Board Compensation Can Be a Strategic Investment

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Contributing Writer
member of Bellco Credit Union

12 minutes

Success with paying directors requires both thoughtfulness and hard work.

Whether and what to pay credit union directors is getting attention. 

CUES Supplier member Kaufman and Canoles goes into detail in an article on the subject.

“It is a well-known fact that federal credit unions are not permitted to directly compensate members of their boards of directors,” the article states. “As a result, a number of FCUs are converting to state charters primarily so they can pay their directors. 

“An estimated 18 states allow directors of state-chartered credit unions to be compensated,” the article continues. “Some of these state laws are very specific. For example, the Arizona statute provides that a credit union may compensate an officer, director or committee member for the officers’, directors’, committee members’ services to the credit union. Providing reasonable life, health, accident and similar protection is not considered compensation. Colorado has a similar law. Four states—Georgia, Kentucky, South Dakota and Wyoming—are silent on the degree or type of board compensation that may be paid.” The article provides charts with details by state.

The legal situation may be part of why many U.S. CUs are thinking about monetarily compensating their directors but few are doing it. “There’s a lot of talk, but very little action on a broad scale,” observes Deedee Myers, Ph.D., CEO of CUESolutions provider DDJ Myers, an ALM First company, based in Phoenix.

And that’s not necessarily a bad thing, she points out. “Board compensation is a strategic investment,” she says, not done out of gratitude or recognition that a CU has grown and that the director’s job has become more demanding. “There needs to be a goal and an informed decision that a change in directors’ compensation will help reach that goal.  

“Deciding to compensate the board,” she continues, “is a thoughtful process that takes commitment to ensure the right outcome; it’s a lot of work.” 

Ent Credit Union as a Case in Point

$9.5 billion Ent Credit Union, Colorado Springs, has done that work. After converting to a state charter in 2016, the CU set out in 2018 to find a plan for paying directors. In doing so, it ran into two surprises, according to CUES member Pam Nicholson, vice chairman of the CU’s board. Those include: 

(1) a lot of small state-chartered CUs were already paying their directors, and 

(2) those payments mostly were made without evaluations to upgrade director/board performance, she says. “They failed to include rigorous, objective scoring that rewarded good performance and identified opportunities for improvement.”

“We looked at what others were doing,” she recalls. “We hired a consultant to search for a model, but we didn’t find anybody doing the formal assessment and evaluation that we wanted, so we built our own.”

Nicholson, who’s also chair of the board’s governance committee, is a retired healthcare executive and consultant. She has served on the Ent CU board since 2017.

So, how does Ent compensate its directors today? For starters, it pays all board members a flat $40,000 a year, paid out quarterly, assuming good attendance. If a member misses one board meeting, he or she still gets the $40,000. Miss two and it’s cut in half to $20,000.

It also holds onto another $15,000 performance bonus that allows those that meet and exceed expectations to make up to $55,000 a year.

The payments are reported as 1099 income, subject to federal and state income tax but not Social Security/Medicare taxes. “We aren’t employees of the credit union,” she observes. 

The performance bonus is based on two questionnaires of 26 questions, Nicholson explains. Directors are scored from one to five with five being the top score. Each board member receives three scores annually: one from the board, one from management and one combined from both. 

“The goal is to have little difference between the overall board and management scores,” she notes.  

If any director falls short of the target scores, staff leadership and board members discuss and come up with an action plan to improve that person’s performance. 

Removing Underperformers

Ent CU’s peer-to-peer board assessment uses a one-to-five scorecard to gauge the effectiveness of each director, Nicholson details.

“Any board member who falls below a 3.0 score will be invited to a conference where an action plan will be developed. If there’s no improvement, that board member could be removed.”

Has that happened? No director has been removed yet, Nicholson reports, but one director had a score of less than three in the first peer-to-peer evaluation. 

“They didn’t realize they were perceived as lagging,” Nicholson observes. “Once that was understood, they made positive changes” and their scores went up. 

