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Supporting Sarbanes Oxley Initiatives with Compensation Management

Regulatory changes and public litigation have underscored the importance of compensation clarity. Insurers can address a variety of incentive and commission issues with compensation management systems

Introduction

The Sarbanes-Oxley Act was signed into law on July 30th 2002, and introduced highly significant legislative changes to financial practice and corporate governance regulation. It introduced stringent new rules with the stated objective: "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws".

Provisions of the Sarbanes Oxley Act (SOX) detail criminal and civil penalties for noncompliance, certification of internal auditing, and increased financial disclosure. This fear of penalties sent corporate leaders scrambling to meet compliance requirements. It affects all the public U.S. companies and non-U.S. companies with a U.S. presence. SOX is all about corporate governance and financial disclosure. In dealing with compliance issues corporate America is determining what new technology and enhancements to systems will be required.

The Role of Incentive Compensation Systems

The main impact of Sarbanes-Oxley falls on the CEO and CFO. Section 302 - Corporate Responsibility for Financial Reports states that the CEO and CFO must review all financial reports to make sure that they do not contain any misrepresentations and that information is "fairly presented". It made them responsible for internal accounting controls, deficiencies or fraud in internal accounting controls and anything requiring material changes in internal accounting controls. Insurers have historically been tasked with financial reporting, but many problems arose when those historical systems based on spreadsheets, paper processes, and legacy infrastructures tried to meet the comprehensive demands of SOX.

Regardless of channel ICM represents a vulnerable area of concern as ever changing marketing variables and incentive alternatives make reliable reporting critical.

Most companies managed to deal with the initial requirements of SOX, but are now faced with compliance of Phase Two demands. The essential task is to meet the SOX requirements but do so with a sustainable, compliant capability. This will inevitably require a thorough examination and overhaul of present systems and a need to evaluate new systems to better automate and control future operations and adapt to further regulatory constraints. A February, 2007 Survey by AMR Research Corporate showed spending to comply with Sarbanes-Oxley accounting legislation is likely to hold steady at $6 billion in 2007 as smaller companies are required to comply with some sections of the law for the first time. Corporate spending on Sarbanes-Oxley will likely account for about 20 percent of overall compliance, governance, and risk management spending, which is projected to rise 8.5 percent from 2006 to $29.9 billion. The core issue faced by all companies is ensuring that transactional systems consistently provide key business data without compromising quality, accessibility and accuracy.

Incentive compensation management is an essential component in the financial data framework and a key process to be managed for effective SOX compliance. The ICM process allocates and calculates millions of dollars of sales costs and expenses. It does this across a wide variable of distribution channels and is responsible for keeping the entire sales chain informed. ICM represents a vulnerable area of concern as ever changing marketing variables and incentive alternatives make reliable reporting critical. From the perspective of SOX compliance, ICM is in the cross-hairs of any auditing effort.

Recognizing the inherent risk in insurance remuneration based upon the foregoing and the difficulty in controlling diverse and interdependent transactions many process variables need to be considered.

It is obvious that SOX compliance represents a regulatory approach to sound business practices. Companies involved with ICM have an essential business need to control and manage all aspects of their compensation process as matter of internal “best practices.” Utilizing proven ICM software products is another example of the synergy created by efficiently running a business while simultaneously assuring compliance with regulatory standards. It then becomes obvious why forward thinking insurers seek to imbed sound ICM controls into their business process to benefit their own internal standards, shareholder confidence and third party compliance.

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Addressing Regulatory Challenges with VUE Software

Because it was carefully designed for the insurance industry, VUE Compensation Management provides a wide array of key features that boost productivity for carriers and everyone in the producer value chain. The product of many years of knowledge and experience in the insurance sector, VUE Compensation Management makes a dramatic difference for companies accustomed to spreadsheets, inflexible legacy systems and/or substandard solutions.

Many vendors require the purchase of a complex, involved system that may duplicate capabilities an organization already has. VUE Software, on the other hand, is available a-la-carte. Customers select only the applications they require. For example, for calculating payments a customer can choose a commission engine, an incentive compensation engine or both, depending on technology needs and what the company already has in place.

VUE Software removes the mystery and headaches from defining, executing and managing compensation programs, and it boosts profitability at the same time. Increased competitiveness, improved internal processes and built-in compliance measures have been combined to bring customers an ROI of 100 percent or more after 12 to 18 months using VUE Compensation Management. This CSSI solution is the answer for the competitive insurance organization seeking to maximize business value from commissions and incentive compensation management while meeting the challenges created by continuing regulatory changes.

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