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From PLI’s Course Handbook
Advanced Corporate Compliance Workshop 2007
#11083
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INCENTIVES AND DISCIPLINE:
AT THE INTERSECTION OF
HUMAN RESOURCES AND
BUSINESS ETHICS
Joan Elise Dubinsky
International Monetary Fund
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Incentives and Discipline:
At the intersection of Human Resources and Business Ethics
Joan Elise Dubinsky, Esquire
Ethics Officer, International Monetary Fund
July 5, 2007
Introduction
The long-term success of a Corporate Ethics & Compliance Program relies in large part on
understanding why employees behave as they do. Ethics & Compliance programs should
encourage employees—at all levels—to conduct business ethically and legally. In this paper, I
will examine how organizations can motivate employees to follow the laws, rules and policies
that form the core of their programs.
No Ethics & Compliance Program can succeed if it fails at getting employees to behave
consistently with the expectations of the program. That is where the concept of rewards and
punishments enter. How companies motivate, discipline, reward, and punish are critical
considerations. For compliance programs to have impact, they must be able to change or modify
the conduct of employees-- from the CEO suite to the mail room, and everywhere in between.
Employees respond to both positive and negative “triggers”—factors that motivate them to either
do something or not do something. Those triggers that motivate employees to do something
positively are usually called “rewards.” Those triggers that motivate someone to not do
something are usually called “punishments.”
Disciplinary action is generally well understood. Rewards can mean the grant of extra pay.
Rewards can also include awards, recognition, advancement, career opportunities, and other
types of positive incentives. The use of monetary compensation, whether through cash awards,
bonuses, or other types of payments, can be controversial. Rewards and punishments connected
to an Ethics & Compliance Program must be closely coordinated with other Human Resources
compensation, pay, benefits, and employee relations systems.
Federal Sentencing Guidelines
The Federal Sentencing Guidelines require that an organization promote and enforce its ethics
and compliance standards through appropriate incentives and disciplinary measures. That
employees who violate their organization’s standards will be punished is deemed an essential
element of an effective program. What form the disciplinary action may take is left up to the
organization, on a case-specific basis.
The initial Guidelines, issued in 1991, spoke to ensuring uniformity in disciplinary action—
without favorable treatment or less harsh punishment to a few select employees. The original
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Guidelines saw disciplinary action as essential to deterring inappropriate, unethical, or illegal
employee behavior.
The 2004 amendments to the Guidelines expanded upon the concept of appropriate disciplinary
action by including its reverse--using positive motivation to reward proper conduct. The 2004
version of the Guidelines adds a new obligation to promote proper conduct through incentives.
Section 8B2.1(b)(6) of the U.S. Sentencing Guidelines Manual states:
“The organization’s compliance and ethics program shall be promoted and enforced
consistently throughout the organization through (A) appropriate incentives to perform in
accordance with the compliance and ethics program; and (B) appropriate disciplinary
measures for engaging in criminal conduct and for failing to take reasonable steps to
prevent or detect criminal conduct.”
What follows are a set of practical suggestions on how to implement effective rewards and
disciplinary systems in connection with an Ethics & Compliance Program.
Working at the Intersection of Human Resources and Business Ethics
Collaborate closely and carefully with Human Resources
Employee motivation, human behavior, incentives, and punishment are part and parcel of an
organization’s Human Resources function. No Ethics & Compliance Program should attempt to
implement stand-alone incentives or punishments. All such systems must be developed and
introduced through close collaboration with Human Resources. Failure to do so will result in
shadow or “ghost” human resources operations, with contradictory messages, inconsistent
results, and legally indefensible outcomes.
Ethics and Compliance Officers may need to initiate the conversation with Human Resources
about the need to understand employee behavior and motivation in connection with business
ethics. In some organizations the myth persists that if the company declares what employees
should do, employees will automatically do what they are told. Experience teaches us otherwise.
Simply telling employees to “follow the law” historically has had little positive impact on what
employees actually do.
Discussing employee motivation, rewards and punishments with Human Resources may not be
easy. Ethics & Compliance Officers must be alert to internal politics and dynamics. Turf
protectionism can be a surprisingly strong impediment. How employees are paid is a core
function of every Human Resources Department. An outsider—even a well meaning outsider—
can be seen as threatening if the offer of collaboration is not carefully presented.
