Executive Compensation Checklist for New and Experienced Board Members (Credit Union Conference Presentation Slides)
 

Executive Compensation Checklist for New and Experienced Board Members (Credit Union Conference Presentation Slides)

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Looking for an Executive Compensation Checklist for your Credit Union? This presentation serves as a valuable tool for new and experienced board members in pinning down the latest information on new ...

Looking for an Executive Compensation Checklist for your Credit Union? This presentation serves as a valuable tool for new and experienced board members in pinning down the latest information on new regulations and compensation philosophies associated with creating a successful executive compensation plan. For more info, visit: www.nafcu.org/bfb

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Executive Compensation Checklist for New and Experienced Board Members (Credit Union Conference Presentation Slides) Executive Compensation Checklist for New and Experienced Board Members (Credit Union Conference Presentation Slides) Presentation Transcript

  • The Compensation ChecklistLearn the pitfalls to avoid as you craft your CEO’s compensation package Presented By: James S. Patterson, Attorney Sherman & Patterson, Ltd.Tom Telford, Executive Vice President Burns-Fazzi, Brock & Associates
  • Overview• New Part 750 – Golden Parachute / Indemnification Payments• Proposed Rule on Executive Compensation• New Rule 701.4• Cash Compensation Philosophy• Example of WesCorp Litigation• 10 Best Practices of Compensation Oversight• 5 Step Safety & Soundness Road Map for Executive Benefit Plans
  • Part 750• Part 750 – New rules relating to – “Golden Parachute” payments – Indemnification payments
  • Golden Parachutes• Distinguish “legitimate severance payments”• Two part test – Payments “contingent on termination of employment” – Received when credit union is “troubled”
  • Golden Parachutes• “Troubled” – Insolvent – Under Conservatorship – Deemed by a regulator to be troubled, or – Assigned a 4 or 5 CAMEL or CRIS rating
  • Golden Parachutes• Exceptions – Pre-existing arrangements, death benefits, properly designed collateral assignment split dollar plans – Bona fide deferred compensation ‒Nondiscriminatory severance • Up to 12 months of salary • Different levels (with a permitted 10% variance) must cover at least 33% of employees
  • Indemnifications• Whether or not “troubled”• Payments disallowed if – Assessed civil penalty – Removed from office – Subject to cease and desist order• Exception “to the extent” findings are in the individual’s favor• Interim payments allowed subject to limitations
  • Proposed Rule on Executive Compensation• Applies to credit unions with assets in excess of $1billion – Excessive compensation – Excessive risk taking – Or both
  • Proposed Rule on Executive Compensation• Disclosure Requirement (persons covered, succinct description, material changes, specific reasons why incentive compensation does not encourage inappropriate risks)• Submit annual report to the appropriate federal regulator, in the format specified
  • Proposed Rule on Executive Compensation• Additional requirements for larger credit unions – More than $10 billion in assets – Three year deferral required (or annual pro-rata distributions)
  • Proposed Rule on Executive Compensation• Six factors for determining whether an arrangement provides excessive compensation – Amount of compensation – Prior compensation paid to the individual and to others with comparable expertise – Credit Union’s financial condition – Compensation paid by comparable “institutions” – Projected total cost and benefit – Connection between the individual and any breach of duty
  • Rule 701.4• Describes duties of FCU Board of Directors• Effective January 27, 2011• Financial skills requirements – 6 months• NCUA letter of clarification (11-FCU-02)
  • Rule 701.4• Five director duties* – General direction and control – Good faith (ordinarily prudent person standard) – Fair and impartial – Working familiarity with finance and accounting practices – Direct FCU operations according to federal laws* Can rely on information from employees or consultants – must “merit” confidence
