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Wednesday
Jun152016

Richard Bistrong: Will incentive time bombs blow up your company?

Marc Hodak, an NYU Adjunct Professor and compensation consultant, spoke at the Ethical Systems event in New York a few weeks ago. He talked about “incentive time bombs,” where “bad behavior can hide behind good performance,” and how those behaviors can go unnoticed and unobserved by management until it’s too late.

Listening to Marc, I thought of how sales managers, finance personnel, and forward-based sales teams engage in channel stuffing, keeping bad debt on the books, and not writing down obsolete inventory, all to keep the quarter on track.

None of that necessarily violates the FCPA. But it show how organizations might bend the rules when necessary, and that sends a loud yet
unspoken message that overshadows sound accounting procedures.

That's not outlier behavior. When I proffered to the SEC in 2007 and shared my own experiences (and guilt) with these practices, the SEC attorney responded, “Well, we hear and see a lot of that.”

Last week, the DOJ indicted two former employees of Insys Therapeutics (the makers of fentanyl) on federal anti-kickback charges. There was an e-mail in the Indictment. A sales manager wrote, “There is no excuse for any of your [doctors] not to take care of you at this crucial time of the quarter (emphasis added).”

The email also said it's time for the doctors “to give back for all the hard work, long days and late nights you have spoiled them with.” Apparently, those late nights included strip clubs and bottles of whiskey.

(As the DOJ says, an indictment is merely an accusation and the defendant is presumed innocent until and unless proven guilty at trial beyond a reasonable doubt.)

Back to Marc Hodak. He cautions organizations to look for the ethical and legal time bombs by asking if incentives “are encouraging gamesmanship that hurts the company.”

Ultimately, he says, bad behavior will become obvious when the “tide recedes.”

The tide apparently receded last week for Insys. The indictments raise the question: Who was signing those expense reports for the strip clubs and the whiskey bottles?

When I work with audit groups, we talk a lot about expense reports. Auditors often look at expense reports as vehicles for corporate theft, including foreign bribery. But I encourage them to look at those documents as “behavioral fingerprints.” The trail of expense reports can tell you a lot about what people in the field are doing, even if they aren't stealing.

The Insys-related indictments also demonstrate how quarterly goals and incentives can push front-line behaviors in the wrong direction. Regardless of the tone at the top, when it comes to sales performance, it’s the voice of the direct report, the supervisor, who is the tone at the top.  

A command for the troops to “get the business done” without interjecting “how you get business done” is one of Marc Hodak's incentive time bombs. When the tide recedes, the damage will be easy to see. And in the worst case, it could lead to straight to the DOJ.

_____

Richard Bistrong is a contributing editor of the FCPA Blog and CEO of Front-Line Anti-Bribery LLC. He was named one of Ethisphere's 100 Most Influential in Business Ethics for 2015. He consults, writes and speaks about compliance issues. He can be contacted by email here and on twitter @richardbistrong. He'll be a speaker at the FCPA Blog NYC Conference 2016.

Reader Comments (2)

Hi, Richard – I wish more people, and especially compliance and ethics professionals, understood your point. It is one of the reasons I wrote the SCCE white paper “Using Incentives in Your Compliance and Ethics Program” (SCCE; 2012), http://www.corporatecompliance.org/Resources/View/tabid/531/ArticleId/814/Using-Incentives-in-Your-Compliance-and-Ethics-Program.aspx

Even though the Sentencing Guidelines call for incentives to be part of the compliance and ethics program, too many people still fall short in recognizing the power of incentives. Among the points I urged companies to do in the white paper was to have compliance and ethics input on all incentive plans.

“One step to help add a control perspective is to ensure that the compliance and ethics officer is there when the incentive plans are considered. Compliance and ethics would be there to act as the devil’s advocate, and to ask the questions “what could go wrong” and “how would this look in the newspapers?” The compliance and ethics person can make other managers step back and examine their proposals from a more realistic perspective, and can escalate to the board any plan that is likely to drive employees to unethical conduct.”

There is nothing inherently wrong with using incentives, even strong incentives. But the stronger the incentives are, the smarter the approach needs to be and the stronger the controls need to be.

Cheers, Joe
June 15, 2016 | Unregistered CommenterJoseph Murphy
Joe, thank you for your comments and I look forward to reading your paper. As I shared not too long ago, at Compliance Week, we had both the regulators and compliance leaders talking about the importance of incentives in a compliance program. You don't often hear that intersection of agreement, and I agree with your reflections, in that it's time to pay attention. As Donna Boehme shared, compliance needs a "line of sight" into the business, and if variable compensation is compartmentalized out of that site line, it's really to everyone's detriment, including the business units, even if they don't realize it at the time. Thank you again, Richard
June 15, 2016 | Unregistered CommenterRichard Bistrong
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