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

1. The Compensation Checklist
Learn 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

2. 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

3. Part 750
• Part 750 – New rules relating to
– “Golden Parachute” payments
– Indemnification payments

4. Golden Parachutes
• Distinguish “legitimate severance payments”
• Two part test
– Payments “contingent on termination of
employment”
– Received when credit union is “troubled”

5. Golden Parachutes
• “Troubled”
– Insolvent
– Under Conservatorship
– Deemed by a regulator to be troubled, or
– Assigned a 4 or 5 CAMEL or CRIS rating

6. 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

7. 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

8. Proposed Rule on Executive Compensation
• Applies to credit unions with assets in excess
of $1billion
– Excessive compensation
– Excessive risk taking
– Or both

9. 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

10. 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)

11. 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

12. 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)

13. 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

14. 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?

15. 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
Accounts
Payable & 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

16. 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

17. Rule 701.4
• Management oversight
– Board, among other things, must directly set
compensation
– Establish policies
– No “screening” or “filtering” from CEO

18. 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)

19. 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)

20. 10 Best Practices of Compensation Oversight
• Develop compensation philosophy
• Specify covered positions
• Seek comparability data
• Annually review compensation
• Consider multiplier effect

21. 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

22. 5 Step Safety and Soundness
Road Map for Executive Benefit Plans
1. 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 exist
4. 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)

23. 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)

24. 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))

25. 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

26. 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

27. 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

28. 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

29. 3- Gain Knowledge and Understanding of the
Executive Benefit Plan Options
Types of Plans & Uses:
Tax Deferral (Deferred Compensation – Retention)
1. 457(b)
2. 457(f)
3. 451
Taxed Immediately (Section 162 – Vesting)
1. Restricted Bonus
2. Secular Trust
Tax Avoidance (Welfare Benefit Plans – Tax Arbitrage)
1. Post Retirement Medical
2. Split Dollar

30. 4- Determine the Right Balance of Fair and
Reasonable For Your Credit Union in
Rewarding 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.

31. 4- Determine the Right Balance of Fair and
Reasonable For Your Credit Union in
Rewarding 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

32. 4- Determine the Right Balance of Fair and
Reasonable For Your Credit Union in
Rewarding 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 participant's 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).

33. 4- Determine the Right Balance of Fair and
Reasonable For Your Credit Union in
Rewarding a Benefit Plan
How Many Have Nonqualified Benefit Plans?

34. Credit Union SERPs Offered for CEO Position
457(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%

35. Credit Union SERPs Offered for CEO Position
457(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%

36. Credit Union SERPs Offered for CEO Position
457(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%

37. 5- Seek to Understand and Mitigate the Risks
That Impact Executive Benefit Plans
Board Due Diligence
Issues 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

38. Questions?
James S. Patterson, Attorney
Sherman & Patterson, Ltd.
jpatterson@splawfirm.net
Tel: (763)479-2699
Tom Telford, Executive Vice President
Burns-Fazzi, Brock & Associates
ttelford@bfbbenefit.com
Tel: (888) 494-8911
http://www.nafcu.org/BFB/