Executive Compensation: Making Sense of Fair and Reasonable

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

BFB WebinarMy 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) LogoBurns-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.

Compensation and Severance Plan Rule Changes May Impact Your Credit Union

By Kirk D. Sherman and James S. Patterson, Sherman & Patterson, Ltd.

457(f) Compensation RegulationsAfter almost eight years and several false alarms, the IRS may finally issue the new Section 457(f) regulations addressing nonqualified deferred compensation plans and severance plans. Two IRS attorneys speaking at separate events have expressed hope that the regulations will be released by this summer.

Credit unions at greatest risk of having to modify their plans are those that sponsor:

  • Nonqualified deferral plans (other than 457(b) eligible plans) that allow elective deferrals,
  • Nonqualified deferral plans that use noncompete restrictions as substantial risks of forfeiture, and
  • Severance plans providing severance benefits greater than two times compensation.

For other credit unions, the new regulations may be a non-event.

What Should Your Credit Union Do Now?

  • While awaiting the new 457(f) regulations, credit union boards and management can determine whether the credit union sponsors 457(f) plans that use noncompetes or elective deferrals, and whether it has promised severance greater than the two-times limit.
  • Having identified such plans, the credit union (and its advisers) will quickly be able to determine if and how the new rules impact the credit union’s arrangements and what, if any, changes are required.

Understanding the Tax Implications of 457(f) Rule Changes

In 2007, the IRS first announced its intent to change the 457(f) rules.  If the rules are issued as the IRS anticipated, elective deferrals and deferrals subject to noncompete restrictions would no longer defer taxes.  Instead, taxes would be deferred only if the deferrals were non-elective and subject to cliff vesting (i.e., the benefit is forfeited if the executive quits before the specified vesting date).

  • Most credit union 457(f) plans already use cliff vesting, and elective 457(f) deferrals are rare.  Therefore, we expect few credit unions to have to modify their 457(f) plans.
  • The guidance is also expected to address what qualifies as a bona fide severance benefit for purposes of 457(f). Compensation paid under a bona fide severance plan would be taxed as received. Compensation in excess of the bona fide severance limits would be taxed in a lump sum at termination.
  • We expect the bona fide plan limit to be the lesser of two times the executive’s annual total compensation or two times the qualified plan compensation limit (two times $265,000 in 2015).  Credit unions can still pay severance in excess of the two times limit, if fair and reasonable, but the taxation may be different.
  • As with 457(f) plans, we expect that few changes to severance plans will be required to comply with the new rules.
  • For noncompliant 457(f) or severance plans, we expect the new rules to provide a process for transitioning to compliant designs.  Grandfathering of noncompliant arrangements seems unlikely.

What Should Your Credit Union Do When the IRS Issues the Guidance?

After the IRS issues the new 457(f) guidance, and especially if it expands the guidance beyond what is expected, your credit union should check with its advisors to make sure you address any modifications to your nonqualified deferral or severance plans that may be required at that time.

Watch the recent webinar, “Attracting and Retaining Executive Talent with Fair and Reasonable Compensation,” presented by Kirk Sherman, Dr. Loretta Dodgen of Human Capital Solutions Group, and Chris Burns-Fazzi of Burns-Fazzi, Brock to learn more about executive compensation trends and challenges.

Burns-Fazzi, Brock (BFB) LogoBurns-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.

Do you know where your credit union stands on executive compensation and benefits?

Every credit union is unique, and every CEO places a different emphasis on how they want their executive compensation and benefits package tailored, which makes an assessment of ‘market rates’ for executive benefits and compensation challenging. If you’re a board member you want to be both fair to your executives, provide a combination of compensation and benefits with the right mix of incentives to ensure alignment with your strategic goals, and also fulfill your fiduciary obligation to fellow credit union members.

As an executive, you want to make sure that your compensation and benefits are competitive and fit your personal needs, and are also flexible enough to adapt as those needs change throughout your career.

One great way to find out where your credit union stands relative to the market is with the NAFCU-Burns-Fazzi, Brock (BFB) Executive Compensation and Benefits Survey (free to survey participants).

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How Does Compensation Compare for Women Credit Union Executives?

Guest post written by Chris Burns-Fazzi, Principal, Burns-Fazzi, Brock

For many industries, gender equity has been a topic of discussion.  Have you ever wondered how men and women compare as credit union executives and the compensation they receive? We did too.

The NAFCU Annual Conference coming up at the end of July in Nashvillewill feature a Women’s Leadership Summit, with a number of timely topics, including an initial look at how men and women credit union executives compare in regards to compensation and their presence in top executive positions.

A bit of background – for five years now, Burns-Fazzi, Brock (the NAFCU Services Preferred Partner for Executive Compensation and Benefits) has underwritten the annual NAFCU-BFB Survey of Federal Credit Union Executive Benefits & Compensation. Conducted by an independent firm, Clark and Chase Research, there is no cost to participate, and the results are shared with participants as well as each year at the NAFCU Annual Conference. This year, we compared the survey results by gender.

We’ll go through the analysis in much greater detail at the conference, but some highlights —

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Some Good News about Deferred Compensation

Guest post written by Tom Telford, Executive Vice President, Burns-Fazzi, Brock

A pending IRS rule has some credit unions worried about the fate of their deferred compensation plans.

For some eight years now, the IRS has been considering the tax status of nonqualified deferred compensation plans offered by federal credit unions (FCUs). At issue is whether FCUs are entities of the federal government. In its analysis, the IRS concluded that FCUs are not because they are not federal instrumentalities. The IRS also had the option of finding that FCUs are eligible to offer these compensation plans because they are tax exempt organizations.

These plans have historically been an additional option for retirement planning above and beyond traditional 401(k) plans.

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