Credit unions have new requirements regarding executive compensation as part of the financial regulatory reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act.
This is just one example of increasing regulatory oversight and scrutiny on boards and their executive compensation decisions.
The best defense for any board when regulators ask questions about compensation is a well-designed and documented executive compensation plan.
Overall, executive compensation should be:
- Legally compliant;
- Perceived as fair by employees;
- Competitive; and
- Reflective of your compensation philosophy.
Determining appropriate benchmarks and selecting peer group data are key steps in designing an effective executive compensation system. But base salary represents the bulk of a credit union CEO’s total compensation package.
On average, base salary accounts for 86% of CEO total compensation among credit unions with $100 million or more in assets, according to CUNA’s 2010-2011 CEO Total Compensation Survey Report.
Regularly review all components of your credit union’s executive compensation plan, including base and variable pay, executive benefits, perquisites, and severance.
Also review performance factors that determine variable pay in view of current business realities and objectives. Determine how balanced they are, and how this balance drives both individual and organizational performance.
Boards must analyze the components in terms of how well they work together as a whole to support business strategy and goals.
And finally, they must make sure the peer group and sources for compensation comparisons remain appropriate for the market.