August 2, 2010
As volunteers in a member-owned organization, credit union board members may have little or no experience in setting executive compensation. At the same time, they are competing for executive talent with corporate boards full of CEOs who know this territory well.
Salary levels may be the easiest variable to set, starting with industry salary surveys such as those available from CUES and the Credit Union National Association. Health insurance and 401(k) plans come in fairly standard packages—the biggest issue with them is finding providers with a track record of excellent service.
Perhaps the most difficult part of the executive package to determine is the supplemental benefits that allow credit unions to compete with for-profit institutions.
Credit unions can’t provide stock options. Defined-benefit pension plans are waning. That’s why such benefits as deferred compensation plans and supplemental insurance may be necessary to tip the scales in a credit union’s favor.
Here are some steps to follow when considering supplemental benefit plans:
1. Put the cost into perspective. The National Credit Union Administration’s benchmark for a sound capital-to-asset ratio is 7 percent. The average credit union is doing significantly better than that, averaging 9.87 percent through the first quarter 2010. While there are not currently strict regulatory guidelines, other than safety and soundness considerations, your credit union can consider allocating up to 10 percent to 15 percent of its capital to investments that will finance executive supplemental benefit plans. Chances are that leaves room for a greater investment in your leadership. And when you factor in the potential cost of replacing leaders, the bottom-line impact of supplemental benefits may be negligible.
2. Measure the retirement gap. What percentage of your CEO’s salary will be replaced by your credit union’s retirement plan? A typical 401(k), if the CEO contributes the maximum, might generate 25 to 30 percent of his or her final income. According to a 2004 study conducted by Aon and Georgia State University, retirees will need 75 to 85 percent of their final income during retirement to preserve their lifestyle. Should a credit union be responsible for closing that entire gap? Not necessarily. But it’s useful to quantify the gap, and do what you can to close it.
3. Identify specific needs. Supplemental benefits don’t have to be the same for every executive. Some executives may place the most value on a 457(b) or 457(f) deferred compensation plan. Others may have a greater need for additional life or disability insurance. Long-term care insurance is more often being used to preserve nest eggs from medical costs not covered by Medicare. Tailor packages to fit the needs of each individual.
4. Include your best executives. Losing a CEO to a competitor is costly, but so is losing the people who could hold the job next. Supplementary benefits can strengthen your succession plan and preserve leadership quality and continuity.
One mistake some credit unions make is not considering these things until they’ve lost someone who’s very hard to replace.
Remember, our industry is blessed with many leaders who would never go to the board and ask for a more robust compensation and benefits package. It just isn’t their style. But that doesn’t—and shouldn’t—prevent anyone from listening to a better offer. The best-case scenario for these leaders is when the better offer comes from their own credit union.
Gene Zumwalt is a director in CUNA Mutual Group’s Executive Benefits department. If you have questions about the information in this article, please contact him at gene.zumwalt@cunamutual.com, or at 800.356.2644, Ext. 8859.
