Board compensation: Dirty little secret or brilliant strategic move?

The subject of compensating board members has been prominent in the press lately, as the states of Washington and Tennessee have recently passed regulations that allow state-chartered credit unions to pay their directors.  The arguments to allow pay for credit union directors are not surprising:  expertise is required for a board to be fully accountable to the membership; the liabilities of serving on a credit union board are not insignificant; the financial marketplace is ever-more complex, requiring board members to have ever-increasing knowledge and responsibilities; credit unions are competing with for-profit institutions for not just executive talent, but also for board-level strategic and thought leadership.

The arguments against paying board members are also familiar:  paying boards may attract some who are only in it for the stipend; not-for-profits shouldn’t pay board members as a matter of stewardship; paying board members erodes the distinctions between for-profit and not-for-profit entities; there is no empirical evidence that paying a board would result in a stronger, more successful credit union.

So which side of the argument do you fall on?  Or, more importantly, if you are a state-chartered credit union domiciled in one of the states that allow payments to board members, what does your credit union do?  In a recent Credit Union Times series of articles on the subject, 26 credit unions that currently pay board members were approached to provide insight.  Only eight credit unions agreed to be interviewed.  That, to me, is very telling.

It seems that many credit unions, whether they pay board members or not, are not comfortable with that decision.  And therein lies the problem.  Credit unions do not know how to discuss this issue.  It is not a question of whether you pay the board.  It is a bigger question of why, and for what purpose  is the board paid.

The number of states that currently allow for payment to board members is limited, but growing.  Among those that do pay, the level of pay varies wildly, with most credit unions paying very minor stipends, but with a few notable and magnanimous exceptions.  As the practice of paying board members is not well publicized or documented, but for the required and difficult to decipher Form 990s, a relationship between director pay and credit union performance is not yet a science and cannot, at this point, be correlated.  Does this mean it is a bad practice?

No.  It simply means we are not asking the right questions.

If a credit union is domiciled in a state that allows for board compensation, and the credit union is considering paying it board members, the first question to ask is, “Will paying board members advance the credit union’s charter and make it a stronger, more viable and relevant financial institution?”  There is no blanket answer to that question.  Rather, this first question should generate a series of additional questions:

• What is the credit union’s charter and strategic plan for its membership?
• What kind of expertise is needed in our marketplace to advance the charter and grow the credit union?
• Does the credit union have the expertise, at the board and the executive leadership team level, to advance that charter?
• What kind of expertise do we foresee as needed in the future?
• Who is the credit union’s competition?
• Why are they considered the competition?
• What is the role of our board?  Of each board committee?
• What does each board member contribute to the board?
• What sources of expertise do we need?
• Is that expertise available to us?  What is the best way to access it?
• If we garner the desired expertise on the board, what do we hope to glean from it and how does that translate to growth or success of the credit union?
• What are our expectations of board members with regard to time commitment, meetings, outside learning, and professional expertise?
• How do we keep board members interested, involved, and engaged?
• What do board members deserve from the credit union in exchange for the expertise and services that they bring to the credit union management and membership?
• How can we provide that in a way that supports the credit union charter?

When establishing a compensation package for the credit union’s CEO and senior executive team, it is important to begin with a compensation philosophy.  The philosophy articulates the goals and objectives of the credit union related to compensation, and how the compensation structure for the executive team supports and reinforces those goals and objectives.  The compensation philosophy serves as a guidepost for future compensation decision-making and ensures alignment of the interests of the executive team, the board, and the membership.

In deciding whether to compensate board members, the philosophy is equally as important, and the same questions should be asked when establishing the board compensation philosophy.  What are the goals of the credit union and how will the structure of compensating board members support that goal?  What is the benefit to the members?  And how do we communicate it?

So the first questions should relate not to “if” or “how much,” but rather “why” and “how.”  The philosophy regarding board member compensation should be firmly established and clearly articulated, and any compensation arrangements, whether with executives or board members, must support that philosophy.  Credit unions that pay their board members should not be avoiding interviews.  Rather, they should welcome the opportunity to explain their philosophy, how that philosophy translates into practice, and how their practice supports the credit union’s mission and brings value to its members.

The need for the dialog is overdue.  Join it.