The Federal Credit Union May-June 2014 - (Page 42)

INSIDE NAFCU SERVICES Best Executive Compensation Practices By James S. Patterson, C. Daniel Sherman and Tom Telford C ompensation best practices bring comfort to boards and executives, assuring them that their executive compensation is competitive, compliant and an appropriate use of credit union resources. Here is the strategy your board should consider in today's competitive marketplace: Develop a Compensation Philosophy A compensation philosophy is a formal document that codifies the credit union's guiding compensation principles, targets and objectives. It should: identify a peer group of employers; target positioning within the peer group; specify the balance between guaranteed and incentive compensation; and define the mix of cash compensation and benefits. Having a documented compensation philosophy helps to establish consistency, creating a measure of fairness and continuity when the board changes members. Compare Industry Data The board should review two or three reputable sources to compare similarly sized credit unions and comparable positions within those credit unions. Require Regulatory and Tax Compliance Boards should ask legal staff or consultants to confirm that the plans and their funding vehicles comply with all applicable regulations - including IRS rules - before any future audit. Review Compensation Annually Although a compensation package may be fair and consistent when it is created, 42 annual reviews can help ensure that packages remain current with market standards. Consider the Multiplier Effect An executive's benefits are often tied to base salary, which means that a board might have to increase supplemental executive retirement plan (SERP) payments as the base salary increases. Establish a Subcommittee for Executive Compensation Compensation issues are complicated, and the board should consider establishing a compensation committee or executive committee to oversee compensation issues. Committees Must Communicate Effectively With the Board The committee should give the board a yearly report that: reminds the board of the compensation philosophy, clearly and accurately discloses executive compensation levels and compares these to peer data, and provides minutes of committee discussions. Engage Consultants Who Report Directly to the Board Consultants with expertise in credit union compensation and benefits retained by, and reporting directly to, the board help ensure that the board is receiving accurate, unbiased and unfiltered information. No Screening or Filtering by the CEO Boards received clear direction through National Credit Union Administration (NCUA) Rules and Regulations Part 701.4 in January 2011 that NCUA is concerned about senior executives, especially CEOs, having too much influence over the executive compensation set by the board. NCUA clarified that the board must set executive compensation without any "screening" or "filtering" from the CEO. Inspect Plan Modifications Before approving a plan modification, the board should understand the reasons for the changes, their costs and the impact of the changes on benefits, and it should document everything. Ensure Plan Documentation Is Compliant and Terms Understood Having plan documentation prepared - and reviewed periodically - by a benefits attorney minimizes chances for regulatory or tax violations or for disagreements with executives or beneficiaries. Associate With Professionals to Monitor Legal Developments Regular consultation with compensation professionals helps keep boards informed of and prepared for the changing legal landscape. Jim Patterson is an attorney with Sherman & Patterson Ltd., a law firm focusing on executive compensation at credit unions and other tax-exempt entities. Patterson has worked closely with state regulators in the 46 states that have state credit union charters and with regulators at NCUA. He can be reached at Dan Sherman is also an attorney with Sherman & Patterson Ltd. Tom Telford is a principal with BurnsFazzi, Brock & Associates (BFB). Telford specializes in executive compensation for the credit union and other not-for-profit industries. He is at THE FEDERAL CREDIT UNION MAY-JUNE 2014

Table of Contents for the Digital Edition of The Federal Credit Union May-June 2014

Voices & Opinions
Calendar of Events
From the Chair
Inside NAFCU
Business Talk
The Lending Landscape
The Social Life: A Social Media Roundtable
NAFCU's 2014 Annual Report
Getting to Know...
Management Insight
Compliance Central
Inside NAFCU Services
From the President's Desk

The Federal Credit Union May-June 2014