Rationalizing Risk: Compliance as "Bonus Prevention"

As part of my series on “Rationalizing Bribery,” I now turn to the issue of personal incentive compensation. As tweeted by Ben DiPietro, @BenDiPietro1, Wall Street Journal Reporter, during my interview at the Dow Jones Global Compliance Symposium (DJGCS) on April 23, 2014 “I knew (what) I was doing was wrong but rationalized the risk.”

I call attention to his tweet to make clear that in sharing my “rationalization process,” I am by no means attempting to justify or deflect responsibility from my own behaviors. Rather, I hope that by revealing my thinking as I confronted corruption in the sales field, that I might provide value to today’s compliance professionals, as they look to assist those who work in challenging markets where there is a high level of corruption risk.

Joel Schectman, Wall Street Journal Reporter, @joel_schectman, tweet from the DJGCS: “You’ve already lost when it’s a zero sum game between compliance and profit. Richard Bistrong…”

Lets start with the premise that behaviors in any organization are driven to some degree by compensation.  As Andrew Leigh states in Ethical Leadership (2013) “you increase the chances of desired behavior happening by rewarding it.”

The relationship between compensation and compliance becomes even more critical when an international salesperson is working in a “low integrity” territory. Simply stated, if a salesperson has a high percentage of total compensation based on individual sales performance in a “low integrity” territory, the message of compliance becomes distorted by economics.  That salesperson is being paid in a way that encourages him to view compliance and compensation as a zero sum game.  Such a person is being asked by his paycheck to ask himself “Does my sales manager want compliance or sales?” Corporate compliance and ethics are now compromised, as a sales person tallies his “deliverables” if he is ever confronted with risk or actual corruption in the field.

Ben DiPietro, @BenDiPietro1 tweet during DJGCS “Bistrong: how you compensate a sales person will impact how they view compliance.”

Again, by putting someone in a "low integrity" territory with a high percentage of compensation based on individual sales performance, a company is sending out mixed messages.  Personal sales incentives ask an employee to focus on the ends, or “wins”  while compliance focuses the employee on the means.  When the two messages speak to conflicting priorities, a salesperson will be left to wonder what management really wants.

Integrating this type of compensation into an environment of procurement instability (as discussed in my previous post), certainly creates the potential for a  “perfect storm,” of risk rationalization.

There will be no shortage of sales, marketing and business development employees, with lucrative incentive compensation packages, who are going to want to push the envelope on finding a way to deliver sales success over compliance to a sales manager.  In an unstable procurement environment, where purchases are sporadic, unpredictable, yet financially significant, a sales person knows that if he or she misses a major procurement, it may or may not come back in the sales and bonus cycle.

Thus, when confronted with a corrupt transaction, the sales person may think, “I have a lot on the line here personally, this purchase won’t happen again for another year, at least, so what does my sales manager want, compliance or sales?”  As in my prior post on Cisco In Russia, when the Cisco employee heard the talk among his agents turn to bribes, he was reported to have left the room, and when invited to stay, he said “I don’t want to.” He did not walk out to call his compliance officer, he walked out as to not witness anymore what he was already hearing. What drove that decision, compliance or performance? 

Donna Boheme, Principal of Compliance Strategists LLC, @DonnaCBoehme, Tweet at the DJGCS, “Bistrong #DJGCS: for intl sales people “#compliance is ‘bonus prevention”

According to Mr. Leigh, “badly chosen incentives can undermine ethical behavior and even encourage unethical practices.”Accordingly, when compliance and compensation are not aligned and the message of anti-bribery gets distorted through personal incentive pay packages, then the result could, in fact, be a decrease in desired "compliance" behaviors.

In a recent conversation I had with a Eurpoean compliance professional, I shared my concerns about the impact of individual incentive compensation in sales organizations, specifically regarding anti-bribery compliance. He said in many companies, the C-Suite message is compliance and anti-corruption, but the pay schedule only tells employees “to win.”  These companies leave it to the salesperson to figure out the priorities.  When company executives engage in such “double-speak,” saying one thing, but paying for another, there could be serious consequences for all involved.  

