This document summarizes strategies for creating effective compliance-based employee incentive programs. It discusses using both positive and negative incentives to encourage compliant behavior. Positively, companies can tie executive compensation, bonuses, promotions and other employment decisions to compliance goals and metrics. They can also provide recognition awards. Negatively, companies can take disciplinary actions for non-compliance like reporting employees to law enforcement, terminating employment, imposing financial consequences or public shaming. The document advises carefully considering local laws when determining disciplinary policies.

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January 21, 2015Volume 4, Number 1
COMPLIANCE POLICIES AND PROCEDURES
Guide to Creating an Effective Compliance-Based Employee
Incentive Program (Part Two of Two)
By Nicole Di Schino
1
compliance goals. “Historically, compensation focused
on looking at the numbers, whether the employee was
helping the business or not,”Sokenu said. “Business
goals and compliance aren’t mutually exclusive but
they can conflict,”he said. To encourage executives to
consider compliance in addition to business growth,
“many companies have a component of reviews that
heavily emphasizes compliance,”he explained.
For example, in 2013, Wal-Mart announced that it
was overhauling its executive compensation plan to
include compliance metrics. Historically, the company’s
executive incentive compensation programs were based
on the financial measures of sales, operating income,
and return on investment. While still considering those
measures, the company added a compliance
component to its evaluations.
In order to further emphasize its ongoing commitment
to enhancing compliance, certain executive bonuses
were subject to achieving compliance goals, Walmart
announced. It said:
During fiscal 2014, our company’s senior
leadership will evaluate the company’s key
compliance policies, processes, and controls,
and prepare a timetable for implementing
further enhancements on a prioritized basis (the
“Fiscal 2014 Compliance Objectives”). These
enhancements will address the key components
of a corporate compliance program, including
leadership and resources, standards and controls,
communication, systems, training, and monitoring,
among others. Senior management will provide
quarterly reports to the Audit Committee on
the progress in implementing the Fiscal 2014
Compliance Objectives. If, in the judgment of the
Audit Committee, the company has not achieved
adequate progress in implementing the Fiscal 2014
An employee incentive program that provides effective
disciplinary measures for compliance missteps and
incentives for positive behavior is one of the“hallmarks
of an effective compliance program,”according the
DOJ/SEC FCPA Resource Guide. To assist companies in
creating such a program and determining the optimal
positive and negative incentives, The FCPA Report is
publishing a best-practices guide to developing and
implementing an incentive program that works. This,
the second article in the series, discusses the carrots
and sticks a company can use to encourage compliant
behavior. The first article in the series discussed the
risks and benefits of incentivizing compliance, outlined
three steps a company should take before creating
an incentive program, and discussed how a company
should measure compliance. See also“When, Why and
How Should Companies Discipline Employees for FCPA
Violations?,”The FCPA Report, Vol. 1, No. 8 (Sep. 19, 2012).
Six“Carrots”Companies Can Use to Positively
Reinforce Compliance Efforts
Companies can use a wide variety of measures to
positively reinforce management and employees’
compliance efforts. Incentives can range from tying
portions of executive pay to compliance to a simple
recognition in a company newsletter. “Incentive
programs are only limited by the imagination of those
in charge,”Claudius O. Sokenu, a partner at Shearman &
Sterling, said. “Companies can do it any number of ways.”
When creating or revising a compliance-based incentive
program, companies should consider the following
options:
1. Compliance-Based Executive
Compensation Plans
An increasingly popular way to incentivize compliance
is to tie executive compensation to the completion of

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the board may evaluate whether the executives are
meeting those obligations, Peter Viksnins, Director at
PricewaterhouseCoopers and an adjunct professor at
George Washington University, said.
To evaluate broader compliance goals,“when it comes
time for the executive to outline his or her contribution
to the organization or receive additional compensation,
part of that conversation should be whether the
executive has worked with the compliance program
and encouraged compliance while delivering results,”
Sokenu said. There are various approaches to evaluating
executives. Companies can look at the executive’s overall
compliance record, discuss key functions and talk to
individuals responsible for various compliance
efforts, he explained.
