Over time, underpaid executives risk starving the credit union of critical executives. Paying too much wastes wealth and risks embarrassing the board of directors and creating discord among employees and members. This article provides an overview of the standard of adequacy and how board members who constantly walk that tightrope can strike the right balance to pay enough but not too much.
For federal credit cooperatives, the Federal Credit Cooperative Act empowers the board of directors to hire and compensate senior employees and employees. The NCUA regulations then authorize credit unions to provide benefits to employees, but “the type and amount of these benefits must be appropriate in view of the size, the financial situation of the Bundesbank and the obligations of the employees”.
The NCUA Examiner’s Guide then takes on the baton. In the “Management” chapter, the guide takes up the topic:
While auditors should generally not be calling for changes to the compensation arrangements in healthy credit unions, they should be aware of unsafe and unsound compensation practices where appropriate.
The guide then contains a dirty dozen practices that “may constitute unsafe and unhealthy practices”. Mainly among them:
Compensation agreements that significantly exceed the compensation of individuals with similar responsibilities and duties in other insured credit unions of similar size, in similar locations, and in similar circumstances, including financial health and profitability.
Hence, fair compensation is a security and soundness problem that is solved by paying only what similar credit unions pay similar executives for managerial services. The challenge is to identify similar credit unions and similar executives and how much the credit unions are paying those executives.
Fortunately, credit unions can learn from the experiences of other organizations in various industries that will be further explored on this issue. The NCUA Similarity Test is the same as the IRS applies to non-profit non-profit organizations that are tax-exempt under Section 501 (c) (3) of the Tax Code, such as: B. Hospitals. However, these organizations have additional restrictions.
A 501 (c) (3) organizer who is personally receiving inappropriate compensation incurs significant “intermediate sanctions”. Additional penalties are also imposed on the decision-makers of the organization that approved the compensation.
Given these penalties, 501 (c) (3) organizations are very good at ensuring that they only pay adequate compensation. Their best practices, along with lessons learned from specific failures of credit unions, are a roadmap for credit unions to achieve the same level of security:
- Board-controlled process—The board should lead the process, overseeing those collecting the comparative data and engaging all advisors involved. The results should be reported directly to the board of directors without filtering by the executives whose remuneration is being determined.
- Independent body—The compensation decisions should only be made by individuals who have no family, professional, business or other relationships with the executives that could affect their decisions. The deliberations should take place in the board meeting and excuse those whose compensation is being determined.
- Data sources—Published surveys can be the most helpful source of compensation data. To add to or fine-tune the data, additional sources for comparable employer compensation data include IRS Form 990s (from government-approved credit unions), private inquiries to other credit unions, and written vacancies from other credit unions.
- records—The Board of Directors should keep careful and up-to-date records of the comparability studies and surveys used, the analysis used to select the appropriate peer group, the process for determining total compensation (see below), and participation in the deliberations.
- Similar credit unions—Although it can be difficult to find perfect matches, most surveys help get close by reporting data based on asset size. When selecting the size, the board should use the actual current size of the credit union, not the size the credit union is trying to achieve. For example, some board members say, “We’re $ 750 million now, but we want to grow to $ 1 billion, so we’re going to be using $ 1 billion worth of data from credit unions.” The problem with this approach is that every $ 750 million credit union wants to grow to $ 1 billion in value, so the growth target is already built into the compensation that $ 750 million credit union pay out.
- Total compensation—The comparison should be based on total compensation, which consists of salary, bonus and benefits. A comparison based only on total cash compensation (salary and bonus) can, depending on the strength of the service package, lead to total compensation that is significantly lower or higher than that of the comparison group. Surveys are more helpful because they take into account the prevalence and size of key benefits such as unqualified retirement plans and paid time off.
- Non-taxable services—The benchmark should include all elements of remuneration, whether or not the element is taxable. For example, a split dollar for the lender may not result in any taxable income for the participant, but it does provide an economic benefit that should be assessed and included in the comparison.
- Previous undercompensation-The IRS allows a 501 (c) (3) organization to currently pay more than the peer group if the organization previously underpaid the executive. A credit union seeking equal treatment should obey the requirements of the IRS and the courts dealing with the problem – quantify the amount the executive has been underpaid in the past, determine when and how the employer will Make up for the shortfall and provide the information in formal minutes of the Board of Directors or the Compensation Committee.
A credit union council that follows these best practices in determining executive compensation will feel more confident that it is not under- or overpaid executives and will be able to demonstrate compliance to its auditors, members and executives.