“The goal was to professionalize our board,” Nicholson explains, “to apply objective standards, to match needs with qualifications, to search for talent based on key attributes.” So, Ent brought in professionals. 

The board determines which attributes are needed and then uses DDJ Myers to recruit candidates based on the credit union’s priorities. Board openings are posted on LinkedIn, other social media sites and some board recruiting sites; all applications are screened and then narrowed down to the top five. 

“From there, the nominating committee narrows it down to three,” Nicholson reports, “and then the entire board and CEO are part of the final in-person interview. 

“We also worked with DDJ Meyers on the assessment tools,” she continues. “We had them take what we had developed and finalize the tools for us. Today, they still administer and create the reports for us. As a board, we spend time reviewing the board assessment with management to ensure we are aligned and create actionable goals for the following year.”

It’s an impressive effort, but what’s the ROI? 

“We’re able to recruit people with specific skills that we, as a board, agree on,” Nicholson explains, such as financial, mergers, strategy, marketing, branding and advocacy. “We recruit more precisely by geography, skill sets, diversity. We’ve improved the skills we’re bringing in to achieve our goal of continuously improving and being a high-performing board.”

The results are also evident in board meetings, Nicholson says. “We now also use Diligent Boards and receive the board packets a week in advance. We share our questions with management beforehand, so the discussions are more robust and allow management and the board to use the time more effectively.”  

Sign of Appreciation

After Oregon changed its laws in 2015 to permit state-chartered CUs to pay directors starting in 2016, $1.8 billion Northwest Community Credit Union, Eugene, seized the opportunity and, in 2017, started paying board directors a flat $15,000 a year for their service, with adjustment for special duties. The chair gets $25,000, and executive committee members and the chairs of the governance and ALCO committees $20,000. 

“We wanted to stay competitive,” observes Northwest Community CU president/CEO John D. Iglesias, CSE, CCE, a CUES member. “And we thought it was only fair in light of their growing responsibilities.”

Did the move change the caliber of the board and the governance culture at NWCU? 

“Our directors serve because they are community leaders who have a passion for credit unions and want to spread financial wellness,” Iglesias says. “I don’t think compensation really changed that.” 

In addition to offering compensation, NWCU has also worked to recruit young professionals, bringing down the average age of its board. 

“We have members in their 30s and 40s,” Iglesias reports. 

NWCU has a nine-member board, a number he considers optimal for a financial institution—big enough to include diversity and cover the bases, but small enough to be efficient and economical.   

NWCU is approaching a proposed merger with TwinStar Credit Union of Lacey, Washington, that will put the combined CU at an asset size of $4 billion. With that proposed merger is expected to become a combined board of 13. TwinStar CU’s board had been considering compensation for a while, Iglesias says, and recently decided to pay its board of directors in alignment with industry trends.

NWCU recruits unpaid associate directors who may become full directors as openings occur—if they have completed certification requirements and demonstrate the right skills, Iglesias explains. One associate director now serving a second two-year term will receive $6,000 a year if required training has been completed. Directors are chosen for overall quality—“We want community leaders with great reputations,” he says—but also for diversity in skill sets, geography (NWCU is statewide), and experience within diverse communities and ethnicities.” 

Per Diem Versus Salary

There are two basic models for paying directors. One is a flat amount annually, often with a step-up for the chairman and maybe key committee chairs. The other is a per diem payment for time spent on serving as a credit union director, however that is calculated. 

For CUs that are paying directors, a flat salary is the norm, Myers reports. On the other hand, per diem pay encourages directors to show up for meetings, she observes. 

$1.18 billion Prairie Centre Credit Union, Rosetown, Saskatchewan, continues its longtime practice of paying directors per diem for the time they spend in meetings, preparation and training, generally by the day or half-day, reports CUES member Michelle MacDonald, chief information officer. 

In 2022, Prairie Centre CU paid regular directors $575 for a full-day board meeting, which included $100 prep time. For a half day, full board or committee meeting, the CU pays $300, which includes $100 prep time. The chairman also gets $7,200 per year and committee chairs $1,000.

