(It is in rewards and compensation systems)
(By Dr. Joseph W. Koletar, CFE, Founding Principal of Behavioral Forensics GroupTMLLC)
(NOTE: Our previous posting briefly suggests that rewards structures within companies sometimes encourage fraud, especially when business is going bad. This posting by Dr. Koletar picks up where that posting ended by more deeply defining the role of rewards in white collar crime.)
Executives are well-educated, experienced, highly-compensated people. Why, then, do they and their organizations fail, sometimes in spectacular manners (Enron, et al.)?The answer is so simple, it seems to defy logic.
The issue is in the reward systems and policies, including compensation (at higher levels, Compensation Committees).
From line, to intermediate, to executive management, everyone has a report card. There is an obvious incentive to get good “grades.” These are usually expressed as increased sales, improved profitability, expansion, acquisitions, stock market valuations, etc. Simply put, there is a powerful incentive to seek, find, and report good news.
Data are abundant – from internal monitoring systems, internal and external audit, operations and sales reports, etc. Yet, those subject to compensation/performance requirements sometimes move forward with reckless abandon, “seeing” only those things which improve their performance numbers and suggest “continuous improvement.” The latter metric is a lofty, but often dangerous goal. Why? Because it defies logic. Were it to apply to recreational sports we would all have professional contracts. Does this mean failure is “OK?” No, but occasional failure is realistic.
The never-ending quest (mandate?) for more, quicker, and better often leads to inflation, intimidation, and even outright fraud. (The best hitter in the history of baseball – Ted Williams – struck out, grounded out, or flied out 60 percent of the time.) Yet, we and the superiors who determine our status and compensation seek relentlessly for only good news. It is a widely-accepted axiom of management theory and practice that bad news tends to filter out as it approaches the top. (Messengers delivering “bad news” are rarely rewarded, and often are shunted to the nether regions.) Such news goes unreported, shaded, softened, “explained,” or removed by “slight adjustments.” When these actions require the assistance of others they can quickly become a modus vivendi within even the stoutest organization. Bad leads to worse, and worse may lead to system collapse. (Each “little white lie” must become a larger “white lie” to allow for past misdeeds while “adjusting” for current shortcomings.)
One would think, given the long and somewhat ponderous litany of corporate collapses, that organizations would have taken steps to address such risks, but failures persist. Even the mandates of Sarbanes-Oxley and Dodd-Frank legislation seem to not have been as effective as intended. Perfection is impossible, but the pernicious frequency of misdeeds marches on.
There are people and organizations devoted to the discovery of misdeeds – auditors, regulators, compliance officers, and forensic professionals; but still the misdeeds persist. The answer is easy. It lies in compensation plans. One is hard-pressed to find a compensation plan, particularly at the higher organizational levels, that contains a critical element relating to the discouragement of fraud. Until such issues are addressed, the title of an old song pertains:
“The beat goes on.”
Joseph W. Koletar
BEHAVIORAL FORENSICS GROUPTM LLC
The Behavioral Forensics GroupTM LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives. The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics GroupTM LLC. Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4GTM is a premier, pioneering practice in this field.
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