When Prudential Life Insurance Company of Japan discovered that employees had defrauded approximately 500 customers of ¥3.1 billion over 34 years, the company didn't just fix the fraud. They suspended all new sales for nine months and faced an estimated $1 billion impact. The root cause? A compensation system that created incentives for misconduct, paired with controls that couldn't detect it.
You need a systematic way to evaluate whether your organization's incentive structures are creating similar risks. This template provides a structured assessment framework you can use immediately.
Purpose of the Template
This Incentive Risk Assessment Template helps you evaluate compensation structures, bonus programs, and performance metrics across your organization to identify where financial incentives might encourage employees to cut corners, manipulate data, or engage in misconduct.
Use this template when:
- Reviewing existing compensation plans annually
- Evaluating new sales programs or performance incentive structures
- Conducting root cause analysis after a control failure
- Responding to audit findings related to sales practices or employee conduct
- Implementing or updating your three lines of defense model
The template addresses the gap Prudential identified in their own analysis: "insufficient" establishment of their three-line management system, with "unclear roles and responsibilities between the first and second lines."
Prerequisites
Before using this template, you'll need:
- Access to compensation plan documents for the business units you're assessing. Understand how employees are actually paid, not just what HR policy says.
- Performance metrics data showing what behaviors get rewarded. If your sales team gets bonuses for hitting quarterly targets but no penalty for customer complaints six months later, that's a data point.
- Historical control failure data from your second line functions. Pull reports from customer complaints, quality assurance findings, internal audit issues, and regulatory examination comments for the past 24 months.
- Stakeholder availability from first line management, HR, and internal audit. You'll need their input to validate findings and implement countermeasures.
The Template
INCENTIVE RISK ASSESSMENT TEMPLATE
Business Unit/Function: _____________________
Assessment Date: _____________________
Assessor: _____________________
SECTION 1: COMPENSATION STRUCTURE ANALYSIS
1.1 Compensation Mix
- Fixed salary as % of total compensation: _____%
- Variable/commission as % of total compensation: _____%
- Timing of variable pay: ☐ Immediate ☐ Deferred (______ months)
- Clawback provisions: ☐ Yes ☐ No
Risk Flag: If variable compensation exceeds 50% and pays out immediately with no clawback, flag for enhanced monitoring.
1.2 Performance Metrics
List all metrics that drive variable compensation:
Metric 1: _____________________
- Measurement period: _____________________
- Individual vs. team: ☐ Individual ☐ Team ☐ Both
- Quality gate attached: ☐ Yes ☐ No
[Repeat for each metric]
Risk Flag: If all metrics measure volume/speed with no quality or compliance gates, flag for control enhancement.
1.3 Pressure Points
- Can employees meet basic living expenses on base salary alone? ☐ Yes ☐ No
- Are there "threshold" bonuses that create cliff effects? ☐ Yes ☐ No
- Do metrics reset frequently (monthly/quarterly)? ☐ Yes ☐ No
- Is there visible disparity between top and median performers? ☐ Yes ☐ No
Risk Flag: Three or more "Yes" or "No" responses (depending on question) indicate high-pressure environment.
SECTION 2: CONTROL ENVIRONMENT ASSESSMENT
2.1 First Line Ownership
- Does first line management own compliance risk for this function? ☐ Yes ☐ No ☐ Unclear
- Are supervisors measured on compliance outcomes? ☐ Yes ☐ No
- Supervisor-to-employee ratio: 1:_____
- Frequency of transaction reviews by supervisors: _____________________
Risk Flag: If ownership is unclear or supervisors aren't measured on compliance, first line is not functioning.
2.2 Second Line Monitoring
- Automated controls in place: ☐ Yes ☐ No
If yes, describe: _____________________
- Manual sampling frequency: _____________________
- Sample size as % of population: _____%
- Time lag between transaction and review: _____ days
Risk Flag: If monitoring is purely manual, sample size is below 5%, or time lag exceeds 30 days, controls may not detect timely.
2.3 Third Line Independence
- Internal audit coverage frequency: Every _____ months
- Last audit date: _____________________
- Audit scope included incentive risk: ☐ Yes ☐ No
- Open audit findings related to this area: _____
Risk Flag: If audit cycle exceeds 24 months or scope doesn't address incentive risk, third line gap exists.
