Updated rules regarding incentive-based compensation for the industry could make credit unions more competitive in attracting talent.
During the National Credit Union Administration’s April meeting,
The industry hopes that the changes will include allowing credit unions to more freely base pay on incentives, arguing that it would help credit unions hire executives, lenders and other employees in a competitive environment.
“We need the best of class performers to keep credit unions relevant and competitive and we lose good talent because of a compensation gap,” said Deedee Myers, founder and CEO of the leadership firm DDJ Myers. “Unfortunately, many credit union boards use an archaic methodology that pays incentives the same way [they did] 10 years ago and [is] no longer relevant.”
NCUA last updated rules on compensation more than 20 years ago. Although credit unions can't calculate compensation based on lending, there are some exceptions, such as allowing a bonus derived from an institution's “overall financial performance.”
But there has been uncertainty over what classifies as “overall financial performance” and examiners have enforced the measure unevenly, according to Thomas Zells, a staff attorney with the NCUA’s Office of General Counsel, who spoke during the April board meeting.
The NCUA didn't respond to a request for comment by deadline for this story but Zells said during the April meeting that “credit unions have consistently expressed frustration in determining what loan metrics can be factored in to payments based on overall performance.”
Carrie Hunt, executive vice president of government affairs and general counsel of the National Association of Federally-Insured Credit Unions, noted that her group’s members have consistently said they would like to include lending performance in calculating executive compensation.
That change would fit with trends on employee compensation, experts said. A 2018 Pay Practices and Compensation Strategy survey found that 75% of organizations now use pay-for-performance programs. The study also found that employees receiving incentive-based compensation are more likely to be engaged.
Thirty-eight percent of private industry workers had access to nonproduction bonuses in 2017 while employees receiving incentive-based pay received more in compensation than those paid by the hour, according to data from the Department of Labor.
Even though leveraging compensation can be a key strategy for employers in retaining top talent, it's still important to screen candidates to help achieve a team based culture rather than one motivated by profits, said Brad McGinity, chief revenue officer at 15Five, a performance management software firm.
“I’m personally a fan of incentive compensation plans when it can be objective, but I very much dislike them when they say I’m going to give you a bonus based on manager discretion,” he said.
Bonuses should be determined by data rather than a manager’s opinion of an employee, McGinity added.
“When we rate the quality of [a product] it will say more about each of us, than objectively of [the product],” he added.
So far, the credit union trade groups have been happy with the news that NCUA will update the compensation rules, especially since it could help credit unions better compete for talent with banks. Though Hunt recognized that banks and credit unions aren’t complete “apples to apples,” she noted that the environment has evolved and the industry needs to adapt.
“[W]e have a regulatory regime that is protective, but we also need a regulatory regime that allows for growth and innovation," she added.
Hunt would like to see NCUA recognize that credit unions need to stay competitive and that implementing compensation tied to lending will benefit loan grown.
“The regulations regarding compensation have not been updated in over 20 years and need to reflect the realities of the environment credit unions operate in,” Hunt added. “The current regulatory environment provides more than sufficient safeguards against volume-based lending.”
The NCUA will have to walk a tightrope, however, when changing the rules. For one, the regulatory agency will have to safeguard against unsound and devious lending practices that would benefit an employee rather than the wellbeing of a credit union.
Wells Fargo serves as an extreme example of how incentive-based pay can go horribly wrong. In September 2016, it became public that employees at the mega bank created fake accounts under customers’ names to meet sales goals.
“If the balance is not achieved, credit unions could be at a major competitive disadvantage in the battle for quality lending talent in the marketplace,” said Dennis Dollar, a former chairman of NCUA. “It is not an easy balance to strike, so NCUA is seeking comment rightfully to make sure they prevent unsafe practices but don’t overstep into the management of the credit union when it comes to compensation and incentivizing the staff.”
