Losing a certain number of your credit union’s best executives to competitors is inevitable over time. It’s just part of the natural cycle of recruiting, developing, and occasionally losing talent—an expected cost of doing business. Or is it?
We think not.
Credit unions often have succession plans in place. These plans help them move forward when they do lose a key executive. However, we think more CUs need to develop a leadership continuity plan and focus—designed to keep (and develop) executives by offering them highly desirable education and financial incentives.
The CU industry does have cultural advantages that draw in good leaders and keep them in the fold, such as a tradition of loyalty and fairness. But when a top prospect is weighing job offers or overtures from headhunters, loyalty and fairness must be backed by tangible advantages.
Education and financial incentives, described in more detail later on, can help your CU keep the executives it values most. Education incentives also help with succession planning; so when someone great does leave a key role, you have an internal candidate ready to step in.
- From 2009 to 2011, 34.9 percent of turnovers involving CEOs who had been hired from outside the organization were forced by the employer—rather than planned turnovers. But for CEOs hired from within, only 18.5 percent of the turnovers were forced.
- From 2009 to 2011, insider CEOs who left a company delivered a median 4.4 percent share-holder return above regional market index, while outsiders delivered just 0.5 percent.
- Insider CEOs are nearly six times as likely as outsider CEOs to serve a company for nine or more years. Of the CEOs who have served for nine or more years, 85 percent have risen from within their companies.
|Appoint a Champion
Even with a training program and a supplemental executive compensation program in place, your succession plan can’t establish leadership continuity without a champion.
Sometimes, boards prefer that the CEO not be responsible for grooming a successor. Some CEOs have no interest in grooming a successor, and/or the board doesn’t want the CEO to do it because they’re displeased with the CEO’s performance.
In such cases, HR executives can be a natural choice to oversee the succession plan, using their expertise in training and benefits management. Whoever champions your succession plan must be able to keep inter-departmental politics out of it as much as possible, while giving clear-eyed reports to the board. In fact, it’s probably best to have the training program’s champion report directly to the board on this matter.
In today’s marketplace, CUs can’t afford to think it’s OK to give up their star players who have skills coveted by other CUs and by better-capitalized commercial banks and insurance companies. Your board only directly hires and manages the CEO. However, it can still promote having a well designed and managed leadership continuity plan for all top execs. Your CU’s plan should feature education benefits, supplemental compensation, and excellent program design and management.
The Role of Education
Many CU executives seek to build their knowledge and credentials by earning graduate degrees and professional designations, such as CUES’ Certified Chief Executive, or “CCE”. CUs often pay at least some expenses for employees who do these things.
It’s smart to invest in continuing education for employees. Degrees and certifications may improve the odds that your executives will be ready to step up when your CU needs them.
In addition to general education, ask your leadership team what is being done to provide ongoing, hands-on cross-training in how to run your credit union. Recommend a structured program in which at least the top few tiers of management work in areas outside their own, learning the basics of running each area and reporting back on what they’ve learned.
By participating in such a program, these leaders will gain insights about how their own area can interact better with areas where they’ve cross-trained. Plus, while you and your senior managers can use the participants’ reports to inform strategic planning, you’ll also learn more about how junior executives think and work. You’ll be filling a pipeline with talent, while building a culture of continuous learning. Also, in the short term, you’re creating a more flexible leadership team that can plug unforeseen gaps and cope with unexpected disruptions.
Suggest that cross-training and management development opportunities be offered throughout your organization, to the extent possible. How many CEOs started as tellers and loan officers? It’s never too early to begin encouraging employees to learn and grow.
The Role of Executive Benefits
To ensure the training program isn’t just grooming executives for other employers who can pay more, make sure your CU adds financial incentives to the continuity plan mix. We recommend that you consider expanding incentives beyond the top one or two executives. More CUs are establishing such rewards as supplemental executive retirement plans for the top two or three executive tiers.
Your CU may not be able to compete on salary alone, and you certainly can’t compete directly with stock options offered by a publicly traded company. However, you can seek a compensation program that makes it worthwhile for your executives to stay long term, and more expensive for competitors to lure them away.
One way to do this is with “golden handcuffs”—that is, tying an incentive to a performance and/or tenure benchmark. For example, your CU can contribute to a deferred compensation plan—such as a 457(f) account. Different strategies can be used to fund the account, such as professionally managed investment accounts and annuities. A CU’s contributions to a 457(f) plan aren’t capped by ERISA (Employee Retirement Income Security Act) rules and IRS limits, as a 401(k) would be. Also, unlike a 401(k), a CU is allowed to offer a 457(f) plan to an individual or group of highly compensated employees without offering it to all employees.