Sokenu recalled how a company he is friendly with
accomplishes this task. There,“the board actually
interviews the head of internal audit, head of
compliance, head of legal,”he said. “They look at the
internal audit reports for each of the functions that
each executive supervises. They look at the internal
audit reports for those functions to see whether they
are scoring well . . . and if there are issues identified,
whether those issues have been fixed. The board tries
to determine where the issues are coming from,”he
said. Additionally,“they look at the whistleblower
reports and compliance reports, the hotline reports,
whatever aggregation of complaints. Let’s say, for
example, that there is a disproportionate number of
complaints coming from the finance team, it’s going
to be really hard for the CFO to say he’s doing well.”
See also“Seven Steps Companies Can Take to
Incentivize Internal Reporting of FCPA Violations,”
The FCPA Report, Vol. 1, No. 3 (Jul. 11, 2012).
By evaluating multiple features of the compliance
program and the executives’contributions to the
program, the board can determine which executives
have done well on the compliance front and can create
a“well-reasoned, well-thought out process for trying to
determine whether any of these C-Suite types
are following up on their tone-at-the-top
responsibilities,”Sokenu said.
Compliance Objectives, and taking into account such
other considerations with respect to compliance
matters for fiscal 2014 as the Audit Committee
in its judgment may deem appropriate, then the
CNGC [Compensation, Nominating and Governance
Committee] may reduce or eliminate fiscal 2014
annual cash incentive compensation for the
relevant Executive Officers.
See also“The Fallout from Walmart’s Ongoing FCPA
Investigation,”The FCPA Report, Vol. 3, No. 13 (Jun. 25,
2014).
Financial incentives are powerful motivators, Bret
Campbell, a partner at Cadwalader, Wickersham &
Taft, said. “Tying compliance to a monetary bonus
incentivizes individuals more than just a plaque or a
certificate,”he said. It also sends the right message
to a company’s regulators, he continued. A company
wants to be able to say it uses both the carrot and the
stick. If employees take improper actions, a company
should have HR remedies available, up to and including
termination and law enforcement referral, Campbell
explained. On the other hand, if employees are doing
the right thing, a company should reward them for
that financially, he said.
A company’s compliance-based compensation structure
will vary based on the employee and also based on the
company’s risk profile. “For example, some companies
that have had an FCPA problem and are trying to get
in good with the government may say that 25% of
an employee’s compensation is going to be based on
how well the company does on the compliance report,”
Sokenu said. “It is not five percent, it is not ten percent,
it is a significant number.”
Evaluating the Compliance Efforts
of Senior Executives
Executives can be evaluated based on their
contribution to the company’s“tone at the top”and also
for their performance with regard to specific compliance
objectives. For example, if the company is involved in
an FCPA settlement and faces compliance obligations,

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employees’evaluation for promotion opportunities
should be compliance, Sokenu advised. Several issues
should be evaluated, he said. “Has the senior manager
incentivized his or her direct reports? How many training
sessions has the employee attended? Different people
come up with different questions to ask, but, in essence,
all of the questions are designed to get to two questions.
First, is the employee himself or herself being compliant?
Second, how well, within the employee’s sector of the
organization, is the employee pushing compliance?”
Managers can also be evaluated for compliance with
specific goals such as performing due diligence on
business partners or cooperation and implementation
of a remedial compliance program, Viksnins added.
A company can also consider compliance when making
other employment decisions, Low said. “For instance,
particular kinds of assignments can be taken and used as
an opportunity to feature good compliance behavior.”
4. Spot Bonuses
Spot bonuses or incidental rewards can be used to
reward middle-level management and junior-level
employees for specific compliance-related behaviors,
Viksnins said. “For example, if a mid-level manager
makes sure that all his or her direct reports have timely
completed training, rather than have his or her annual
compensation include a component related to that,
he or she might get a spot bonus or compliance
award of some sort, that may be publicized
throughout the company,”he explained.