SECTION 3: CULTURE AND BEHAVIOR INDICATORS
3.1 Observed Behaviors
Review past 12 months. Check all that apply:
☐ Customer complaints citing pressure tactics
☐ Unusual spike in transactions near period-end
☐ Pattern of reversals or cancellations after incentive period closes
☐ Employees describing targets as "impossible" in surveys
☐ High turnover among new hires who miss targets
☐ "Hero" culture celebrating rule-bending to hit numbers
Risk Flag: Any three indicators suggest cultural reinforcement of risky behavior.
3.2 Ethical Culture Reinforcement
- Frequency of compliance messaging from senior leadership: _____________________
- Compliance training includes incentive-related scenarios: ☐ Yes ☐ No
- Employees can describe consequences of misconduct: ☐ Yes ☐ No ☐ Unknown
- Speak-up channels are promoted and used: ☐ Yes ☐ No
Risk Flag: If ethical culture reinforcement is infrequent or employees can't articulate consequences, culture is weak.
SECTION 4: RISK RATING AND COUNTERMEASURES
Overall Risk Rating:
☐ Low (0-2 risk flags)
☐ Moderate (3-5 risk flags)
☐ High (6-9 risk flags)
☐ Critical (10+ risk flags)
Required Countermeasures by Risk Level:
LOW: Annual reassessment, maintain current controls
MODERATE:
- Increase second line sample size to 10% minimum
- Implement quarterly compliance messaging from business unit leader
- Add quality metrics to compensation formula
HIGH:
- All Moderate countermeasures, plus:
- Defer 30% of variable compensation for 12 months with clawback
- Implement automated monitoring for key risk indicators
- Increase internal audit frequency to 12-month cycle
- Require supervisor sign-off on all high-value transactions
CRITICAL:
- All High countermeasures, plus:
- Immediate compensation structure redesign
- Consider temporary suspension of new business pending control enhancement
- Engage external consultant for independent control assessment
- Report findings to Audit Committee
Action Plan:
Countermeasure 1: _____________________
Owner: _____________________
Due Date: _____________________
[Repeat for each countermeasure]
SECTION 5: SIGN-OFF
First Line Manager: _____________________ Date: _____
Second Line (Compliance): _____________________ Date: _____
Third Line (Internal Audit) Review: _____________________ Date: _____
Customizing the Template
For sales organizations: Add Section 1.4 to capture product mix incentives. If certain products pay higher commissions, track whether those products also generate higher complaint rates.
For financial services: Expand Section 2.2 to include transaction monitoring thresholds aligned to your anti-money laundering program. If your AML monitoring doesn't consider employee incentives, you're missing a key typology.
For healthcare: Add quality outcome metrics to Section 1.2. If physicians are incentivized on patient volume but not readmission rates, that's a risk flag.
For manufacturing or operations: Modify Section 3.1 to include safety incidents, quality defects, or production shortcuts observed near performance measurement periods.
For technology or project delivery: Add metrics around technical debt, security vulnerabilities introduced, or corner-cutting in testing phases when teams are measured purely on delivery speed.
The compensation mix percentages in Section 1.1 should reflect your industry norms, but the 50% threshold for variable compensation is a useful general benchmark. Adjust based on your regulatory environment and historical loss data.
Validation Steps
Pilot the template on a business unit where you already know the risk profile. This validates that your assessment criteria actually surface the issues you're aware of.
Compare your risk ratings to historical loss events, customer complaints, and audit findings. If a business unit you rated "Low" has generated multiple control failures in the past year, recalibrate your criteria.
Test your countermeasures by tracking the same metrics quarterly. If you implement enhanced monitoring but still see period-end transaction spikes, your countermeasure isn't working.
Validate with internal audit. Have them review your assessment methodology and sample your work. Their independence provides credibility when you escalate findings to senior management.
Present findings to the Audit Committee at least annually. Prudential's leadership admitted they had "excessive respect for sales staff" and "an absolute view of the correctness of the business model." Your board needs to hear where incentive structures create risk, even if that's uncomfortable.
Prudential redesigned their compensation structure to include minimum base salary and commissions that pay out over several years. That fix came after nine months of suspended sales. Use this template to identify structural flaws before they cost you nine months of revenue.
