And presto! Seemingly out of thin air, executive compensation is back on the agenda for ethics and compliance officers to ponder.
Perhaps it was Verizon's decision last week to recalculate the compensation of departing CEO Ivan Seidenberg, after a few comment letters from the Securities and Exchange Commission that the formulas Verizon used could be improved. Or maybe you've been wondering what Institutional Shareholder Services is planning with the new approach to evaluating executive compensation packages it will implement this spring. For true devotees on the subject, the Society for Corporate Compliance & Ethics has even published a new white paper about compensation by Joseph Murphy, a longtime compliance hand who probably thinks about this stuff more than anybody.
I have long struggled to like executive pay as a compliance issue. To a certain extent, compliance officers can't do much about it. You and fellow slaves in the financial reporting department are shackled to a thicket of SEC rules that spell out disclosure requirements in exacting detail. Nobody ever reads these details until the CEO somehow departs the company—and then everyone is aghast at the bloated severance package he or she is taking out the door. We all know the complaints that come next: How did this happen? Where was the board?
Well, the board was in the boardroom, and very likely ignoring the ethics & compliance department counsel that an eight-figure severance package is probably a bad idea. Of course, even the janitor could come up with that insight, but take solace. Since the boards setting CEO pay are largely comprised of other CEOs, the boards aren't listening to him either.
Murphy's paper takes a more expansive view: How can ethics and compliance be woven into the compensation structure for all employees, CEO and janitor alike? This is a much better way to view the issue. First, lower-level employees are more likely to commit the misconduct that trips up companies most often—the bribes to foreign officials or bullying of whistleblowers that attracts the interest of regulators. Second, by inserting ethics and compliance into compensation policy, across the whole company, you have a better chance at forcing the board to include ethics and compliance in specific compensation packages… like, say, those of the CEO and other executives.
A 2009 survey from the SCCE underscores how much compliance officers do need to press their case. Only 34 percent of respondents said their departments had much say in setting compensation for senior executives; the figure dropped to 15 percent for rank-and-file employees. Forty-six percent said ethics and compliance metrics are not used at all as part of evaluations for executives. Worse, another 18 percent didn't even know. The numbers were little better for rank-and-file employees: 48 percent said compliance metrics weren't used, and 6 percent didn't know.
Murphy embraces the idea that employees should receive awards for ethical behavior, in the form of pay raises or bonuses specifically tied to it—and I'll be honest, that still strikes me as hard to accept. I see the reasoning: You give a salesman a bonus for exceeding his sales goal, so why not give an employee a bonus for exceeding some metric tied to ethics or compliance? Logically it makes sense. Murphy makes a compelling argument that the U.S. Sentencing Guidelines would welcome the tactic as part of the strong compliance program that regulators want to see.
Still, once we're handing out bonuses for outstanding ethical performance, we're in the realm of offering rewards if employees use internal hotlines before alerting regulators to misconduct. Lots of you ask whether other companies actually do that; I've heard only one unconfirmed report of a compliance department that claimed it did. The idea is dubious at best, and you'll never be able to offer the eye-popping rewards the SEC and Justice Department can.
I know, I know—bonuses for outstanding conduct aren't the same as rewards intended to steer employees away from ratting you out to the feds. And were we to substitute “Employee of the Month profile” for “bonus,” none of us would have any problem with this; it's human nature to enjoy flattery and praise for performing well. But something about rewarding money rather than praise makes me hesitate just a bit.
Regardless, Murphy has written a thought-provoking paper worthy of your time. What are your views about embedding ethics and compliance metrics into compensation policies? What metrics would you actually use? And how would you shape the compensation: in bonuses, higher salary, something else? We'd be eager to know.