Establish clear expectations about ethical and legal business conduct
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Effective Ethics & Compliance Programs must provide exceptionally clear information about
what is expected of employees. By establishing clear standards and setting high expectations,
organizations describe what it is that employees should and should not do to ensure that their
business conduct is ethical and legal. These expectations are usually codified in company
policies and rules. The code of conduct generally contains a high level summary of the most
important standards of business practice and conduct.
The code should make it clear that compliance with its provisions is expected of all employees.
The code should also unambiguously state that failure to abide by the code’s provisions will lead
to disciplinary action. Self-enforcing codes state the obvious fact that their provisions are more
than mere suggestions. Employees are put on notice through the code that there are real
consequences—often negative—for failing to live up to these articulated behavioral standards.
A typical Code of conduct provision states:
“Violations of laws, regulations, this code of conduct, or our policies can have severe
consequences for you and our company. Some violations may be criminal in nature and
punishable by fine or imprisonment. Violations can jeopardize our relationships with our
customers, suppliers, vendors, and shareholders. Employees who violate the laws,
regulations, this code of conduct, or our policies are subject to disciplinary action up to
and including dismissal.”
Make the “social contract” clear
Clear expectations about conduct ensure that employees are put on notice as to what their
company expects of them. Smart organizations unequivocally state that failure to abide by their
expectations will have consequences. Employees are more likely to think that their workplaces
are fair places to work if rules are clear and consequences spelled out.
However, this expectation of employees is bilateral, not unilateral. In exchange for agreeing to
comply, employees should be able to rely upon reciprocal commitments from their employers.
This is the essence of the social contract between worker and employer. Organizations
committed to fundamental fairness need to be clear about what employees can expect from them.
The employer’s commitments generally include:
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Fair treatment of individuals
Notice and some type of hearing when allegations are raised against individuals
Measured, deliberate decision-making
Consistency in imposing disciplinary action
Fair and uniform punishments for infractions
Understand what motivates employees to “do right” and to “do wrong”
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Each organization must understand what it is that motivates its employees. Motivation can be
seen as positive, or “pulling” better behavior. Motivation can also be seen as negative, by
“pushing away” or punishing inappropriate behavior. Employees respond to both positive and
negative “triggers”—factors that motivate them to either do something or not do something.
Those triggers that motivate employees to do something positively are usually called “rewards.”
Those triggers that motivate someone to not do something are usually called “punishments.”
By examining why employees “do wrong” or fail to follow laws and policies, organizations are
in a better position to design a set of motivating triggers.
Employees “do wrong” for one of four reasons
Character
There exists some type of fundamental
character flaw or weakness that prevents the
individual from conforming his or her behavior
to the expectations of the organization.
Peer pressure to “do wrong” from colleagues, as
evidenced by “everyone does it” reasoning.
Downwards pressure from supervisors or
managers to cut corners, save money, or “just
get the job done” without recognition of the
rules and laws that must be followed.
Employees lack skills, knowledge, equipment,
tool, or resources to do the job lawfully and
ethically.
Employees either don’t know how or are
unwilling to apply critical ethical judgment to
complex situations.
Pressure
Resources
Judgment
Conversely, employees “do right” for a number of reasons. These factors must also be taken into
consideration when designing rewards and punishment systems.
Employees “do right” for a number of reasons
Social acceptance
Self-interest
Avoidance
Idealism
Employees comply with codes and policies to
show that they are part of a social group and are
accepted as a team member.
Employees may choose to comply because they
perceive it in their self-interest to do so.
Avoiding the pain of punishment may be a
strong motivator to comply with laws and rules.
Many employees report that they choose to
comply because they see their efforts as
supporting a larger community and advancing
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its communal goals. “Doing right” serves a
purpose greater than the employee’s immediate
self-interest.
Rewards and recognition, incentive programs, and other types of positive motivation should help
encourage employees to “do right.”
Incentives and rewards are controversial
The concept of rewarding and recognizing positive behavior—as opposed to disciplining
negative behavior—is new to the Federal Guidelines as of 2004. It is also controversial.