  • Rule 701.4• Financial Statements – What does this line mean? – Why is this important? • Is the item’s value changing over time? Why? • Is the change important?
  • Line Item Dec 09 Mar 10 % Jun 10 % Sep 10 % Dec 10 % Chg Chg Chg Chg Assets Real Estate 225,604,566 222,728,670 -1.3 222,155,136 -0.3 221,618,831 -0.2 203,188,690 -8.3 Loans Unsecured 88,600,852 87,209,049 -1.6 88,437,591 1.4 88,776,772 0.4 89,709,394 1.1 Loans Liabilities & Capital Dividends 969 930 -4 489 -47.4 797 63 740 -7.2 Payable AccountsPayable & Other 8,608,737 9,169,506 6.8 10,160,759 10.5 12,103,137 19.1 10,198,461 -15.7 Liabilities Income & Expenses Loan Income 31,472,513 8,216,680 4.4 16,525,981 0.6 24,816,678 0.1 33,259,417 0.5 Investment 15,442,991 3,121,244 -19.2 5,424,092 -13.1 8,253,164 1.4 10,757,912 -2.2 Income
  • Rule 701.4• How to acquire financial skills – FCUs need training policy providing: • Internal/external training, self, on-the-job • Education: college courses, OSCUI, NCUA E & I internet-based training
  • Rule 701.4• Management oversight – Board, among other things, must directly set compensation – Establish policies – No “screening” or “filtering” from CEO
  • Compensation Philosophy• Guiding principles and objectives – Purposes (e.g., degree of leverage?) – Peer group compensation standards – In writing and signed by Board Chair• Administrative Responsibility – Monitor compensation regularly to ensure consistency – Delegate day-to-day responsibilities to CEO or other executive(s)
  • WesCorp• One side of the story• Seeking damages from key executives for SERP payments• Illustrates importance of process (e.g., active board involvement, third party review, documentation of intent, executive session)
  • 10 Best Practices of Compensation Oversight • Develop compensation philosophy • Specify covered positions • Seek comparability data • Annually review compensation • Consider multiplier effect
  • 10 Best Practices of Compensation Oversight • Engage periodic consultant review • Consultants report to Board • Inspect plan modifications • Ensure plan document is compliant • Associate with professionals to monitor legal developments
  • 5 Step Safety and SoundnessRoad Map for Executive Benefit Plans1. Develop a written compensation philosophy (NCUA 701.4)2. Executive Benefit Plan Vendor Due-diligence (NCUA 701.4)3. Gain knowledge and understanding of the executive benefit plan options that exist4. Determine the right balance of fair and reasonable for your credit union in rewarding an executive benefit plan (NCUA 701.4)5. Seek to understand and mitigate the risks that impact executive benefit plans (NCUA 701.19)
  • 1- Develop A Written Compensation Philosophy NCUA 701.4, the NCUA Letter No. 11-FCU-02 • Develop a written compensation philosophy • Specify covered positions • Seek comparability data • Annually review compensation • Consider multiplier effect (e.g., salary increases may increase Defined Benefit SERP benefits)
  • 1- Develop A Written Compensation Philosophy NCUA 701.4, the NCUA Letter No. 11-FCU-02 • Engage periodic consultant review • Consultants report to the board (NCUA is concerned about CEO’s “screening” or “filtering” info) • Inspect plan modifications • Ensure plan documentation is compliant • Associate with professionals to monitor legal developments (e.g., expected regulations under IRC 457(f))
  • 2- Executive Benefit Plan Vendor Due-diligence Three Key Elements to Vendor Consideration • Evaluate the vendor’s experience and expertise • History • Endorsements • Business Model • Weigh the vendor’s reputation in the industry • Clients • Financial Health • Examine key operational issues • Online Administration • Compliance Reporting • SAS70 • Field Personnel
  • Checklist for Board Due Diligence & Compliance Reasonable Compensation Package The Board should review the benefits provided to key employees at the various payment scenarios: – Retirement / Payment date – Death – Disability – Involuntary Termination – Termination following Change of Control – Termination for “Good Reason” – Voluntary Termination
  • Checklist for Board Due Diligence & Compliance Informal Funding Review The Board should review the informal funding investment purchased to offset the cost of the benefit plan. This includes: – Review of the type of investment – Current values – Year to date performance – Concentration based on percentage of total equity
