Compensating Executives Is Strategic Issue Credit Unions Must Address

It’s a hard topic for credit unions and certainly a touchy one these days: executive compensation. None the less, executive compensation is a strategic issue many credit unions must address. I had the opportunity to visit with Alec Berkman, president of Executive Compensation Solutions. They recently published their yearly survey on credit union executive compensation and benefits. Below is my Q&A with Berkman.

(1)    ECS recently published an employee and executive compensation & benefits survey for credit unions. What were some of the trends you identified?

It still looks like about 30-40% of credit union CEOs will be retiring in next five to seven years. That is a big number and credit unions and boards must be prepared for that shift. Many of them are Boomers.  Another 20% of credit union executives change positions for perceived greener pastures every year. There is more movement across the country than most people would imagine.  Evidently, there is sustained demand for higher levels of talent.

We’ve also seen a slowing in the growth rate of base compensation. We saw reactionary moves in 2009 and 2010, where some plans and salaries were frozen. Those were tactical rather than strategic decisions. Prior to 2008 we were seeing a seven and eight percent growth in base pay; it has now slowed to about four percent.

For awhile we were seeing a narrowing of the gap between bank and credit union CEO pay. However, bank CEO compensation is accelerating again. So now the gap between banks and credit union is widening.

We are also seeing a shift in credit unions where more CEO compensation is “at risk” or tied to performance. Executives will get paid when they hit credit union goals.

(2)    When it comes to CEO compensation, are there pay differences by gender? Why do you think that is?

This is the first year we looked at the gender issue. There are wider opportunities for women in credit unions than in other industries. There is also significant disparity between male and female credit union CEO compensation. When you look at credit unions under $50 million in assets, over 70% of the leaders are women.  When you look at credit unions over $2 billion in assets, women occupy 30% of those positions. However, the glass ceiling seems to be in place.  Women on average earn between 75% and 80% of what male CEOs make.

(3)    From a compensation standpoint, what are some things credit union boards can do to keep their CEO?

Boards have a primary responsibility to think about executive compensation in ways that align the interests of the executives and the credit union. A credit union board and its executives are well served by setting expectations in advance and benchmarking along the way.

(4)    If a credit union board and its CEO have differences when it comes to compensation, what do you suggest they do?

The best approach is to set mutual expectations in advance. From there, establishing the right communication is critical. Professional advice plus accurate and relevant data is important in making good decisions. Transparency is essential.

(5)    In this day and age with increased scrutiny on executive compensation and the economy, why should credit unions be concerned with rewarding their CEO and executives?

We are still in a competitive marketplace where you want to attract the best and the brightest people. You want to reward them meaningfully, but reasonably. The compensation program also has to be affordable. It has to tie to credit union goals and performance. A good team has a deep bench. Having a talented executive team in place probably leads to more success.  Optics are an important consideration. One way to explain the reasonability of a CEO’s compensation is to look at the ratio of compensation to member. For example, if your CEO’s total compensation is $500,000 and you have 200,000 members you are only spending $2.50 per member or $.20 per member per month. However, having a compensation philosophy and a methodology for establishing CEO compensation is at the core of the issue of fairness and increased scrutiny.

(6)    What are some ways credit unions can reward executives and the CEO?

There are four components of executive compensation: base salary, short term bonuses, long-term incentives (retirement/retention) and perks. Most credit unions overlook the effectiveness of the long-term piece. You need to coordinate all four areas and all four areas should be linked to sustained achievement.

(7)    How can credit unions use the ECS survey?

Good decisions come from good information. Our survey can help guide them through a consulting process that is matched to their decision process. While our survey, which we provide free to anyone who wants it, is a great tool, you have to remember the analogy of building a house. You don’t build a house with just one tool: you use multiple tools. Credit unions should also use additional data from Callahan, the ABA survey, CUNA survey and CUES survey. Usually, a pattern of competitive compensation information will emerge.

(8)    How does ECS help credit unions with their services?

We have constant engagement with our clients. While the decision process belongs to the client, we can help the credit union develop or revise their compensation philosophy and evaluation methodology. We look at peer groups, regionalization, other industries and succession plans for credit unions.

(9)    What business books should every credit union professional read?

The Ultimate Question, by Frank Reichheld; Answering the Ultimate Question, by Richard Owen; Funky Business by Kjell Nordstrom, Merge, by William McDonald; Think Big, Act Small, by Jason Jennings and The Fifth Discipline by Peter Senge.  In my opinion The Fifth Discipline is the best business book ever written; it’s about how to build personal mastery and a growth focused culture.

Executive Compensation Solutions (ECS) is a client-focused consulting firm that brings innovative thinking to compensation and benefits issues with an exclusive focus on the credit union movement.  Their staff has a broad depth and range of experience that provides a comprehensive approach to the credit union challenge of attracting, retaining and rewarding key value creators while aligning the goals of the credit union and itsexecutives and its membership.  For more information, you can visit their website or download a copy of their Credit Union Executive Compensation Survey.

Comments

[Gregg Stockdale]

Hey Mark, Great stuff... My only problem is the survey. If everyone replies to the surveys and then bases their compensation off the survey, how do you break out? We all know boards are reluctant to give management items they don't have, so the survey is only the list of what was "allowed". There needs to be a standard. Well compensated should earn X for this matrix and Y for another matrix. It's not just asset size either. That can (used to be anyway) pumped up artificially. I like your "analytical measurement" of $/Members for larger cu's.