Pharmaceutical Commerce - May/June 2017 - 28

Legal & Regulatory
Is your corporate board equipped to monitor
incentive programs?
Compliance officers at pharma companies need to ensure that the right mechanisms are in place for monitoring
sales and business incentives
By Regina Cavaliere and Alison Little, KPMG

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 prog r ams.
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
*Office of the Inspector General, US Department
of Health & Human Services https://oig.hhs.

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, productrelated 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
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
Asking the right people the right
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

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

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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.
F u r t h e r, b o a r d s s h o u l d b e s u r e
to ask the right questions and speak
with representatives from all levels of
management. Hear ing from midd le
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

Table of Contents for the Digital Edition of Pharmaceutical Commerce - May/June 2017

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Pharmaceutical Commerce - May/June 2017 - Cover4