NAFCU Services Blog

Written by Liz Santos, ‎Senior Vice President of Marketing and Business Development
Originally Published on CUInsight.com

My little brother recently celebrated his 40th birthday. We marked the occasion by thumbing through old pictures and making fun of each other’s unfortunate haircuts. That’s Herbie on the left, in one of our rare moments of peace, prompted only by the promise of a sugary reward.

Growing up, Herbie and I had the usual love-hate relationship, although probably more hate than love. The hate part was invariably fueled by the perception of fairness. “That’s not fair!” was a regular retort in our household, as if there was ever any room for our parents’ reconsideration. When you’re a kid, fairness is meted out by your parents, often based on gender, birth order, age, or by the almighty “Because I said so.”

For credit unions, however, it’s a different story. Fairness, especially in relation to credit union executive benefits, is more predictable and consistent than my parents’ household rules. Executive benefit plans are a critical tool in recruiting, rewarding, and retaining your leadership team. A key concept in designing these plans is “fair and reasonable.” As expected, the NCUA has rules regarding fair and reasonable compensation.

Why do credit unions need guidelines for executive compensation?

When it comes to executive compensation for credit unions, the concept of fair and reasonable serves an important purpose. Paying executives fair and reasonable compensation requires balancing the needs of the credit union (and its members and examiners) and the executives. Paying too much wastes vital resources, while paying too little risks depriving the credit union of key managerial talent. Careful attention to the process will assist the credit union in arriving at an executive compensation that is fair and reasonable and that attracts, retains, and rewards executive talent.

Do banks have the same guidelines for executive pay?

Executive compensation planning at credit unions is comparable to that at banks in terms of balancing organizational and individual needs. However, some key differences are:

• Banks can offer stock and other equity compensation not available in credit unions, making it more difficult for credit unions to compete for the executive talent.

• Banks are subject to different regulations that address issues such as clawbacks (e.g., repaying bonuses for restated financials), the employer’s ability to deduct the compensation for tax purposes, and golden parachute penalties.

Unless your leadership team thinks sugary birthday cake is an adequate performance incentive, I recommend viewing a recent BFB webinar, “Attracting and Retaining Executive Talent with Fair and Reasonable Compensation.” The presentation delves into what is fair and reasonable, and how to apply that concept to your executive compensation philosophy.

Burns-Fazzi, Brock (BFB) is the NAFCU Services Preferred Partner for Executive Compensation and Benefit Consulting. Burns-Fazzi, Brock engages the law firm of Sherman & Patterson to advise on regulatory and tax compliance matters. Sherman & Patterson, located in Minneapolis, MN, has consulted with and represented tax-exempt organizations with their executive compensation needs for the past 30 years. They work closely with NCUA and state credit union regulators, and frequently write and present on these topics.

For more information and educational resources, visit http://www.nafcu.org/BFB.