Insights
Occasional papers from Western CUNA Management School

Credit Union Nonqualified Executive Benefits:
Educating the Board of Directors on the Issues
William J. Adler. Esq.

William J. Adler is a partner in the law firm of Styskal, Wiese and Melchione, LLP which is located in Glendale, California. He can be reached at (818) 241-0103 and at William Adler [wja@law4cus.com]

This article was written in consultation with the attorneys of Styskal, Wiese & Melchione, LLP. Although the article was prepared with care, it is not designed to be a complete or definitive analysis of the law in this area. Moreover, this article was written with the understanding that it reflects the authors' perception of the state of the law as of this date. Furthermore, the information contained in this article is not intended to constitute and should not be received as, legal advice and does not in any way create an attorney-client relationship.

Introduction

Credit unions and their boards of directors are continually challenged with an old problem -- how to recruit, retain and reward employees, particularly senior management executives. Our experience as legal counsel to credit unions is that most boards are fairly well informed about typical components of executive compensation such as base salary, bonus and/or incentive plans, qualified pension plans, vacation and sick or paid time off benefits, automobile, club benefits, professional dues and education and travel expenses. A well-informed board will have information and/or a survey of typical benefits from an outside consultant, a credit union association or a credit union league. This information can be quite helpful in assisting the board in evaluating the competitiveness and reasonableness of the basic compensation package it is providing its executives or offering prospective executives.

Even so, we have observed that credit unions are increasingly competing for talent not only with other credit unions but also with "for profit" companies, which can provide compensation opportunities for their executives (such as ownership opportunities) that are generally not available to executives of "not-for-profit" organizations such as credit unions. This reality was recognized by the NCUA in their commentary to a recently Proposed Rule where they stated that the "competition to attract and retain employees has increased and the employee benefits marketplace has become more sophisticated." This has lead to credit unions "increasingly providing more diverse and less traditional forms of employee benefits including, for example, deferred compensation plans and stock option plans." NCUA Proposed Rule 701.19 (December, 2001).

How then can credit unions compete against "for profit" companies and even against other credit unions? What tools are available to credit unions to recruit, retain and reward executives beyond the typical components of executive compensation? And what are some of the legal restrictions that Boards and their executives should be aware of?

Take Advantage of Qualified Plan Benefits

In considering an executive's compensation package, the executive and the board should first take full advantage of all qualified retirement opportunities available to the credit union's employees such as 401(k) plans and defined benefit plans. This will assist in recruiting and rewarding executives. However, due to "top heavy" limitations on qualified plan contributions, executives are not always permitted to fully participate in such qualified plans.

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