“If the credit union is healthy, then the rule is to leave things as they are unless the practices are not safe and are not sound,” Sherman said. “One example of an unsafe and unsound practice is when the compensation significantly exceeds compensation paid in similar settings.”

Dodgen pointed out, however, that regulators and credit union members are increasingly scrutinizing pay for performance or variable pay structures.

She noted that members can easily find out what executives are being paid by accessing IRS Forms 990s, which are public financial disclosure documents that non-profit organizations such as state chartered credit unions are required to file annually.

In the past, if there was a general understanding that an executive did a great job, the board would simply award him or her a $25,000 bonus, and it would be duly recorded in the meeting's minutes. In today's business climate, however, that doesn't work.

“You have to have a rationale for giving those incentives for performance because it is a strategic and reputational risk,” Dodgen said.

When working with board members, Dodgen is always asked how they can determine the right amount of compensation for their executives. While it is important for credit union boards to offer a competitive base salary, she said, that is only one factor that executives weigh in deciding whether to stay with or leave a credit union. Some of those factors include the credit union's location and quality of life, as well as the credit union's challenges and opportunities.

“The bottom line comes down to can I [the executive] afford to take this job and are there other [credit unions] that are also offering opportunities and are offering a more competitive package to me,” Dodgen explained. “At the same time, you have to consider not only what is good for the executive but what is good for the credit union and its members.”

Credit union compensation databases are good tools that can help directors determine the range of competitive base salaries for their executives, she added.

“When you start looking at pulling a number, what I would encourage you to do is to think more of a competitive market range that fits your credit union,” she advised. “And within that range, based upon other elements of the compensation package, determine where that individual would fall based on his or her success and experience.”

She also noted that directors think twice before promoting a senior executive to the CEO's position in what they may consider a “bargain deal.”

“What invariably happens [in that case] is that within six months, the board has a disgruntled CEO who is questioning if the board really values his contributions,” she said. “Now the board is in the position of playing catch up, and it's hard to catch up and maintain a competitive strategy.”

Instead, board members should look at compensation as an investment, not as an expense.

“If you are looking at [compensation] and say you need to cut back on expenses, then you are constraining your ability to grow,” Dodgen noted.

Poor decisions by the board involving compensation may lead to the departure of executives, which makes matters even more challenging for any credit union.

Large accounting firms have estimated that the cost of executive turnover can be as high as six to eight times the annual salary of an executive, depending on the complexity of the position, Chris Burns-Fazzi, principal for benefits consultancy Burns-Fazzi, Brock in Charlotte, N.C., said.

“If you're losing people, your strategies and goals are delayed,” Burns-Fazzi said. “I had a credit union tell me if they did not hold their executive team together they could not possibly meet their five-year goals. They are already two years into their strategy and they are in danger of losing some key executives because of market competitiveness.”

In addition to base salary and benefits, specific executive benefit plans such as nonqualified deferred compensation 457(f) and 457 (b) plans, the Welfare Benefit: BFB Split Dollar plan and the Section 83 Bonus: BFB Restrictive Bonus plan are effective options for retaining executives.

While all of these executive benefit plans have pros and cons, regulators require board directors to fully understand them and select plans that are fair and reasonable, Burns-Fazzi said.

“It's very expensive to replace talent, so credit unions with the talent need to make sure they have a plan in place to retain that talent,” she said. “It's like any asset. If you take a lot of time to cultivate and develop an asset, you don't want to just lose it. Human capital is the most important asset for credit unions or for any institution.”

Burns-Fazzi noted that regulators are taking a closer look at these executive benefit plans mainly for safety and soundness reasons, but also for credit union succession planning.

“They want credit unions to develop these plans because they know that talent is important and expensive to replace,” she said. “So while regulators want credit unions to use these plans, they also want them to be careful and knowledgeable about what they're doing. These plans can have a detrimental impact on the bottom line if a board does not watch what's happening, and that's why regulators want to make sure the board is doing its due diligence.”