“It’s not intended to be an incentive,” MacDonald explains. “People serve because they are community-minded and care about rural Saskatchewan. But we don’t want no pay or low pay to be a deterrent. We just want to be fair and in line with our Canadian peers.” 

Training time counts for the same full-day or half-day pay. All directors at Prairie Centre have chosen to complete the Pro.Dir (professional director) certification. Some take courses such as CU finance for directors or attend national conferences, she adds. 

Luseland Credit Union, Luseland, Saskatchewan, recognizes that individual board members and boards overall benefit when directors engage in continuous learning, especially in such key areas as credit union risk management, financial trends and analysis, and strategic planning. The $165 million CU believes so highly in the value of education that it provides additional compensation as an incentive for directors to continue their learning, reports Adam Franko, general manager. 

“Directors receive a per diem for all board and committee meetings, as well as training sessions they attend in person,” Franko says. “They receive $175 per half day and $350 for a whole day of in-person training. Through a partnership with another supplier, board members also receive $25 per course completed through the online portal. We also have director training and certification through CCUA (Canadian Credit Union Association) and partnership with CUES. Our governance committee has recently decided to reward directors that complete CUES courses at a rate of $10 per point earned” using the CUES Learning Portal, which awards points for course completion. “We looked through some of the courses we had completed already and found that five points per hour was a reasonable and generous average.”

$34-plus billion Vancity Credit Union, Vancouver, British Columbia, has chosen to use some of its significant resources to pay directors flat amounts. It has a formal director compensation program that is not radical but competitive with Canadian financial institutions of similar size, reports spokesperson Shannon Miller.  

A director is paid $52,186 in 2023, a committee chair $60,824 and the board chair $85,140. An additional $5,000 per director per year can be tapped to cover expenses for professional development related to director education. There are nine board members, six of whom are women. 

Every three years, an ad-hoc three-person remuneration committee reviews the changing board compensation landscape and recommends a change, usually a percentage increase, Miller explains. That committee is made up of director-caliber members who are not on any Vancity CU board or a member of the staff, she adds. Then members vote on the changes at the annual meeting.

“The role of boards and board members has come under closer scrutiny in recent years with growing attention given to how directors promote the long-term success of the organizations they lead,” Miller adds.

Raising Performance

“If you want your CU to perform better,” suggests Ancin R. Cooley, principal of Synergy CU Consulting, Chicago, “look where your weaknesses are and then try to find board talent that can fill that gap.” 

With the implementation of the current expected credit loss model happening in 2023, Cooley illustrates, “now would be a great time to have a director with accounting experience, perhaps an accounting professor or graduate student from a local university or from a local CPA society.” 

Traditional “pay” for CU directors often has been travel and education money, sometimes including sending directors to events happening in places like Hawaii or Las Vegas, he says. 

Performance incentives, when used, tend to be negative, Myers notes. The usual practice is to have a core performance standard and then nudge a member who doesn’t measure up by suspending pay until they raise their performance.

But progressive boards are starting to go positive. Having a performance review and paying directors more for exemplary performance is still a shift forward, she observes. “It’s new ground—fertile, but mostly untried.”

Progressive boards, Myers adds, often search for three kinds of talent: older members with strong community contacts, mid-level executives in mid to near-career peaks, and young up-and-comers. That typically means lowering the average age. 

Performance starts with recruitment. Leading CUs are doing expertise assessments to inform a targeted board member search, she explains, sometimes using third parties to recruit what they need.

The idea of recruiting a board “star”—someone with a great qualification who might normally be beyond the reach of the CU—and paying a star salary is worth considering. It may upset other board members, Myers concedes. “It crosses a border.” She’s not aware of any CU that has done it yet. 

But it’s intriguing. “If the board would tremendously benefit from a highly-qualified rock star, and it takes another $10,000 to get them,” she wonders, “why not do it and rock?”

Richard H. Gamble writes from Grand Junction, Colorado.

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