Executive Compensation Regulation

As the NCUA again considers regulating exec pay at large credit unions, here are four surefire compensation best practices for all credit unions.

The idea that the U.S. government should have a say in what financial services leaders are paid is not new. But it is often debated.

This discussion was renewed when the National Credit Union Administration approved in July a proposed rule addressing incentive-based compensation arrangements.

This proposed rule responds to provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires six regulators of financial institutions, including the NCUA, to issue joint regulations requiring the disclosure and reporting of compensation at certain financial institutions. The proposal approved this summer is essentially the same as the one proposed but not finalized in 2016.

Let’s look at some key details of the proposed rule and then consider what best practices in compensation credit unions of all sizes should be following as a matter of course.

The Proposed Rule

According to this Troutman Pepper article, “Dodd-Frank sought to create guardrails around executive compensation by, among other things, requiring recoupment of incentive compensation received by executives resulting from faulty financials; mandating more robust disclosures to shareholders regarding executive compensation; and, under Section 956, reining in incentive-based compensation practices that were seen as promoting overly risky behavior at financial institutions.”

The proposed rule regulates “incentive-based compensation,” defined broadly by the notice of proposed rulemaking as “any variable compensation, fees or benefits that serve as an incentive or reward for performance.” It covers senior executive officers such as those with titles and job functions like CEO and other C-suite positions.

The proposed rule covers depository institutions and their holding companies, broker-dealers, federal credit unions, investment advisers, Fannie Mae and Freddie Mac, and other financial institutions as determined by the regulators. State credit unions without federal insurance may be required to disclose certain executive compensation information through IRS Form 990. 

The proposed rule applies to federal credit unions with more than $1 billion in assets and divides financial institutions covered under the rule into three categories, each with separate requirements:

• Level 1: institutions with assets of $250 billion and above;
• Level 2: institutions with assets of at least $50 billion and below $250 billion; and
• Level 3: institutions with assets of at least $1 billion and below $50 billion.

According to the NCUA, as of the end of the first quarter of 2024, there were no federally insured credit unions in Level 1, two credit unions in Level 2, and 441 credit unions in Level 3. 

NCUA’s action in July approved the same proposed rule as was approved in May by the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Housing Finance Agency. Importantly, the official comment period on the proposed rule can’t begin until it is published in the Federal Register, which requires approval by all six regulators. As of this writing, The Board of Governors of the Federal Reserve System and the U.S. Securities and Exchange Commission had not approved the joint rulemaking. However, participating regulators can separately solicit comments in the meantime; NCUA is doing so.

In all, whether 2025 will be the year this proposal becomes regulation is still open for debate.

Timeless Best Practices

As we have said, if the proposed regulation becomes a final rule, it will directly impact fewer than 500 credit unions. Still, the actions taken this year by the NCUA and the other agencies serve as a good reminder that the way top leaders at credit unions are compensated is important, something worthy of your consideration and something regulators are likely to continue to scrutinize.

At PARC Compensation Consulting, we recommend the following best practices for effective executive compensation management. Let us know if you have questions or would like assistance in implementing any of them in your shop:

1. Integrate risk management into your compensation plans. In other words, adjust your compensation structures to include risk-adjusted performance measures so that the incentives you offer don’t encourage excessive risk-taking.
2. Utilize deferred compensation plans or extended performance rewards. These can promote executive retention and encourage a focus on sustainable growth long term. 
3. Strengthen accountability in your compensation processes. For example, emphasize the role of your board or board-level compensation committee in reviewing and approving your CEO’s compensation package and ensuring the organization’s CEO compensation policies both meet regulatory standards and align with the credit union's strategic goals. The same ideas apply for CEOs or CHROs in charge of setting up pay structures for other executives and top leaders. 
4. Periodically refresh your compensation philosophy. The compensation landscape is rapidly changing. An updated compensation philosophy serves as a foundational guide for making consistent and fair decisions aligned with current regulations and best practices.

J.P. O'Connor, Senior Compensation Consultant at PARC Compensation Consulting