The U.S. Department of Justice (DOJ) announced Friday a three-year pilot program designed to promote compensation systems that “shift the burden of corporate financial penalties away from shareholders . . . on to those more directly responsible.” The Compensation Incentives and Clawbacks Pilot Program directs companies entering into criminal resolutions to implement  compliance-oriented compensation systems and provides incentives to companies that seek to recoup compensation from culpable employees.

First, the DOJ directs companies entering into criminal resolutions to implement robust, compliance-related criteria tied to their executive compensation and bonus systems. The implementation of a compensation and bonus system with embedded compliance criteria is intended to reward positive behavior, deter misconduct and encourage proactive managerial oversight. As implemented, individuals who fail in their compliance responsibilities would not receive a bonus and/or would be subject to disciplinary measures as delineated in the company’s compliance policies.

Second, the program incentivizes companies to clawback compensation from alleged wrongdoers by offering the possibility of fine reductions. To the extent that a company is successful in its clawback efforts, the DOJ will reduce the fine by the amount of compensation recouped. If, despite best efforts, the company is unsuccessful in its recoupment efforts, the DOJ will consider a fine reduction.

Despite the DOJ’s guidance memorandum, there remains some uncertainty regarding the application of the program’s requirements. The DOJ retains significant discretion in enforcement. For example, the fine reduction for unsuccessful clawback efforts may not exceed 25% and is subject to prosecutorial discretion regarding whether “good faith” recoupment efforts were made.

Additionally, and importantly, it is unclear exactly which employees fall within the scope of the program and may be held responsible for compliance failures. While the individual wrongdoer is certainly subject to its terms, it is unclear the extent to which compliance personnel, those with supervisory authority and employees who knew of – or were considered “willfully blind” to – the compliance failures will be scrutinized or held liable.

Despite these uncertainties in the program, one thing is clear: the DOJ remains focused on individual accountability and demands corporate investment in compliance. Now, the DOJ has escalated its efforts to shift the burden of malfeasance onto responsible individuals and away from innocent shareholders. While the Pilot Program applies only to companies entering into criminal resolutions, it offers useful factors to consider in creating compensation structures that align executives’ financial interest with the company’s compliance priorities.

Miles & Stockbridge’s White Collar Group will be monitoring the pilot program.

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