Many organizations question whether ethical conduct should ever be rewarded. They view the
standard this way: ethical and legal conduct is expected as the norm for all employees; hence
only the departure from such standards must be punished. They worry that by rewarding ethical
conduct, they are creating a “bounty” system that distinguishes ethical conduct as the exception
rather than the rule. They argue that employees should receive nothing extra--whether
recognition, notice, financial reward, or other positive gain--for doing that which they are
supposed to do.
Some argue that ethical conduct is subjective and cannot be measured. Hence, in the absence of
precision, organizations that attempt to reward intangibles put themselves at risk. They fear
being seen as subjective—especially when granting limited rewards to only a few selected
employees.
Other organizations believe extraordinary ethical conduct should be affirmatively recognized.
They argue that positive notice for ethical conduct deserves praise. Some believe that positive
public relations outcomes will result from rewarding extraordinary ethical conduct. These
benefits can include:
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Other employees learn about the organization’s ethics and compliance program
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Other employees will model their behavior to meet the organization’s expectations in
order to obtain these rewards for themselves
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All employees will strive to reach an overall higher standard of conduct that goes above
and beyond minimal compliance with the rules
Rewards and recognition systems can be used to highlight ethical and compliant behavior.
Similar to other spot award programs, these systems can be used to highlight unusual or “beyond
the call of duty” conduct by individuals or small teams. Some organizations offer a “President’s
Award for Integrity and Business Ethics” that is given annually to one or more employees.
Employees who have demonstrated extraordinary commitment to the organization’s values are
nominated by their peers or managers for consideration by a high-level review committee. The
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top nominees and award winner are selected and announced publicly, and participate in a
recognition ceremony hosted by the company’s president.
In theory, performance evaluation systems can be used to motivate ethical behavior
In theory, positive recognition for ethical and legal behavior can be incorporated into an
organization’s performance evaluation system. Like rewards and incentives, performance
evaluation systems are controversial and complex. They are also generally disliked.
The underlying concept is that measuring and evaluating employee behavior is at the heart of all
performance management systems. Performance management systems are designed to evaluate
performance in connection with predetermined business goals. These systems are predicated on
the assumption that all work can be measured. Thus, employee behavior can be measured against
a range of established standards such as profitability, teamwork, professionalism,
communication, results orientation, and customer focus.
One argument in favor of incorporating ethical and legally compliant conduct into performance
evaluation systems is that organizations already know how to set standards and measure other
types of employee behavior. Thus, it should be relatively straightforward to set across-theorganization standards for ethical conduct. In practice, some organizations already evaluate
employees on whether they:
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Engender trust and confidence
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Make and keep commitments
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Encourage and reward ethical conduct of subordinates
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Demonstrate respect to all individuals
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Conduct business in accordance with the code of conduct
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Inspire others to follow the organization’s values
Another way to connect ethical incentives with performance management is to evaluate both the
results that were achieved and how they were achieved. Under this philosophy, what was
accomplished must be examined in light of how those results were achieved. For example, a high
performing sales executive must show superlative results and demonstrate that those results were
reached through lawful and ethical means.
In most organizations, performance management is intimately linked with pay and
compensation. There is an argument that positive ethical and compliant behavior should not be
recognized through financial gain. The counter argument is that organizations are comfortable
and adept at recognizing positive behavior through their compensation systems. Rewarding
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ethical conduct should be no different than rewarding creativity, drive for results, or
organizational acumen.
A few organizations are experimenting with direct financial rewards for ethical and legally
compliant conduct. This approach may help to solidify the connection between tangible rewards
and ethical leadership. Of course, great care must be taken not to create a “monster” system in
which the wrong type of behavior gets rewarded.
Disciplinary action is not as controversial
Disciplinary action is much less controversial than positive recognition for exemplary behavior.
In fact, it is part and parcel of most business ethics functions. Punishing or disciplining unethical
or illegal behavior is seen as a strong deterrent to inappropriate business conduct.
Most organizations have adopted a progressive discipline system, outlining a hierarchy of
increasingly severe punishments for various types of infractions. In organizations that have
bargaining units or are in industries with historically strong union representation, the progressive
discipline system may be very specific and non-discretionary. For instance, such companies may
have a comprehensive list of infractions tied to specific types of disciplinary action, generally
ranging from oral warnings up to and including dismissal for the most severe infractions.
