The Federal Credit Union May-June 2014 - (Page 42)
Best Executive Compensation
By James S. Patterson, C. Daniel Sherman and Tom Telford
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
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
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,
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
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
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 www.splawfirm.net.
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 www.bfbbenefit.com.
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
The Lending Landscape
The Social Life: A Social Media Roundtable
NAFCU's 2014 Annual Report
Getting to Know...
Inside NAFCU Services
From the President's Desk
The Federal Credit Union May-June 2014