  • Checklist for Board Due Diligence & Compliance Overall Annual Plan Performance The Board should review the overall performance of the plan. By comparing the annual expense of the plan to the earnings of the investment, the Board will be able to determine if the plan is performing as projected or if they need to make any adjustments. • Total expenses, including annual benefit expenses, informal funding fees, premium expenses and administration fees • Current income from the informal funding investment • Impact to the bottom line of the Credit Union
  • 3- Gain Knowledge and Understanding of theExecutive Benefit Plan Options Types of Plans & Uses:Tax Deferral (Deferred Compensation – Retention) 1. 457(b) 2. 457(f) 3. 451Taxed Immediately (Section 162 – Vesting) 1. Restricted Bonus 2. Secular TrustTax Avoidance (Welfare Benefit Plans – Tax Arbitrage) 1. Post Retirement Medical 2. Split Dollar
  • 4- Determine the Right Balance of Fair andReasonable For Your Credit Union inRewarding a Benefit Plan • Employees will need about 70-80 percent of pre-retirement income • Retirement income sources include – Social Security – Qualified retirement plans • High income earners will have a gap due to IRS limitations on qualified plans and annual exempt amounts with Social Security.
  • 4- Determine the Right Balance of Fair andReasonable For Your Credit Union inRewarding a Benefit Plan Soc. Sec. 401k Gap 0.0%125% 0.0%100% 69.5% 31.3% 46.5% 75% 67.6% 66.7% 76.8% 50% 51.5% 41.2% 55.3% 25% 27.1% 34.2% 20.1% 17.3% 12.4% 6.1% 0% 3.0% $50,000 $100,000 $175,000 $250,000 $500,000 $1,000,000 Pre-Retirement Compensation Levels
  • 4- Determine the Right Balance of Fair andReasonable For Your Credit Union inRewarding a Benefit Plan Example of GAP PROJECTED ANNUAL DISTRIBUTIONS PARTICIPANT DATA FROM EXISTING BENEFIT PLANS Age Years Salary ($) Proposed Projected Total Existing Proposed as of of as of Retirement Final Retirement Social Current Participant 4/1/2012 Service 4/1/2012 Age Salary ($) Length (Yrs) Security ($) Plans ($) Amount ($) % (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)PRESIDENT/CEO 44 21 275,000 62 661,820 20 19,584 112,213 131,797 19.91%TELLER 25 40 29,544 62 171,113 23 19,266 79,662 98,928 57.81%BRANCH MANAGER 57 37 74,066 62 90,028 23 10,548 28,094 38,642 42.92%Notes/Assumptions: - The report indicates the participants projected final average compensation rate, growing from the current compensation rate at a 5.00 percent annual increase (inflating on January 1 of each year).
  • 4- Determine the Right Balance of Fair andReasonable For Your Credit Union inRewarding a Benefit Plan How Many Have Nonqualified Benefit Plans?
  • Credit Union SERPs Offered for CEO Position457(b), 457(f) and Split-Dollar Plans by Asset Size Credit Union Executive Compensation/Benefits Survey - CUES (2011) Percent Offering SERP <$20M $70 $100 $400 $600 - M- M- M- M- $69.9 $99. $199. $599 $999. Asset Size M 9M 9M $200M-$399.9M .9M 9M $1B or more 457(b) 13% 19% 37% 44% 51% 65% 76% 457(f) 14% 15% 33% 34% 51% 49% 44% Split Dollar 7% 13% 16% 14% 14% 32% 22%
  • Credit Union SERPs Offered for CEO Position457(b), 457(f) and Split-Dollar Plans by Asset Size Credit Union National Association - CUNA (2010-2011) Percent Offering SERP $150 $200 $400 $100M M- M- M- $600 - $200 $300 $600 M- Asset Size $150M M M $300M-$400M M $1B $1B or more 457(b) 33% 39% 40% 39% 57% 70% 56% 457(f) 23% 15% 28% 39% 49% 39% 36% Split Dollar 9% 12% 12% 15% 19% 16% 9%
  • Credit Union SERPs Offered for CEO Position457(b), 457(f) and Split-Dollar Plans by Asset Size National Association of Federal Credit Unions-Burns-Fazzi, Brock - NAFCU/BFB Survey (2011) Percent Offering SERP $40M- $75M- $335M- Asset Size <$75M <$150M $150M-<$335M <$750M $750M + 457(b) 12% 14% 38% 44% 75% 457(f) 15% 16% 15% 41% 40% Split Dollar 2% 15% 10% 6% 5%
  • 5- Seek to Understand and Mitigate the RisksThat Impact Executive Benefit PlansBoard Due DiligenceIssues of Safety and Soundness Roadmap to Construct a Plan, Identifying and Avoiding Risks Third Party Legal and Ongoing Relationship Product Board Due Vendor Risk Diligence & Selection Analysis Administratio n
  • Questions? James S. Patterson, Attorney Sherman & Patterson, Ltd. jpatterson@splawfirm.net Tel: (763)479-2699Tom Telford, Executive Vice President Burns-Fazzi, Brock & Associates ttelford@bfbbenefit.com Tel: (888) 494-8911 http://www.nafcu.org/BFB/