In the glass half-empty/half-full analogy, compensation increases for credit union executives in 2010 are down compared to last year’s modest raises, but looking good beside the salary and annual bonus hikes in the banking industry.

However, achieving parity with banking executives in the realm of short-term compensation will not allay a looming crisis for credit union employees from the leadership team to the front lines to the back office: that of setting aside adequate retirement savings, warns Charles E. Carlson, strategic consultant with Gallup, Inc.  enetrix, a Madison, Wis.-based division of Gallup, conducts the CUES Executive Compensation Survey.

Based on this year’s survey results, it seems likely that annual salary and bonus adjustments reflect the impact of the economic downturn on credit union performance and caution about the pace of the economic recovery. As in past years, credit unions participating in the survey identified earnings, board evaluation and loan growth as their top criteria for setting CEO compensation.

The rate of salary and annual bonus increases for credit union CEOs continued a slide that began in 2007. The increase in base salary averaged 3.62 percent for 2010, compared to 5.37 percent in 2009, 7.11 percent in 2008 and 8.02 percent in 2007. Base salary raises peaked for the decade in 2006 at 8.5 percent. (See Table 1.) Similar to base salary, base plus bonus compensation increased 2.54 percent in 2010, compared to 4.76 percent, 7.34 percent, 8.5 percent and 9.58 percent in previous years.

In terms of total compensation for CEOs of the 573 credit unions reporting salary data for their chief executive in this year’s survey, the 2.39 percent increase this year is less than a quarter of the 9.75 percent average posted in 2006; the rates for intervening years were 4.87 percent in 2009, 7.38 percent in 2008 and 8.81 percent in 2007. Average total compensation for CEOs ranged from $90,949 at credit unions in the $10 million to $19.9 million asset range up to $472,057 at $1 billion-plus credit unions. The overall average for CEO total compensation in the 2010 survey was $246,503.

For executives other than the CEO, average increases in total compensation ranged from 1.22 percent for business lending executives to 5.17 percent for chief operations officers. In dollars and cents, executive base salaries and bonuses ranged from a median $71,403 for collections officers and $92,510 for business development executives, up to $156,476 for senior credit union service organization executives and $161,961 for executive vice presidents.

Credit Union/Bank Comparisons

Earlier in the century, the CUES Executive Compensation Survey began including a comparison of credit union annual pay and bonuses to those in the banking industry. The wide chasm in salaries and short-term incentive pay between the two sectors of the financial services industry narrowed only slowly in the early years of those comparisons. However, the gap narrowed and, for some positions and asset ranges, actually closed with the banking crisis of 2008-09.

“There’s more correspondence than probably we’ve ever seen before between credit union and bank executives’ compensation,” Carlson says. “But it’s important to clarify that using the term ‘total compensation’ in the CUES survey comparison doesn’t cover all compensation.”

The comparison covers total direct compensation, including base pay and short-term incentives, but leaves out the increasingly important component of long-term compensation and retirement benefits, he notes. Community banks may have a much more aggressive long-term incentive program than credit unions.

As Table 2 shows, CEOs of larger credit unions, those with $250 million or more in assets, actually surpassed their community banking peers in terms of both base salary and annual bonuses, on average. The compensation data used in these comparisons are not limited to the same financial institutions year after year, but the broad trends are interesting. Comparing base salary only, CEOs of smaller credit unions (those with less than $100 million in assets) are earning a median $105,517 this year, while the chief executives of similarly sized banks are earning $124,250. The gap was much larger in 2005: $88,197 and $112,756, respectively.

Among the largest financial institutions, credit union CEOs are earning a median base salary of $390,270 while their banker peers are earning $389,400. In 2005, the median pay was $320,952 and $352,631, respectively.

Credit union-bank comparisons for other positions show mixed results. In terms of total compensation, chief operating officers and chief financial officers tend to earn less than their banking counterparts at the lower and upper ends of organizational size but have closed the gap and even surpassed median compensation among financial institutions in the $500 million to $999 million range.

For example, in the $100 million and under asset range, the median compensation for credit union COOs is $78,934, compared to $88,268 for bankers. In the $500 million to $999 million range, the respective pay is $156,485 to $147,250. For CFOs in the same ranges, the comparisons are $71,415 to $98,125 and $160,831 to $148,000.

Short- vs. Long-Term Incentive Pay

As in the recent past, larger credit unions tend to pay higher bonuses to their chief executives as a percentage of base pay than do smaller organizations, ranging from a 5 percent bonus for CEOs of credit unions with less than $20 million in assets up to a 21 percent bonus at credit unions in the $1 billion-plus range. That worked out to a median annual bonus of $4,134 for CEOs of smaller credit unions, in comparison to $70,358 at the largest financial cooperatives. The median bonus for all asset sizes for 2010 is $25,950.

Carlson cautions that solving the problem of direct compensation in credit unions is likely to create a follow-on issue of having adequate replacement income at retirement. In comparison with the banking sector, credit unions tend to offer benefits that are much more equitable across employee ranks, with similar contribution levels for all staff, he notes.

“When you rapidly increase the rate of executive pay in the years before retirement, there may not be sufficient funds in retirement programs to come close to replacement income,” Carlson says. That shortfall has a variety of causes, from the way U.S. pension laws are designed to limit tax-deductible retirement funds for highly paid staff, to the shift over the last generation from defined benefit to defined contribution retirement plans, to the aging of our industry’s executive ranks, to the vagaries of the stock market over the past decade. “All of a sudden, you have a huge funding problem—huge,” Carlson warns.

He sees real challenges ahead in dealing with the retirement funding issue. “I think we’re now dealing with a couple of generations of people coming up who will not be able to retire financially. Their savings just aren’t adequate, and the societal safety net is full of holes.”

Given the corporate financial scandals that opened this decade and the rocky economy ever since, sensitivity to the size of executive compensation packages may be at an all-time high—and salary and bonus trends in the not-for-profit sector have not escaped scrutiny, Carlson says. Credit unions and other nonprofits are now required to file detailed reports on executive compensation, and database services are compiling those reports and making the information available for public review.

Increased transparency coincides with tougher regulatory requirements that boards be adequately informed about executive compensation management and have a strategy for more objective compensation decisions. As a result, directors will likely be devoting more time and energy to pegging executive compensation to long-term organizational performance.

“Clearly, credit unions are a critical part of the financial services industry, and many people may see them as even more important than they were before the downturn. They now may command a superior competitive position,” Carlson notes.

“At the same time, credit union boards face the challenge that we must measure total compensation, and we must understand what workforce management looks like going forward—and retirement and succession planning are a key part of that equation. The key is going to be making sure we measure and adequately compensate for the true contributions in the short and long term.”

Note: Under a rule proposed by the NCUA on July 29, federally insured credit unions that are insolvent, in conservatorship or have ratings of CAMEL 4 or 5 would be prohibited from offering golden parachutes to their executives.

Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, based in Stoughton, Wis.