August 30, 2010

If you view executive compensation trends as a reflection of the financial services industry in particular and the American economy in general, it would be fair to characterize the first 10 years of this new millennium as the decade that began with a roar and ended with a grumble.

According to the 2010 CUES Executive Compensation Survey, the rate of CEO salary and bonus increases continued a downward trend that began in 2007 with the first twinges of a nationwide financial crisis. But a closer examination of compensation trends reveals a more nuanced view of how the credit union industry fared during the recession. For one, most credit unions did grant their CEOs and other top executives both salary hikes and bonuses, albeit at a more modest pace. For another, 2010 marks the year that average direct compensation for credit union executives achieved near-parity with their community banking peers in terms of annual salary and short-term incentives.

From that latter trend, says Charles E. Carlson, Strategic Consultant with Gallup, Inc., it’s fair to conclude that credit unions have “a very competitive position in direct compensation in the financial services marketplace.” But he quickly cautions that credit union boards and executives face a continuing challenge in the coming decade and beyond—designing long-term compensation programs that adequately prepare aging execs for retirement.  

enetrix, a Middleton, Wis.-based division of Gallup, conducts the CUES Executive Compensation Survey. Survey results show, for the most part, increases from 2009 to 2010 (note that these asset categories are not matched for year-to-year survey participants, so some discrepancies may be reflected in credit unions changing asset ranges):

CEO Median Base Salary & Bonus Comparison

       
Across the board for other members of the executive team, the rates of increase for total compensation were lower than the change from 2008 to 2009, reflecting the impact of the economic downturn on organizational performance: (note that these asset categories are matched for year-to-year survey participants):

The base salaries and bonuses of executives other than CEOs for 2010 ranged from a median $71,403 for collections officers and $92,510 for business development executives, up to $156,476 for senior CUSO executives and $161,961 for executive vice presidents. (Note that these asset categories are not matched for year-to-year survey participants, so some discrepancies may be reflected in credit unions changing asset ranges).

The survey’s side-by-side comparison of credit union and bank executive compensation may provide some evidence of how these two sectors fared during the economic downturn. Especially among larger financial institutions, the accompanying chart shows that reported median salary and short-term bonuses for CEOs of community banks have declined significantly since 2005 while annual salary and incentive pay for credit union CEOs has made steady gains. In effect, the executive pay trends for credit unions and community banks, especially among mid-sized and larger institutions, are meeting in the middle. These trends provide only a big-picture view as the data are not drawn from the same financial institutions year after year, but they do paint an interesting picture.

Additionally, the comparison of total direct compensation leaves out the increasingly important component of long-term compensation and retirement benefits, Carlson notes. Community banks may have a much more aggressive long-term incentive program than credit unions.  

Total compensation = salary + short-term bonus. Source: Credit union data from the CUES Executive Compensation Survey; banking data from the Independent Community Bankers of America Compensation Survey and American Bankers Association Compensation Survey

Overall, despite the steady gains credit union executives have made in short-term compensation, Carlson warns that boards and executives of financial cooperatives face the pressing challenge of funding retirement programs that will produce replacement income in retirement at adequate levels. This dilemma is exacerbated by complex pension laws that restrict tax-deductible retirement funding for highly paid staff, the shift from defined benefit to defined contribution retirement plans, and the depletion in value of stock-based long-term compensation programs as a result of the financial crisis and recession at time when many executives are nearing retirement age.  

“I think there has been a tendency in our economy to undervalue the security of employment, to overvalue direct pay, and to not adequately understand the importance of retirement funding,” he says.

As a result, Carlson warns, the whole nation needs to shake up its compensation outlook—especially when it comes to retirement savings. “The economics are going to be brutal in terms of the retirement outlook,” he says.