Ghostbusters, Compensation and Compliance

Thomas Fox

This summer heralds a remake of one of the most iconic movies of recent vintage, I refer, of course, to Ghostbusters. After all, ‘who ya gonna call? Unlike the original movie and its sequel which starred Bill Murray, Dan Akroyd, Harold Ramis and Ernie Houston, joined by Rick Moranis, as the original team; the 2016 version has three female leads; Melissa McCarthy, Kristen Wiig, and Kate McKinnon. While the fan base has been somewhat mixed on the new version, Dan Akroyd was quoted in a CBS News report, “As originator of the original: Saw test screening of new movie,” Akroyd posted. “Apart from brilliant, genuine performances from the cast both female and male, it has more laughs and more scares than the first two films, plus Bill Murray is in it!” Akroyd added that “he plans on seeing the film again once it hits theaters in July: “As one of millions of man-fans and Ray Stantz, I’m paying to see that and bringing all my friends.””

In a recent On management column in the Financial Times (FT), entitled “Leaders facing change need to be expert ghostbusters, Andrew Hill explored the ghosts that he says exist in every organization. While it may not be the types of ghosts that either version of the movie Ghostbusters are fighting, Hill nonetheless believes that “behavioural ectoplasm clings to companies long after change has supposedly swept through. Spectres of past successes haunt the board and frighten investors, while staff in pursuit of new goals have to wade through psychomagnotheric slime to get there.” (How phantasmatic is that?)

Hill noted that there are two very large problems when you bring in corporate ghostbusters to eradicate these old and nefarious behaviors. The first is that it is corporate leadership that is often responsible for the strategy if not the execution itself that needs to be exorcised. The second issue is “outmoded habits are often the same as the ones that knitted the old organisation together. These informal frameworks are sometimes referred to as “truces” — uneasy coalitions between feuding factions, based on embedded routines.”

Yet as with either set of ghostbusters, male or female, they had a variety of tools to combat persistent spirits. One of those Hill mentioned in his article was compensation. He said, “The amount people are paid sends one signal.” He cited to the Salz review from Barclays, which found that “pay contributed significantly to a sense among a few [investment bankers] that they were somehow unaffected by the ordinary rules”. However as important as that signal might be, Hill believes that even more significantly “is to change the stimuli that affect behaviour. Indeed at CitiCorp, Professor Sara Kaplan found that Chief Executive Officer (CEO) John Reed set up “a new system of monthly meetings of the CEO, the line managers and their teams “created acute incentives” to increase sales and cut costs.”

I have been thinking and writing about the intersection of compensation and compliance for some time. I was therefore interested in the panel at Compliance Week 2016, entitled “The Unsolvable Problem: Performance, Pay, Pressure and Misconduct”, which was moderated by Richard Bistrong. Bistrong consistently writes and talks about this intersection more than anyone else in the compliance space. The panel he moderated was no exception.

I was fascinated that it contained an academic type, Marc Hodak, adjunct Professor of Business at New York University, Alexander Proels, Compliance Head Americas at Siemens, and Michael Weisman, Chief Ethics and Compliance Officer at The Kraft Heinz Company. They had some interesting thoughts around compensation, which I think you should consider in your role as a Chief Compliance Officer (CCO) going forward. One key area is the amount of your variable compensation relative to risk? What does your discretionary bonus program consist of? Is it corporate performance based? Group performance based? Only personal, i.e. eat what you kill? Or is it some combination of all of the above?

What are some of the indicia that your compensation structure might be off the rails from the compliance perspective (and would you need the Ghostbusters)? Weisman gave three examples: (1) Lofty goals but no direction for employees on how to get there; (2) that is a paucity of communication between management and line employees, meaning there was raw fear from employees to inform their immediate supervisor of bad news. Conversely, it could be the supervisors who do not want to hear such bad news; and (3) if your company has singular focus on numbers, meaning that is the single judge of your worth as an employee.

A couple of other general concepts that I found interesting, indeed one was a consistent theme of the entire Compliance Week 2016 conference, was that it boiled down to the following “Can you read a balance sheet?” for if you cannot you cannot perform the most basic function in company. Certainly in the intersection of compliance and compensation, you to get under the balance sheet so you can understand how your company sets sales plans and targets. You will need to understand your business operations around productivity requirements going forward.

Tied directly into this concept is that for every incentive there is an offsetting risk. Managing that risk has to be done on an ongoing basis. As a CCO or compliance practitioner, you need to know your business and be seen as a trusted business partner. You will need to understand the design of incentive plans and finally to be able to monitor incentive plans to identify underlying links that may arise through compliance violations.

Hill ended his piece by citing to Oxford Saïd Business School Professor, Jonathan Trevor, for the following “whether the strategy, purpose and structure of companies are aligned often makes the difference between a good organisation and a bad one. Expunging phantasms is essential, but not enough. Leaders also need to make new truces, lest the dead hand of past behaviour strangles new ways of working.” This is particularly true in the convergence of compensation and compliance. Whatever the structure, there will be employees who try to game the system. Some will do it with the tacit or explicit approval of management. You, as the CCO, may be required to act as a Ghostbuster and kill off those old demons.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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