Podcast: Compensation Clawback Strategies
Today we have another Radical Compliance podcast, this time to talk about compensation clawback policies: how to structure them, the challenges in using them, and what one recent FCPA case tells us about the favorable outcomes your company can achieve when clawbacks are part of your compliance program.
The case in question involves Boston Consulting Group. Last month the Justice Department declined to bring charges against the firm for FCPA violations involving its office in Portugal, and the department’s declination letter talked at length about how Boston Consulting withheld bonuses and severance pay from the offending partners; management even forced those partners to surrender their equity in the firm.
The case is a good opportunity to pause and consider how to fit clawback policies into your larger compliance program. To do that, I called up Judy Kreig, a partner in the white-collar defense practice at law firm DLA Piper. You can hear our complete conversation above, and I have a few more of my own observations below.
First, clawback policies must be part of your compliance program toolkit; the Justice Department won’t take your program seriously if your company doesn’t have them, or does have them but doesn’t use them.
Krieg said that by her count, Justice Department officials have talked about the importance of clawing back improperly awarded compensation at least a half-dozen times, starting with deputy attorney general Lisa Monaco’s announcement of a pilot program in 2023 to give companies reductions in penalties equal to the amounts they successfully claw back. “This is now part of how the DOJ assesses your compliance program, should you ever find yourself in this situation,” Kried said. “Part of the reaons for doing it is that the DOJ expects you to do it.”
Plus, under certain circumstances (say, clawing back highly valuable bonus payments from senior executives), those penalty reductions could add up.
Plan Early, and Wisely
So clawback policies should be part of your compliance program; sounds great. The bigger issue for compliance officers is how to draft an effective clawback policy. That will need input from numerous voices in your enterprise, and should probably emphasize more than clawing back compensation that’s already gone out the door.
For example, one objective with the Justice Department’s clawback program is to reduce the costs of corporate misconduct that fall upon shareholders. In that case, you’re better off designing policies that withhold compensation in the first place, rather than policies that try to claw back compensation that’s already been paid.
Krieg
OK, nifty idea — but consider the steps necessary to achieve that end. Your company might need to amend partnership agreements, equity compensation plans, executive compensation plans, bonus structures, and long-term incentive plans. Well, “compliance doesn’t hold the pen for that,” Krieg said. You’d need to work with HR, legal, the heads of operating teams that might be affected by changes in compensation, or even the board’s compensation committee.
In a roundabout way, then, the Justice Department’s clawback program (technically a pilot program that expires in 2026) plays an important role here. If those other parts of the enterprise don’t want to strengthen compensation clawback policies, you can point to the program and say, “Regulators do expect this. Taking no action is a choice, and one they won’t view favorably.”
You also need to think carefully about events that could trigger your policies for withholding or clawing back pay. For example, is the trigger that an employee committed bribery? Because in that case, Krieg said, “you’ve got a very high standard to meet.”
A wiser course would be triggers that allow the company to withhold pay upon suspicion of wrongdoing, since it’s a lower standard that gives you more discretion to move early and quickly. (Of course, this also underlines the importance of solid investigation protocols and internal controls, so that the evidence you’d want to collect is easy to gather.)
A Clawback Might Not Always Help
Go back to that part about keeping the costs of corporate misconduct as low as possible for shareholders. It brings up the somewhat awkward point that sometimes, pursuing executives through clawback policies might not be the wisest idea.
After all, those executives are likely to fight your clawback effort, possibly with messy and expensive litigation. That litigation could end up costing you more in legal fees than you’d ever get back from the executive. That scenario would ultimately cost shareholders more money, so you shouldn’t do it.
Krieg pointed to the example of SAP, which earlier this year paid $220 million to settle civil and criminal FCPA charges. The company clawed back $109,000 from offending employees in that case, and the Justice Department did reduce SAP’s criminal penalty by an equal amount — but, as the department itself noted, SAP had to engage in “substantial litigation” to recoup that $109,000. Does anyone really believe those litigation costs were less than $109,000?
The good news is that the Justice Department recognizes all this. Hence its pilot program doesn’t require you to exercise clawbacks in all circumstances; you just need to have that ability, and then make a reasoned judgment about what’s in the best interests of shareholders. As Krieg put it, “DOJ is not saying you need to blindly forge into that litigation just to show that you’re doing the right thing.”
Then again, if your clawback considerations have reached that point, that means you probably didn’t craft your compensation policies wisely in the first place. Revisit them — and revisit them now, before any specific violation causes you to scramble — with the aim of using compensation as a lever to encourage good behavior, rather than a club to whack employees for bad behavior. That’s how you win the battle before it’s even fought.