In other organizations, decision-makers have far more discretion in applying the range of
disciplinary action to any one situation. Managers are expected to use their best judgment in
recommending or imposing disciplinary action, based on several factors, including:
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Severity of the offense
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First time or repeat “offender”
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Knowledge or intent of the offender
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Impact of the infraction on the individual, coworkers, team, and organization
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Magnitude of the loss
Effective Ethics & Compliance Programs must be supported through the disciplinary process.
There must be a rational relationship between the infraction and the punishment. There should be
some type of rough parity between the type of offense and the disciplinary action imposed. This
will ensure that individuals who have broken the rules, violated policies, or ignored the
organization’s values are punished rather than allowed to avoid responsibility for their actions.
Employees are careful observers of how their employer imposes discipline. Both the reality of
internal justice and the perception of fairness are critical for maintaining employee support.
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Need for uniformity and predictability
Employees and companies thrive on a certain amount of uniformity. If the disciplinary system is
predictable, it will be seen as fair and even-handed. Just as like infractions deserve like
punishment, the disciplinary system should not distinguish among employees due to rank, tenure,
or prominence. Most employees would be deeply offended if higher ranking employees receive
lesser punishment for offenses that would result in dismissal of entry-level employees. If a high
producing executive is disciplined for an ethical violation, the organization will receive a clear
message about the importance of ethics. If the only employees disciplined are of relatively low
rank, a different and more cynical message will be received.
Organizations should work quickly to conclude internal investigations and, where warranted,
take disciplinary action. In many quarters, employees will perceive delays in the imposition of
disciplinary action as evidence of favoritism towards higher-ranking staff members.
All disciplinary actions should be reviewed for consistency throughout the organization. The
organization-wide perspective of the Ethics & Compliance Office permits a wide-ranging view
of what is happening throughout the company.
Some organizations appoint a high-level team of senior employees to review disciplinary actions.
On a retrospective basis, they examine trends in allegations, investigations, misconduct, and
disciplinary action. The team may consist of the head of Human Resources, a representative of
the general counsel, and the Ethics & Compliance Officer. By meeting on a regular basis, the
team can review disciplinary actions for consistency across the organization as well as
effectiveness in changing behavior.
Transparency
Employees are curious about the outcome of individual investigations. They are curious to see
whether the program ultimately improves behavior and business conduct. They may be skeptical
about the uniformity of disciplinary action. A transparent process surrounding enforcement
reinforces the program’s key messages. Transparency will help employees gain trust in these
systems.
Transparency around rewards and recognition programs is fairly straightforward. Part of the
recognition process is publicity about the individual and what he or she accomplished that is
worthy of exemplary notice. For some individuals, the highest reward that can be granted is
public recognition. Incentives tied to pay and compensation are much less frequently publicized.
In most organizations, individual compensation awards and levels are deemed highly
confidential and linked closely to the individual’s privacy rights. As a result, transparency about
compensation decisions is rarely the norm.
Organizations must be very careful how they communicate disciplinary actions. The action must
not be viewed as a “celebration” that a violator has been punished. Also, the organization will
not want to punish the person who, in good faith, reported the ethical violation. Disciplinary
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action should never be announced using names or data that would disclose the identity of the
disciplined person. Even those who have violated company rules have privacy rights that must be
protected.
Some organizations will publicize a list of “typical” investigations and their outcomes, carefully
sanitizing all identifying information. Others will publish summary data about the types of
allegations received, the overall outcome of the investigation caseload, and the types of
disciplinary action imposed.
Some Closing Thoughts
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Before implementing a system of rewards and punishments, organizations need to
understand both why and when employees “do wrong” as well as why and when
employees “do right”.
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Organizations must find ways to motivate employees to behave ethically and legally. At
the same time, organizations must enforce their standards through the imposition of
disciplinary action.
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Incentives and rewards should be carefully implemented, to ensure that they do not
produce unintended consequences or reverse incentives.
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Disciplinary systems must be designed clearly and objectively. Employees need to have
reasonable certainty that similar behavior will merit similar treatment from their
employer.
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All incentive and disciplinary systems must be closely integrated with standard Human
Resources and Employee Relations processes. This is a collaborative effort, at the
intersection of Human Resources and Business Ethics.