New NCUA Regulation §701.4 has some federal credit unions scrambling to make sure their directors have “at least a working familiarity with basic finance and accounting practices.”  Many are on their way to assuring their directors have the training they need.  The NCUA has given directors without such financial skills, whether new or currently serving, six months to receive the training.  Given the effective date of January 27, 2011 for Rule 701.4, directors who were at FCUs on such date and who need the training have just over four months to get it completed. The NCUA explained this standard in more depth in Letter No. 11-FCU-02.  It explained that “[a]t a minimum, a director should be able to examine the credit union’s balance sheet, income statement and be able to answer the following questions”:

• What does this line item mean?
• Why is it important?
• Is the item’s value changing over time?  Why?
• Is the change important?

The NCUA stated in the letter that direction and control of the credit union lie with the board, and that boards set the compensation of their executives.  Given this heightened attention to board management issues, and the importance of the board’s role in setting compensation, we set out below 10 best practices of compensation oversight.

1. Develop a written compensation philosophy
2. Specify covered positions
3. Seek comparability data
4. Annually review compensation
5. Consider multiplier effect (e.g., salary increases may increase Defined Benefit SERP benefits)
6. Engage periodic consultant review
7. Consultants report to the board (NCUA is concerned about CEOs “screening” or “filtering” information)
8. Inspect plan modifications
9. Ensure plan documentation is compliant; and
10. Associate with professionals to monitor legal developments (e.g., expected regulations under IRC §457(f))

Boards of federal credit unions that are already doing these things should make sure that they are documenting their process, so they can demonstrate compliance if requested by a regulator.  Although these rules do not apply to state-chartered credit unions, they provide helpful standards for those boards to follow as well.