The relationship between employee compensation, recognition, and an organization's culture of compliance is increasingly under scrutiny. Regulators, stakeholders and boards are recognizing that how employees are paid, rewarded and potentially penalized can significantly influence behavior.

Effectively integrating compliance considerations into compensation structures requires an integrated approach, encompassing mechanisms to penalize wrongdoing and strategies to proactively incentivize ethical behavior and adherence to compliance norms.

Withholding and recouping compensation

One of the most direct ways organizations can signal accountability for misconduct is through policies allowing for the withholding or recoupment of compensation from employees involved in wrongdoing, or those who fail to comply with their supervisory duties. These policies act as a deterrent and demonstrate a commitment to ensuring that individuals do not profit from unethical behavior or significant compliance failures occurring under their watch. Regulatory authorities, particularly in the financial services sector, have mandated these policies while other authorities have encouraged their use. For example, the ECCP underscores that "the design and implementation of compensation schemes play an important role in fostering a compliance culture." Prosecutors examining corporate compliance programs are therefore directed to assess the use of compensation structures, including clawbacks, to incentivize compliance and punish non-compliance. To incentivize companies to use clawback rights, in 2023 the DOJ adopted a Compensation Incentives and Clawbacks Pilot Program whereby companies can receive reductions in otherwise applicable fine amounts by compensation withheld from culpable individuals.

Our findings indicate widespread adoption of such policies. A significant majority (78 percent) of respondents report having a policy in place that allows them to withhold or "claw back" compensation from employees who engage in misconduct or who fail to adequately supervise others involved in misconduct. This high prevalence suggests that companies recognize the importance of having this mechanism available to them, likely driven by regulatory expectations and a desire to establish clear consequences for serious compliance breaches.

View full image: Does your organization have a policy to withhold or recoup compensation from employees who engage in misconduct or who fail to supervise others who engage in misconduct? (PDF)

Adopting a policy is not, however, the same as enforcing it. Despite the prevalence of these policies, they appear not to be applied frequently. Among those respondents with clawback policies, a notable 55 percent stated they had not actually withheld or sought to recoup compensation within the past 24 months from employees meeting the criteria. This finding indicates a potential gap between policy intent and practical execution. 

Several factors might contribute to this state of affairs, including the legal challenges in enforcing clawbacks (which can vary significantly by jurisdiction and depend on employment contract specifics), potential negative impacts on employee morale, difficulty in definitively assigning responsibility, or a lack of sufficiently severe incidents triggering the policy during the period. Consistency of application of such policies therefore requires close attention, particularly when it comes to holding senior executives and potentially third parties to the same standard as employees.

Even when clawbacks are used, they are not always triggered by external scrutiny. Of those (40 percent) that do have a clawback policy, 32 percent utilized them in the past 24 months based on internal findings, independent of any investigation initiated by enforcement authorities. 

While this finding demonstrates internal accountability, the relatively low overall usage rate raises questions about whether these policies are serving as the potent deterrent regulators envision, or if implementation challenges are limiting their effectiveness in practice. 

View full image: In the past 24 months, has your organization withheld or sought to recoup compensation from employees who engage in misconduct or who fail to supervise others who engage in misconduct?* (PDF)

View full image: Does your organization consider an employee’s or third party’s status as the subject of an internal investigation in making decisions regarding compensation and/or other recognition (e.g., awards)?(PDF)

The shadow of investigation: Impact on compensation and recognition

Clawbacks aside, simply being under an internal investigation can also cast a shadow over an employee's or even a third party's standing within an organization, potentially impacting decisions related to compensation, bonuses, promotions or other forms of recognition. Organizations must navigate a delicate balance: protecting the integrity of their compensation systems and avoiding rewarding individuals possibly involved in wrongdoing, while also respecting due process and avoiding premature judgment before an investigation concludes.

Current practices show a divided approach. Overall, 42 percent of respondents consider both an employee's and a third party's status as the subject of an internal investigation when making decisions regarding compensation and other forms of recognition such as awards. This finding indicates that a significant portion of companies are proactively factoring investigation status into these decisions for both internal and external stakeholders. A slightly smaller, but still substantial, number of respondents (31 percent), however, limits this consideration to employees only, suggesting less willingness or less of a perceived need to apply the same scrutiny to third parties.

This consideration is not applied uniformly across all types of respondent organizations. Publicly listed respondents, often subject to greater external scrutiny and shareholders' governance expectations, are significantly more likely to factor investigation status into compensation decisions. Over half (51 percent) of public company respondents consider investigation status in making compensation decisions for both employees and third parties, compared with only 29 percent of private company respondents. It seems that due to public accountability pressures, public companies are apt to take a more cautious approach to rewarding individuals or entities potentially implicated in ongoing investigations.

Similarly, organizational size and resources, reflected by revenue, play a significant role in a company's decision to consider investigation status in making compensation decisions. Nearly two-thirds (64 percent) of the highest revenue-generating respondents take investigation status into account for compensation and recognition decisions concerning employees and third parties, which contrasts sharply with lower revenue respondents, where only 27 percent do so. Larger organizations may have more sophisticated internal investigation processes, dedicated resources to track investigation statuses, and potentially more formalized connections between human resources, compliance and legal functions to ensure this information is considered appropriately during compensation cycles.

View full image: Does your organization use its compensation structure to incentivize compliance? (PDF)

View full image: How does your organization use its compensation structure to incentivize compliance?* (Select all that apply)

Incentivizing compliance: Rewarding the right behaviors

While penalties and clawbacks address negative behavior, a comprehensive approach also involves proactively encouraging and rewarding positive compliance conduct. Using the compensation structures to incentivize compliance signals that ethical behavior and commitment to the organization's compliance program are valued and contribute to success. An overwhelming majority of respondents recognize this connection, with 83 percent reporting that they use their compensation structure in some way to incentivize compliance.

The most common methods of implementing this incentive approach involve targeted performance indicators and formal recognition programs. Among the respondents who use their compensation structure to incentivize compliance, the vast majority (89 percent) incorporate compliance-related KPIs for designated employees. These individuals might include compliance officers, internal auditors, managers in high-risk functions, or designated "Compliance Champions" embedded within business units. 

Tying specific, measurable compliance objectives to performance evaluations and, consequently, compensation helps ensure that compliance responsibilities are taken seriously and prioritized alongside business objectives. As one member of the compliance and ethics function of a US corporate notes: "Compliance-related KPIs are present for designated employees who are responsible for managing compliance and audit activities. Recently, we decided to offer awards for compliance-related achievements, and it's driven positive results for us."

Beyond direct KPIs, formal recognition is equally important. Nearly four in five (79 percent) of respondents using compensation to incentivize compliance use employee recognition or award programs specifically for compliance-related achievements. These awards can highlight individuals or teams who demonstrate exemplary ethical leadership, implement innovative compliance approaches, champion a culture where people are empowered to raise concerns, and report wrongdoing, or successfully embed compliance practices into business operations. Such recognition not only rewards individuals but also serves to promote positive role models and reinforce desired behaviors across the organization. 

The overall sentiment is that integrating compliance into the compensation and reward framework adds tangible value. "All these measures are included in the compensation structure. It does add value to compliance management. It influences our employees positively, and they know that complying with the rules and regulations is an added advantage for them," says one member of the compliance and ethics function at a US company.

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