NAFCU Services Blog

Serving on a credit union board has gotten more complicated in recent years, based on new and evolving NCUA requirements for directors.  More specifically, rule 701.4 from NCUA dictates that directors must understand the credit union’s specific financial and accounting activities and their various risks from credit and liquidity to compliance and reputation.  There are many questions on the specifics of the rule and how NCUA plans to measure compliance with it.  You are not alone if you’re wondering “how much training is required?” “what exactly does financial literacy mean to NCUA?” and, most important, “what do the regulators expect?”

A recent webcast we recorded with Jim Patterson, partner with Sherman & Patterson, Ltd. and Jen Jackson, Vice President of Compliance and Information for Burns-Fazzi, Brock, may help shed some light on this topic.  My ears perked up when Jim went through a list of 10 best practices that credit union boards should consider when overseeing compensation. Compensation oversight is an important part of rule 701.4, considering the board sets the compensation of the credit union executives. I love lists, and this one made sense to me in what can sometimes be a mess of fuzzy guidelines.

1. Develop a compensation philosophy. Setting up guiding principles and objectives gives you something to shoot for and a great reference to measure how you’re doing.
2. Specify the positions that the board is responsible for overseeing.
3. Seek comparable data. It just so happens that Burns-Fazzi, Brock does an executive compensation survey annually – check out free summary webcasts.
4. Annually review compensation. Seems obvious, I know. :-)
5. Consider the multiplier effect. As the board thinks about adjusting salary, how will that affect other benefits? For example Supplemental Executive Retirement Plans (SERPs)?
6. Engage in periodic review with the help of consultants. This is important. Sometimes you get too close and can’t see the forest for the trees. There’s just sooo much to know and understand. There are experts trained thoroughly in this stuff and know it like the back of their hand – use them.
7. Consultants report to the board. Well consultants are no good, if you don’t know what they think! 701.4 highlights the importance of the board receiving direct information from consultants or employees that is not “filtered” or “screened” by the CEO or other senior executive.  The consultant should address the board and provide a written report for board minutes.  The CEO can attend the meeting but it is important for the board to hear the information directly from the consultant… This also insures the board understands the information and all their questions are answered.
8. Inspect plan modifications. This raises the important dynamic that exists between the CEO (or other senior executives) and the board.  For instance, if an executive is driving the effort to get a benefit plan document updated for one reason or another, it is important that the board review the proposed modifications to ensure they are consistent with the board’s compensation philosophy and its intentions.  The board should not just rubber stamp a proposed amendment, but should review it for legal accuracy and consistency.  The board should review things such as prior board minutes and approved design materials as it reviews (and perhaps approves) proposed amendments.
9. Ensure plan documentation is compliant. Your lawyer/general counsel is your friend …
10. Associate with professionals to monitor legal developments. Constant changes in law can have effects on compensation. For example, tax law changes. You must know these changes, understand them and determine what changes you, as a board, need to make as a result. – Another good area where consultants can help you stay on top of it!

Some advice from Jim: “Boards of federal credit unions that are already doing these things should make sure that they are documenting their process, so they can demonstrate compliance if requested by a regulator.  Although these rules do not apply to state-chartered credit unions, they provide helpful standards for those boards to follow as well.”

If you’re looking for where to get financial literacy training for your board there are a number of options – Internal/external training, self, on-the-job; Education through college courses, OSCUI, NCUA E&I internet-based training; NAFCU online training modules and events.

Learn much more than I know about this stuff from Jen and Jim (the experts!) in the full webcast recording.

Post written by Kirstin Hemsteger, Marketing Manager, NAFCU Services Corp.

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