Similarly,“an employee may get a reward for
doing a particularly good job in implementing
improvements to a compliance program.”
A spot bonus may be helpful to reward people that have
slightly less involvement in the compliance program,
such as someone in a logistics role or human resources
role, Viksnins said. “While their compensation may not
be linked to compliance overall, the company
can demonstrate the importance of compliance
in those other roles and functions by using
the incidental reward.”
2. Compensation and Regular Bonuses
for Mid-Level and Junior Employees
Compensation for mid-level and junior employees,
such as merit-based raises and annual bonuses, can
also be tied, in part, to compliance. “A company should
mainstream compliance incentives, because it has to be
giving people the message that it is not just meeting the
numbers or making the numbers that counts, it’s making
the numbers in a sustainable way, namely a way that
integrates compliance concerns,”Lucinda Low,
a partner at Steptoe & Johnson, said.
Companies can integrate compliance objectives
into their existing employee evaluation system, Low
suggested. “To the extent the company is already
doing performance evaluations, if it doesn’t integrate
compliance into that, it is not mainstreaming it and it
is creating the message that compliance is something
apart,”she warned. “Then, the risk is that compliance is
perceived as not really counting in the same way.”
With more junior employees,“there aren’t the same
sort of tone at the top, message in the middle concerns
that exist with management,”Low said. But, a company
should still encourage compliance. When evaluating
lower-level employees a company should look at
performance based on more definable metrics, Low
suggested. “Have the employees done their training?
Have they filled out any certifications? Have they done
the things they are supposed to do, that fall on them as
employees, from a compliance point of view?”
“I’ve seen situations where managers have to evaluate
all of their personnel on a variety of criteria including
compliance,”Low said. “That has a dual purpose. It
incorporates compliance into the employee evaluation
and it also is telling the manager that compliance is
part of what the company is looking at.”
3. Promotions & Other Employment Decisions
For non-C-suite management employees, those people
who have supervisory responsibility and are looking
after subsidiaries or lines of business, a key part of the

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Five“Sticks”Companies Can Use
to Punish Compliance Failures
Government guidelines make clear that companies
should have specific and appropriate disciplinary
procedures for employees that violate company
compliance policies or anti-bribery laws. But,“[t]aking
actions against people for non-compliant behavior
can be very tricky,”Low warned. Whether a company
can take a particular action depends on the relevant
jurisdiction. “Companies should consider local laws
and try to design a set of policies and procedures that
will allow the company to impose sanctions under local
law,”she advised. “Unions also can come into play with
dismissals or disciplinary actions,”she added.
Viksnins agreed that companies must carefully consider
disciplinary issues, pointing to clients in France and
Germany who operate using very prescribed and
specific disciplinary measures to meet local legal
and collective bargaining concerns.
For more on complying with local laws when
operating abroad, see The FCPA Report’s series on data
privacy. “Conflicting Compliance Obligations: How to
Navigate Data Privacy Laws While Performing Internal
Investigations and Promoting FCPA Compliance in the
E.U. (Part One of Three),”The FCPA Report, Vol. 2, No. 1
(Jan. 9, 2013); Part Two of Three, Vol. 2, No. 2 (Jan. 23,
2013); Part Three of Three, Vol. 2, No. 3 (Feb. 6, 2013).
1. Reporting to Law Enforcement
If a company discovers that an employee has violated
the FCPA or other anti-corruption laws which govern
the company’s activities, it may wish to report that
behavior to the SEC, DOJ or a regulatory body abroad.
Such a decision will obviously have consequences
for both the company and employee and should be
carefully considered by the company and its board.
Most companies also choose to discuss self-disclosure
issues with outside counsel prior to approaching the
government. See“When Should a Company Voluntarily
Disclose an FCPA Investigation?,”The FCPA Report,
Vol. 3, No. 4 (Feb. 19, 2014).
