investigations of companies, determining whether to bring charges and negotiating plea or other agreements. On March 3, 2023, DOJ substantially revised the memo, which was last updated in June 2020. These revisions elaborate on the factors prosecutors should consider in evaluating whether a company’s compensation and consequence management schemes are “indicative of a positive compliance culture.”

With respect to a company’s Financial Incentive System, DOJ added a number of questions for prosecutors to consider, including the following:

• Has the company considered the impact of financial rewards and other incentives on compliance?
• Has the company considered whether commercial targets are achievable if the business operates within a compliant and ethical manner?
• What role does the compliance function have in designing and awarding financial incentives at senior levels of the organization?
• What percentage of executive compensation is structured to encourage enduring ethical business objectives?
• Are the terms of bonus and deferred compensation subject to cancellation or recoupment, to the extent available under applicable law in the event that non-compliant or unethical behavior is exposed before or after the award was issued?
• Does the company have a policy for recouping compensation that has been paid, where there has been misconduct?
• Have there been specific examples of actions taken (e.g., promotions or awards denied, compensation recouped or deferred compensation cancelled) as a result of compliance and ethics considerations?

The DOJ believes that a company should evaluate compliance factors when evaluating compensation arrangements. These revisions provide incentive to do so by suggesting that companies might benefit from documenting that evaluation when resolving criminal allegations. For compliance personnel, any decision to document these considerations should account for the company’s enforcement risk.

New DOJ Pilot Program

In addition to updating the ECCP memorandum, DOJ also announced a pilot program on compensation incentives and clawbacks (the “Program”). The primary goal of the Program is to shift the burden of corporate financial penalties away from shareholders and onto those responsible for the misconduct. The Program, which will last three years, requires all companies that enter into resolutions with the Criminal Division to implement compliance-related criteria into compensation and bonus systems. DOJ specified provisions that companies may include in their compensation arrangements to satisfy the Program, including prohibiting bonuses for employees who do not satisfy compliance performance requirements, imposing disciplinary measures on employees who violate applicable law and those who had both supervisory authority over the wrongdoer and knew of (or were willfully blind to) the wrongdoer’s misconduct and providing incentives to employees who demonstrate full commitment to compliance.

Additionally, the Program directs prosecutors to reduce fines levied on companies by the amount of compensation a company recoups during the resolution period (such as a deferred prosecution agreement) from employees engaged in wrongdoing. The Program also gives prosecutors the discretion to reduce company fines by up to 25% of compensation a company has made good-faith attempts to clawback, even if clawback is not successful during the resolution period. This clawback credit does not include litigation or other costs related to pursuing the clawback, which is often substantial.

Government Focus on Executive Compensation

These policy updates and the new pilot program are consistent with other recent government initiatives focusing on executive compensation and follow the U.S. Securities and Exchange Commission (SEC) adoption of a final rule in October 2022, detailed in our previous client alert, implementing the clawback provisions of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC rule requires issuers to implement compensation clawback policies that provide for recovery of erroneously awarded incentive-based compensation received by current or former executive officers in the event the issuer is required to prepare an accounting restatement.

Conclusion

The DOJ’s updated ECCP memo and the new DOJ pilot program, taken together, signal a clear focus by the U.S. government on tying enforcement decisions to corporate compensation structures. Businesses should develop and maintain compliance-related criteria in compensation schemes and should consider whether documenting such consideration may benefit them when resolving any future criminal allegations. Examples include policies that clawback already-paid compensation from wrongdoers, subject bonuses and deferred compensation to cancelation in the event of compliance violations, and provide financial rewards to employees clearly dedicated to strong compliance.