In this type of environment, it is extremely risky to allow your international sales, marketing and business development personnel to decide corporate, group and individual goals.

More to come, as the Perfect Storm grows.

"Why Transformation Efforts Fail," Final Lessons.

David Stulb, Global Leader for Ernst & Young, Investigation & Dispute Services, in introducing Maryam Hussain's recent book Corporate Fraud, the Human Factor, (link here for more info) states that "aggressive prosecution of bribery and corruption is increasing the risk of operating in many new markets. Yet these are the same markets which are critical to business growth and establishing a sustainable supply chain."  I think of that potential  tension between overseas business growth and corruption when concluding my thoughts on John Kotter's work on corporate transformation, which in the context of this discussion, includes transforming a corporate culture to embrace a true anti-bribery ethic and program. As in prior posts, I continue to focus on the relationship between compensation and compliance as part of that transformation process.

John Kotter, Konosuke Matsushita Professor of Leadership, Emeritus, Harvard Business School, in “Leading Change, Why Transformation Efforts Fail,” (HBR, January 2007) discusses why companies seeking to change the way they operate in a new “more challenging market environment” often encounter internal institutional resistance from “those in the trenches of the business,” and why “leading change is both absolutely essential and difficult.” Today I will conclude my discussion of his work  as relating to my own experiences, and to bring the reader through Kotter's thinking  so that others may consider how to “avoid the common pitfalls.” For those who are interested in learning more, including the details of eight unique steps to transformation, here is a link to the work.

If transformation includes the creation and sustenance of a true anti-bribery culture and program, then incentive compensation for a sales and marketing organization needs to be aligned with desired behaviors to insure that compliance and compensation do not become a zero-sum game. As Kotter states "sometimes compensation or performance-appraisal systems make people choose between the new vision and their own self interest." Hence, as in my prior post where I reference the MIT Sloan Management Review article called "Combining Purpose with Profits", if the C-Suite is proclaiming the "pro-social" goals an anti-bribery effort while delivering a financial message as articulated through a lucrative sales compensation plan to "bring home" the financial goals of sales over compliance, then the best FCPA compliance program will be diluted, or worse, discarded by the time it reaches the overseas sales and marketing organizations.

Kotter concludes that "change sticks when it becomes "the way we do things around here," when it seeps into the bloodstream of the corporate body," and he adds that "until new behaviors are rooted in social norms and shared values, they are subject to degradation as soon as pressure for change has been removed." From my perspective, compensation needs to be a part of that "bloodstream" to insure that incentives align with desired behaviors.  While I was struggling to describe what that transformation might look like, I refer to Andrew Leigh's book Ethical Leadership, Creating and Sustaining an Ethical Business Culture,  (see here for more information) where with permission of the Ethics Resource Center, he illustrates a chart (referencing Prudential Financial, Inc.) called "making the right choices." The chart lists Four Ethical Filters for Decision Making and  I have taken the liberty to put them in a general context, as follows:

1. Policies: Is a decision consistent with policies, procedures and guidelines.

2. Legal: Is the decision legal?

3. Universal: Does the decision conform to company values? Does it benefit stakeholders, internal and external?

4. Self: Does the decision "satisfy my own personal definition of right, good and fair? Can I be proud of this decision or action?"

If a company has implemented a "transformational" anti-bribery program and ethic then individual and organizational decisions throughout the sales and marketing organizations, no matter how far from the "C-Suite" will always be "yes" to the above, and where there is uncertainty, the employee will feel secure in calling upon corporate resources "available to provide... guidance to make sound ethical decisions." I think the above four criteria provide a solid foundational definition as to  how transformation results in a "bloodstream" anti-bribery culture.

I was recently watching a video from the  2013 Dow Jones Compliance Symposium, moderated by Nick Elliott,  Editor, Risk and Compliance Journal, Wall Street Journal, (link here), where Peter Y. Solmssen, General Counsel, Siemens AG, was talking about a project manager who was working in Thailand, who stated that when he is working on a deal, his response to a corrupt event is not "compliance won't let me do that," but that "I don't do that." In my opinion, and the history of change at Siemens has been well reported, that is is what I would characterise as  true transformation.