5. Awards and Recognition
Recognition and awards can also be useful. “I’m not an
HR expert but recognition is sometimes as important to
people as financial rewards. Some companies will try to
affirmatively reward by recognizing employees for good
performance,”Low said. “Having the company talk about
people that have done good things in the compliance
area is one way to reward [such] behavior,”Low said.
There are numerous vehicles for doing that, including:
• Employee of the week, month or year awards;
• Plaques;
• Recognition in company newsletters, magazines or
on company intranet; and
• Periodic or annual awards recognizing people for a
commitment to compliance.
This type of positive enforcement is“similar to
highlighting actions that have been taken on the
negative side,”Low explained. It’s not enough“to show
people that bad behavior has consequences,”she said.
“You want to show that good behavior is recognized as
well, because if you don’t, people don’t think it’s real.”
Highlighting compliant behavior breeds more
compliant behavior and demonstrates a
company commitment to compliance.
6. Travel or Gifts
In addition to providing recognition for positive
compliance behaviors, some companies also give
employees a gift or travel reward, Sokenu said. For
example, an airline that Sokenu is familiar with gave
a travel incentive to its most compliant employee of
the year. Similarly, one of his clients had“the chief
compliance officer invite one employee from any
part of the world, who has done a good job on the
compliance front or done something to prevent the
company from getting into trouble, to come to the
company’s senior executives’offsite annual meeting
and give a five minute speech about what they
did and how they did it.”

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4. Financial Consequences
Companies can also financially punish executives
who fail to meet compliance objectives or make bad
decisions. In other areas, clawbacks have become an
important deterrent tool, Sokenu said, but they are less
common in the FCPA context. “A board can always find
a way to affect compensation, whether that is through
[lower] year-end bonuses or through [not giving] other
types of incentive compensation. There is always some
number that can be affected.”
5. Public Shaming
Companies can also use public shaming to spread the
compliance message and discourage bad behavior.
“Some companies have a hall of shame on their intranet
with the names of the people who have engaged in bad
conduct, what they’ve done and how much they were
fined,”Sokenu said. That“accomplishes two goals,”he
explained. “One is purely a deterrent factor. You don’t
want your name on the hall of shame,”he said. “Two,
from a Dodd-Frank perspective, it encourages people to
come to the company knowing that something will be
done about their complaint, that it will not be ignored.
That makes people feel comfortable coming forward.”
See“Seven Steps Companies Can Take to Incentivize
Internal Reporting of FCPA Violations,”The FCPA Report,
Vol. 1, No. 3 (Jul. 11, 2012).
2. Termination
Employees who show a high disregard for the company
compliance program should often be terminated. “Most
of my clients now have zero tolerance for bad behavior,”
Sokenu observed. “If an employee takes non-compliant
actions, he is out of there. Not only is he out of there,
but he is out of there in a public way,”he said. Sokenu
explained that at many companies,“if an employee is
engaged in bad conduct from a compliance perspective,
and he or she is going to be terminated, he or she is
openly and publicly terminated as a warning to others.”
For example,“if an employee has violated company
policy and paid a bribe to a government official, the
company will terminate that employee and will
do so in a public manner.”
Termination may also be appropriate for a senior
level employee who is not effectively supporting the
company’s compliance efforts, even if the employee
has not affirmatively violated the company’s policies.
“I once represented a company that had an FCPA issue
and a senior member of the C-Suite was arguably rather
dismissive of the issue,”Sokenu said. “The company’s
board surmised that the executive did not take the
issue as seriously as the board would expect. The
board was not impressed and the executive was fired,”
he explained. The termination happened“not because
the executive had anything to do with the bad conduct,
but because he did not jump in front of it and take
it seriously enough.”
3. Other Employment Actions
“Short of termination, there are all sorts of punishments
that are doled out in return for bad behavior,”Sokenu
said. An employee can be passed over for a promotion,
demoted from his or her current position, or excluded
from management training programs. Such negative
actions should also be“documented and made public
within the company,”Sokenu said.