DOJ Announces Game-Changing Clawback Program

Washington, D.C. (March 6, 2023) – The United States Department of Justice (DOJ) just announced its first-ever Pilot Program on Compensation Incentives and Clawbacks. This game-changing initiative – which will be in force for three years – will send significant ripples through executive compensation and government corporate resolution programs. Navigating this new program will require deft counsel who understand this new intersection between employment law and corporate compliance programs.

As to the genesis of the Pilot Program, Deputy Attorney General Lisa Monaco stated, “Our goal is simple: to shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in the misconduct, onto those directly responsible.”

The Pilot Program requires corporate criminal resolutions to include a directive that companies implement a compensation system that promotes compliance. It also rewards corporations that attempt to claw back payments to law-breaking executives and employees.

As to clawbacks, the DOJ Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers, which includes employees/executives who had supervisory authority over culpable employees. Specifically, supervisors who knew of the wrongdoing or should have known about such unlawful conduct (willful blindness) will be subject to potential clawbacks.

At the outset of a criminal resolution, the resolving company will pay the applicable fine minus a reserved credit equaling the amount of compensation the company is attempting to claw back from culpable executives and employees. If the company succeeds and recoups compensation from a responsible employee, the company gets to keep that clawback money and does not have to pay the amount it recovered. The Pilot Program will also ensure that those who pursue clawbacks in good faith but are unsuccessful are still eligible to receive a fine reduction of up to 25%.

Companies should review and consider modifications to existing and future executive agreements and other company policies to permit clawbacks in accordance with the DOJ Pilot Program. As additional guidance becomes available, companies also will need to consider adjustments to their internal complaint procedures and whistleblower programs.

For more information on this development, contact the authors of this post. Visit our Executive Compensation & Employee Benefits Practice page for more information on our capabilities in this area.

Authors:

Mary A. Smigielski, Partner

Sean P. Shecter, Partner