Linking Pay to Regulatory Compliance in the Energy Industry
As regulators in the energy industry expand their role and impact, a growing number of energy companies are warming up to the idea of explicitly tying executive and employee compensation to key performance indicators (KPIs) that focus on compliance with regulations from the CFTC (U.S. Commodity Futures Trading Commission), FERC (Federal Energy Regulatory Commission) and NERC (North American Electric Reliability Corporation). The idea is to further encourage behaviors and actions that help the business avoid regulatory problems and improve compliance.
A number of organizations in other industries have already established a link between pay and compliance. In some cases, they acted on their own initiative. But more often than not, their moves were prompted by outside pressure from the government or public. Over the past few years, a number of very high profile companies in retail, media, energy and financial services have had compliance issues – related both to internal and external requirements. Issues included market manipulation, false reporting of data, corrupt foreign practices, and hacking of personal communications. Because of the severity and/or high visibility of the events, in some cases significant reactive measures were taken by external stakeholders (e.g., boards and/or regulators) that drove companies to put programs in place.
In our view, energy companies may benefit from proactively developing solutions and approaches that make sense from a business perspective – instead of being forced to follow a generic mandate developed by legislators and regulators in response to a problem or crisis.
An initial step is to jointly develop a common set of four to eight KPIs that can be used to track and measure performance within each major sub-sector of the energy industry (e.g., utilities). Today, companies typically collect and analyze data for dozens of different compliance metrics across multiple areas of compliance risk, making it hard for executives and employees to know which ones really matter.
Responses to Deloitte’s 2012 Energy Compliance Survey identified six compliance-related metrics that might provide a useful starting point for developing a common set of KPIs (figure 1).
Figure 1: Key compliance metrics
Once a handful of KPIs has been identified, the next step is to incorporate them into the company’s compensation programs. This will likely require specialized expertise, as designing compensation programs that effectively drive the right behavior is more art than science. However, as a general guideline, quantifiable KPIs that don’t involve self-reporting are generally the most appropriate for compensation programs. We are currently defining these types of KPIs for a number of clients and can expand the process if there is sufficient interest from other market participants to get involved in our pilot program – whether they are utilities, oil & gas companies, or even financial institutions with significant energy transacting exposure.
It’s worth noting that while the compensation tie-in tends to grab the most attention, we believe the most important step in the process is developing the KPIs. Getting those metrics right is more than half the battle, and can help effectively shape behavior, even without an explicit link to compensation. If you would like to participate in Deloitte’s 2013 Energy Compliance Survey and share your thoughts on the most important KPIs, please click on the link below.
Deloitte & Touche LLP
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