John Davis discussed the U.S. Department of Justice (DOJ) Criminal Division's new pilot program on compensation incentives and clawbacks and related DOJ compliance program guidance in The Anti-Corruption Report. The new program intends to increase personal accountability and inspire organizations to be more proactive in fostering compliance via compensation. According to Deputy Attorney General (DAG) Lisa Monaco, the three-year program, which became effective on March 15, 2023, is meant to encourage companies who do not already factor compliance into compensation to retool their programs and requires companies to implement compliance-related criteria into their compensation and bonus systems when entering into criminal resolutions. The program also provides for possible fine reductions if corporations claw back compensation from culpable employees and those who had supervisory authority over them or who were "willfully blind" to the misconduct. 

Companies "must have initiated clawback efforts 'before the time of resolution' – that is, during the investigation," Davis said, adding that they also "must have attempted clawback in 'good faith' – a term that gives prosecutors significant discretion since it is not further defined in the guidance." Companies may face legal repercussions in pursuing clawbacks, however. "The potential credit for clawbacks does not include the often-substantial litigation and other costs of pursuing clawback actions against individual executives… Any resulting reduction in fines is limited to the actual compensation retrieved," Davis noted. In addition, someone subject to a clawback may not be particularly inclined to cooperate. "There could be an effect, as companies have relied, for example, on agreements that establish conditions such as cooperation with investigations as a requirement for the continuing payment of certain executive compensation benefits, especially for former or retired managers," Davis said. "Companies will have to consider the potential effects here and perhaps change the structure of such benefits (such as segregating different types of benefits into ones that can be clawed back and others that may not be touched) to balance these interests… However, there are legal considerations and market dynamics that could make any such efforts difficult," Davis said.

The revised compliance program guidance "directs prosecutors to look at 'consistent application' of disciplinary actions and incentives 'across all geographies, operating units, and levels of the organization,'" Davis said. "The guidance also asks, 'Have disciplinary actions and incentives been fairly and consistently applied across the organization?' And, in addition, 'Are there similar instances of misconduct that were treated disparately, and if so, why?'" Although the pilot program's "criteria are specifically tied to resolution requirements in criminal cases, and are thus not requirements for all companies," he observed, the "revised guidance for evaluation of corporate compliance programs does apply to all companies that could come under DOJ investigation, and that guidance makes clear that the DOJ expects companies to already have these type of compensation criteria in place before the DOJ comes knocking."

"The implication is that, going forward, a program that does not include these elements might not be considered an 'effective' compliance program under the recently updated Corporate Enforcement Policy (Jan. 2023) – a key element for companies to be eligible for declinations in criminal proceedings," Davis said.

The DOJ's Pilot Program follows the SEC's adoption last year of Rule10D-1, which addresses "recovery of erroneously awarded compensation." SEC Rule 10D-1 "applies even where individual officers are otherwise not found to be at fault," Davis said. "The SEC has stated that it intends to require clawbacks in all restatement cases, even when neither the CEO nor CFO has been involved in the misconduct that led to the restatement, arguing that it is ultimately up to those executives to ensure that their system of internal controls will work to prevent restatements," he continued. "The DOJ clawback expectations and pilot program potentially cover a broader set of company executives and managers than the SEC rule, depending on the facts and circumstances of the potential wrongdoing and supervisory roles," Davis said. "However, even for involved supervisors, the DOJ pilot program requires clawbacks only for those who 'knew of, or were willfully blind to, the misconduct,'" he noted. "That said, it is evident that the DOJ and SEC have been talking to each other about these issues," Davis observed. "The SEC announced its clawback approach in this rule only days before Deputy AG issued her September 2022 Monaco Memorandum, which directly led to the more recent DOJ policies, including the pilot program, and the agencies have acknowledged their discussions of these issues."