Q&A: Here’s a question that a Wisconsin credit union recently asked The League’s Legal Affairs team, along with our answer. Do you have a compliance question? Contact The League’s Compliance Hotline at (800) 242-0833 or email.
Q. Can our credit union pay any compensation to its board members?
A. Wisconsin’s credit union statutes (Chapter 186) address this question. They allow some compensation for board officers and for credit committee members:
§186.12 Compensation of officers, operation expenses.
(1) Board members. No member of the board of directors may receive any compensation for services as a member of the board other than reasonable health, accident and similar insurance.
(3) Expenditures. The officers elected by the board of directors, the members of the credit committee and loan officers may receive such compensation as the board authorizes, but the expenditures of the credit union for all purposes shall be paid from its earnings.
The Wisconsin Office of Credit Unions’ Model Bylaws (2017) address this, as well. They say:
Article V, Section 10. Compensation. Except as otherwise authorized by applicable law, no Director may receive any compensation from this Credit Union other than reasonable health, accident or similar insurance. Nothing in this section prohibits reimbursement for out-of-pocket expenses incurred as a result of his or her services as a Director or payment of compensation to Board Officers or credit committee members in accordance with Article VI, Section 9.
Article VI, Section 9. Compensation. The Board may authorize compensation for the Board Officers and credit committee members, if any. The compensation of all employees shall be established by the President, consistent with standards and limitations established by the Board.
While these provisions seem fairly straightforward, credit unions should keep a number of issues in mind:
- Limited to “officers” and credit committee members: Compensation is allowed only for credit committee members and “officers” of the board. The model bylaws define the term “Board Officers.” It “includes the Board Chairperson, Board Vice Chairperson (whether one or more), Board Secretary, and Board Treasurer.”
Compensation is not allowed for other board members; however, they can receive “reasonable health, accident and similar insurance” and “reimbursement for out-of-pocket expenses incurred as a result of his or her services as a Director.”
- Tax filings & reputation risks: Amounts paid as compensation must be reasonable, and they must be reflected on the Form 990 that credit unions file annually with the IRS. That information is publicly available; bankers (and others) monitor it. The credit union must be mindful of reputation risks: to the director, the credit union, and the movement as a whole.
- Conflict of interest concerns: The League’s ii Release No. 0028 – Conflicts of Interest addresses many conflict of interest rules that can impact compensation arrangements.
For example, any director who may be affected by a compensation package must abstain from all discussions and votes on the issue. That requires the director to do two things: 1) Do not participate in any board discussions on the compensation, formally or informally. 2) Do not participate in any votes on the compensation. In fact, all affected directors should leave the room while the remaining board members deliberate and vote on compensation for Board Officers or credit committee members.
Participating in the deliberations or the vote would violate the Oath of Office and this provision in the 2017 Model Bylaws:
Article XIII, Section 2. Pecuniary Interest. No Director, Officer, committee member, agent or employee of this credit union shall in any manner, directly or indirectly, participate in the deliberation upon or the determination of any question affecting the person’s pecuniary interest or the pecuniary interest of any Organization or association in which the person is directly or indirectly interested.
Director and officer liability laws will not protect a director from liability if he/she deliberates or votes on a matter despite having a conflict of interest. For details, see The League’s ii Release No. 0180 – Duties, Liabilities & Protections of Credit Union Directors.
- NCUA restrictions on compensation in connection with loans: Despite the Wisconsin Statutes and model bylaws provisions, Wisconsin credit unions still must comply with NCUA rules that restrict and often prohibit receiving compensation in connection with loans made by credit unions. These restrictions apply to:
- Officials, (which includes member of the board of directors or a volunteer committee, like a credit committee);
- Credit union employees (other than senior management); and
- Senior management employees, which means a credit union’s chief executive officer (typically, this individual holds the title of President or Treasurer/Manager), any assistant chief executive officers (e.g. Assistant President, Vice President, or Assistant Treasurer/Manager), and the chief financial officer (Comptroller).
Those NCUA rules apply to all federally insured credit unions, including all of Wisconsin’s state-chartered credit unions. The rules can be complicated, so ii Release No. 0028 has a chart to illustrate them.
- Different rules for federal credit unions: The Wisconsin Statutes and model bylaws provisions only apply to Wisconsin state-chartered credit unions. Federal credit unions are prohibited by federal law from directly compensating their board members. Under NCUA regulations §701.33: “Only one board officer, if any, may be compensated as an officer of the board. The bylaws must specify the officer to be compensated, if any, as well as the specific duties of each of the board officers. No other official may receive compensation for performing the duties or responsibilities of the board or committee position to which the person has been elected or appointed.”