Is your corporate board equipped to monitor incentive programs?

As other sectors reel from

government investigations into incentive programs, a growing number of life sciences board members are asking whether they, too, could be missing critical risks related to their organizations’ incentive programs. The answer may be yes. At the same time, the employees and middle managers of life sciences companies need to be aware of the risks inherent in incentive programs that are in place, and what potentially needs to be brought to the attention of compliance officers and board members.

Like financial services, the life sciences sector is decidedly competitive and highly regulated. Therefore, management may be challenged to find creative ways to grow the business. This may include asking employees to reach new stretch targets in order to secure their bonuses and other incentives. While incentives drive behavior, all parties must remember that they are beholden to operate within legal, regulatory and, ideally, ethical boundaries as well. It’s not just the stakes that are high; the stress and risk levels in life sciences are through the roof.

Old challenge, new problems

The life sciences sector has some experience with this dichotomy. Over the past 20 years, many have faced allegations of off-label promotion and kickbacks, often driven by overly aggressive sales targets that were simply not attainable through traditional activities. Civil and criminal penalties resulted. CEOs, senior executives and sales personnel were called to task. Eventually, Corporate Integrity Agreements (CIAs) were put in place to establish controls.

Indeed, most life sciences CIAs now require compliance programs to include policies and procedures around incentive programs. Specifically, they must address:

“Compensation (including through salaries, bonuses or other means) for sales representatives and their managers. These Policies and Procedures shall: 1) be designed to ensure that financial incentives do not inappropriately motivate such individuals to engage in improper marketing of [company’s] Government Reimbursed Products; and 2) include mechanisms, where appropriate, that are designed to exclude from incentive compensation sales that may indicate sales for unapproved uses.”*

More recently, however, the scope of risk has widened and deepened. The trend toward industry convergence has shifted business models and created new third-party relationships. Roles within pharmaceutical organizations have also evolved, bringing a host of new players into the customer’s reach.

Now, it’s not enough to place controls around sales force incentive programs (e.g., clawbacks, caps, decelerators and non-sales metrics). Today’s boards must also worry about the incentive programs at work across partners and contract sales organizations, as well as a host of internal departments and functions, including medical affairs, government affairs, clinical research and market access.

Not seeing the full picture

There are many reasons boards may not be aware of all the risks that lie in their incentive programs.

The most obvious is that they lack visibility into the tactics deployed by the organization. Growth tactics and related incentives are usually developed by the business, and few boards have the time to review these at a detailed level. Fewer still have access to information about whether targets are legitimately achievable.

Take, for example, pharmaceutical patient assistance and support programs—an area of increasing scrutiny and concern over the past year. These programs are intended to provide limited, product-related support to patients after a physician decides to prescribe a product. However, there is a risk that these programs may be used inappropriately to drive sales and payer reimbursement. Yet, few boards review the detailed tactics underpinning each product’s growth forecasts and, therefore, do not recognize the potential risk.

Similarly, distribution and channel agreements are coming under the microscope. This is particularly true for relationships with specialty pharmacies. Major companies—both innovator and generic—have been accused of engaging in improper conduct, potentially driven by inappropriate incentives to drive sales through these channels. Boards, therefore, need to assess whether these arrangements contain or are driven by inappropriate incentives.

Asking the right people the right questions

The reality is the traditional structure of board meetings does little to provide insight into everyday risks and cultural concerns of an organization. Since most board meetings are held off-site, board members may not have an opportunity to observe the culture firsthand. And when board members do come to the corporate office, there isn’t enough time to walk the halls and talk with employees.

At the same time, middle management can often fly under the radar of the board. Boards rarely penetrate the middle management level, which is often the most vulnerable to pressure. If growth forecasts seem surprisingly high, for example, boards should ask how middle management expects to achieve those aggressive goals, and whether they are realistic in light of the regulatory and marketing environments.

Further, boards should be sure to ask the right questions and speak with representatives from all levels of management. Hearing from middle management, and even the rank and file, can provide a perspective that the board may not otherwise receive. Kicking the colloquial tires may help ensure that they are getting the full story.

Of course, effective controls and tight board oversight will not prevent all transgressions. Controls may sometimes be circumvented by overly enthusiastic teams or even well-meaning, compliance-minded individuals who just do not consider risks thoroughly. There may also be a lack of transparency as new programs and tactics are developed. Finally, we cannot forget that there are rogue agents who sometimes take extreme measures to line their own pockets or pad their results.

Life sciences companies, like their counterparts in other industries, should continuously improve their controls, training and guidance, regardless of the risk scenario. The more effective the controls and oversight, the earlier misaligned incentives can be identified and stopped.

Looking under the hood

In many regards, board members should take a careful look under the hood of their growth engines. This includes reviewing the incentive programs at work across the organization. Are the growth targets reasonable within the current environment? Are employee incentives—both financial and nonfinancial—aligned to the right measure? How do incentives vary by functional role and level? What are the tactics used to meet these forecasts and assumptions? Are payouts consistent with the approved incentive programs?

Board members should also be setting the right tone for management and the business. Growth is certainly key, but the board has a fiduciary duty to manage risk and, therefore, needs to understand the how behind growth targets. Boards should ensure that—rather than growth at any cost—the maxim for the organization is growth with integrity.

As boards seek more information about incentive programs and their potential risks, they may want to start by requesting a holistic review from the business, focusing on key functions and business areas, or even conducting an independent assessment to determine the extent of their risks.

Time to act

Over the past few months, we’ve heard from dozens of audit committee and board members worried that their organizations could be at risk of potential enforcement action due to inappropriate company conduct driven by misaligned incentive programs.

Our advice to life sciences boards is to take a close look at your incentive programs today. Identifying areas of concern and remediating them now is better than having a whistleblower, the media or regulators do it for you.

*Office of the Inspector General, US Department of Health & Human Services https://oig.hhs.gov/compliance/corporate-integrity-agreements/index.asp

ABOUT THE AUTHORS

Regina Cavaliere

Alison Little

Regina Cavaliere is Principal, Advisory Life Sciences, and Alison Little is Advisory Industry Leader, Life Sciences at KPMG. More information is available at www.kpmg.com/us/healthcarelifesciences.

8 questions compliance officers should be asking about incentive programs

Chief compliance officers, as well as board directors themselves, should be asking themselves tough questions about their incentive programs:

• What visibility do we have into business-level incentive programs and growth targets?
• Are the targets set by management reasonable and achievable by ethical and compliant means?
• Do employees feel empowered to raise compliance concerns regarding incentive programs, targets and tactics?
• Have any employees lodged claims of retaliation for speaking up?
• Is there a back-end process to ensure that incentives are rewarded only to those who achieved their objective compliantly?
• Do we spend enough time talking to middle management to understand their goals and tactics?
• Does our corporate culture reinforce the right policies and governing principles?
• How do we monitor, assess and report on our culture for audit and regulatory purposes?

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