The board, and several of its key committees, may wish to re-evaluate the extent to which organizational culture is being properly reflected in the incentive targets provided under certain executive and (especially) physician/physician group employment agreements.

Recent developments in the broader commercial sector provide a cautionary note on the compliance risks that can arise when performance incentives are misconstrued by employees to justify behavior that is inconsistent with the company’s commitment to legal compliance. When properly constructed, performance incentives can be an important component of legally appropriate employment agreements. They can help motivate executive and physician employees to achieve meritorious corporate and mission goals. Yet the recent commercial developments raise the possibility that, in certain situations, some employees may misinterpret the incentives as promoting conduct that is, in fact, completely contrary to the organization’s ethics and risk culture. These developments suggest that such misinterpretation may occur in spite of significant and explicit compliance education about the proper goals of the incentives.

The board, principally through its compliance, and physician and executive compensation committees, may choose to exercise increased oversight over incentive compensation arrangements, the terms of which are subject to legal standards (e.g., tax and anti-fraud and abuse). The primary focus of this oversight would be threefold: first, to determine whether significant performance incentives are consistent—in both design and application—with the organization’s compliance program and code of ethics; second, whether there is appropriate management and compliance oversight of their application; and third, whether existing compliance education mechanisms are appropriately effective in instilling a culture of compliance throughout the organization.