IRS rules require that a 457(f) plan include a “substantial risk of forfeiture.” For example, if an executive leaves before a stated date or event, the executive forfeits the benefit—hence the moniker, “golden handcuffs.”
In addition to a 457(f), typical options for supplementing an executive’s salary include 457(b) accounts, “split-dollar” arrangements, and executive bonus plans. Supplemental plans may also include long-term care, disability and life insurance.
Get Good Advice
If all these options make your eyes glaze over, you’re not alone. Few boards have the time and knowledge to design an effective supplemental compensation plan without expert guidance. In building a program that fits your structure, culture, and resources, look for a partner who can:
- identify executive compensation benchmarks in your specific market, including benchmarks among other credit unions of your size. You can buy a salary survey and try to design a competitive compensation package based on that, but does the data include supplemental benefits? Also, if you can buy the survey, so can your competitors. This isn’t really giving you an advantage.
Your supplemental benefits plan provider should be able to show you which types of compensation have worked well—and haven’t worked well—among CUs like yours.
- quantify the impact of an executive supplemental compensation program on your CU’s bottom line. You need to know the annual impact of these complex plans. But a financial impact analysis requires specific accounting and legal expertise.
Many supplemental benefits can be funded through an initial outlay by the CU into instruments that build value over time, such as managed asset programs or life insurance. When the instrument matures, the CU can be reimbursed for its outlay, while the executive gets the accumulated value. This is an “earnings only” plan. The plan can also pay the executive a defined benefit at a specific time.
The impact of not having qualified successors in place isn’t easy to assess, but this potentially catastrophic expense can’t be left out of any cost/benefit analysis.
- assess your executives’ needs. Supplemental compensation isn’t one size fits all. Before recommending products, a provider should do a thorough assessment of the executives’ financial situation, including a retirement income gap analysis.
It’s common for top executives to have a significant gap between the percentage of pre-retirement income needed for retirement and the income generated by standard retirement benefits and Social Security. For a lower-salaried employee, a combination of a 401(k), a pension and Social Security can relatively easily replace 60 percent to 80 percent of pre-retirement annual income. Not so for a highly compensated executive. You need to know how much of a gap the executive needs to fill before designing a plan.
For example, a person making more than $150,000 a year who retires after age 60 will require an estimated 84.2 percent of his or her final salary in annual retirement income to maintain his or her lifestyle, according to “The Real Deal: Retirement Income Adequacy at Large Companies”, by Aon Hewitt. However, CUNA Mutual Group specialists typically find that traditional retirement income sources can replace only 30 percent to 40 percent of a top executive’s working income. As mentioned above, the caps contained in federal rules restrict standard income sources such as 401(k) accounts and traditional pensions.
Plans also can be designed to reward executives at times other than retirement. This is important for younger executives, who need obtainable incentives to stay for the short term.
- objectively offer a complete array of products. A comprehensive compensation plan will likely require multiple products offered by multiple carriers. Be careful about a single provider recommending a suite of proprietary products—you need an advisor with broad knowledge of the marketplace and an “agnostic” approach to product mixes.
- ensure your compensation program is in compliance. The design of non-qualified deferred compensation plans—the foundation of most supplemental executive compensation programs—is highly complex, involving legal, regulatory, accounting, product, tax code, and investment issues.
In addition to expert plan design, you need your plan documented so you’ll have accurate answers at your fingertips to help you respond to questions from auditors and regulators.
- provide ongoing guidance on regulatory changes. The National Credit Union Administration was to review 16 regulations (such as Supervisory Committee Audits and Verifications) in 2013, and a third of its current regulations each year moving forward. The Consumer Financial Protection Bureau and the IRS also change rules at a furious pace. So your partner must continuously monitor developments and advise you on adjustments to your program.
Offering leadership development and supplemental compensation won’t guarantee you’ll never lose a promising executive to a competitor. However, you’ll know that if you do lose someone, it won’t be because you gave in to the inevitable. Plus, you will have formed a framework for leadership continuity, no matter when and why you need to tap your pipeline.
Scott Albraccio is executive benefits sales specialist manager for CUES Supplier member and strategic partner CUNA Mutual Group, Madison, Wis. Contact him at Scott.Albraccio@cunamutual.com.
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