Each month, The Salary Sage features a performance measure from Incentive Plan Builder. These measures are intended to offer you on a wide range of options suitable for including in your company's incentive plan programs.
This month's measure is Regulatory Compliance.
|Definition||The company's ability to successfully conform its operations to applicable specifications, standards, or laws.|
Effective regulatory compliance normally includes some or all of the following elements:
|When to use this measure|
This measure should be used for organizations and positions where there is substantial risk of fraud, environmental waste discharge, tax offenses, anti-trust offenses, food and drug violations, infection, or contamination. This is particularly true in industries closely regulated by the government such as health care, food, and pharmaceuticals.
|How to use this measure||
Recent highly publicized cases of regulatory violations have dramatically increased awareness of and concern for regulatory compliance. This has spawned complementary efforts by a number of regulatory and law enforcement authorities and executive agencies (such as the Environmental Protection Agency, the Department of Health and Human Services, and the Department of Justice's Anti-Trust Division). Many of these agencies have developed (or are developing) model compliance programs. Industry and peer organizations are forming to share best practices for compliance training and awareness. Effective compliance usually involves taking advantage of these types of resources and not attempting to go it alone.
|Who is this measure best for?||
In highly regulated industries there should be at least one executive who has a major portion of her/his incentive plan (i.e., 20% or more) tied to effective regulatory compliance. It is often prudent to supplement this with a smaller weighting (i.e. 10%) on most or all of the other members of the executive team. You should also consider which of your lower-level managers' and directors' incentive plans should also include this measure.
|Can this measure be gamed?|
The problem with this measure is that it tends to be all or nothing. In years when there are no violations payouts can become almost automatic and in years where a problem arises it doesn't get paid at all. This situation can be avoided by defining measures around initiatives that consistently improve your organization's state of readiness and reduce risk. This is usually a better approach than measuring infractions after they occur.