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A Pretty Package

December 2006 – Vol: 29 No. 12
by Gene Zumwalt

A Pretty Package
Wrap up executive compensation components to stay competitive in the marketplace.

By Gene Zumwalt

Editor's note: The following first appeared in the December 2006 issue of Credit Union Management.

In today's competitive economy, many credit unions recognize it's not enough to compensate top executives with salary and the same benefits allotted to other employees if they want to retain and attract the best executive talent.

That's the philosophy at $980 million FORUM Credit Union, with more than 93,000 members, Indianapolis, says Board Treasurer Rick Rambo, CCD. "Our board felt the need to 'protect the credit union' by doing more to help retain our CEO," he says. "We also added an executive compensation package to stay competitive in the marketplace."

Yet, packaging the right benefits in an executive compensation arrangement can be an intricate process. Many variables need to be considered when incorporating components into a fair and appropriate package to benefit both the executive and the CU. That's often complicated by such things as an executive's changing needs, CU growth rate and other financial services institutions competing to hire an executive.

CEO compensation used to be simpler. It's more complex today, with deferred compensation and incentive programs gaining in popularity. CUs must now explore the latest in executive compensation tools and carefully consider the building blocks of compensation arrangements, which are vital to a credit union's future.  

The Foundation
More often than not, the fixed components of a compensation plan, which include salary and basic benefits, still tend to be key factors in determining what makes a competitive package.

"Fixed salaries provide organizations with the ability to stabilize their compensation programs while still providing executives with competitive financial rewards. Since the focus on salary is certain to grow, it makes good sense to begin shifting your executive compensation program in this direction," suggested A. Lee Westervelt, a principal with BakerER, a strategic growth and workplace management consulting firm, in a 2004 article in The CEO Refresher.

Confirming this observation, CU executives have seen a rise in salary. Credit union CEOs reported an average increase of 8.5 percent in base salaries, the highest pay hike since 2002, according to the 2006 CUES Executive Compensation Survey.

Beyond salary and benefits, CUs now offer performance-based bonuses, as well as other long-term, tax-conscious incentives and perquisites. These variable components of a compensation package often play a make-or-break role in negotiating executive contracts, especially when attempting to attract talent outside the CU industry.

Additional Options
Short-term cash bonuses typically can be awarded based on the executive's contributions to the credit union and are almost always tied to the credit union's financial performance. Compensation Resources, Inc., a consulting firm based in Upper Saddle River, N.J., that specializes in executive compensation, says long-term cash incentive performance periods usually range from three to five years and can be geared toward "career" wealth accumulation. Perquisites include such things as company cars, club memberships, cell phones, meal and travel allowances, first-class airline travel, etc.

More credit unions also are putting supplemental executive retirement plans into practice. SERPs set aside money and/or other benefits for the executive in exchange for an individual's continued service to the credit union. Components of SERPs could include deferred compensation programs and split-dollar life insurance. SERPs are often also geared to supplement any retirement income shortfalls an executive may face. Credit unions generally set aside 2-4 percent of their assets into an investment vehicle to fund their SERP.

Do Your Homework
With all the executive benefits choices a CU needs to comprehend, it's sure to face many challenges throughout the decision-making process. FORUM CU's Rambo, a CUES Directors Educational Forum member, notes, "Understanding all the options available, how they tie into the compensation plan and what they mean to the credit union financially are all challenges our compensation committee faced."

Performing extensive research and checking into compensation surveys at the national and regional levels, both in and outside the not-for-profit sector, will help CU boards substantiate their executive's total compensation. "We used the expertise of our VP/human resources, our chief financial officer and board members and pulled in legal consultation as needed. We also partnered with CUNA Mutual Group, which offered their expertise in executive benefits programs," Rambo says.

By looking outside the credit union arena, a board can gauge what for-profits are doing to compete. By considering similarities and differences between organizations, it can get an even better comparison. And, just making a few phone calls to peer credit unions can also divulge relevant information a CU may not have already considered.

Being cognizant of your CEO's needs and requests also is vital. Although compensation decisions are something the board must agree upon, it is extremely beneficial to involve and consult with your executive throughout the entire process. "It is primarily important that the board is doing its job for the CEO if we want to retain him," verifies Rambo. "We especially wanted to look at the plan from a tax perspective to assure that it had the least taxable impact on him at the time of his retirement."

Gene Zumwalt is director of executive benefits marketing at CUNA Mutual Group, Madison, Wis.


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