Five Questions Every Credit Union Board Should Ask Themselves When Developing Executive Compensation and Benefits

Most credit union boards are made up of unpaid volunteers.  These volunteers shoulder a tremendous responsibility in the governance of their credit union.  One of the key responsibilities of the board is to choose the right leader for that credit union, and to create a compensation structure that will meet the objectives of making the CEO happy while simultaneously serving the best interests of the credit union members.  In structuring a compensation and benefits program that will attract, retain, and reward the best and brightest, the board should ask themselves the following questions:

1. Who is our competition, and what might they do to woo our talent away?  Any credit union that has unexpectedly lost their CEO to another credit union or to another entity that they didn’t consider to be their competition knows how disruptive a sudden CEO departure can be.  Typically, the larger the credit union, the larger the competitive peer group.  Boards should not be lulled into thinking only about the other credit unions of similar size in their community.  They should consider other financial institutions as well.  For-profit banks can pay in ways that credit unions cannot, and competition for leadership talent can be fierce.  Your own senior management staff can be helpful in identifying who the comparator peer group should be.  Where has key talent that has left prematurely gone?  In assessing who the peer group should be, the credit union should consider not only its current size, but any growth objectives it may have as well, and which credit unions or other financial service companies might be of similar size or have similar objectives.
2. What is our compensation philosophy?  Good decision-making starts with knowing what you stand for.  In order to build a cohesive compensation and benefits package that makes sense in the long-term, the board should first work to define its compensation philosophy, and then commit that philosophy to paper.  By articulating what the credit union’s philosophy is on base pay, bonus, short- and long-term incentives, perquisites, and retirement income, the board creates a foundation for decision-making that serves as a guide long into the future.  Boards say, “We want to be fair, but we don’t want to give away the store.”  But what does that mean?  Does it mean that the credit union believes in pay at mid-point of its peers?  Does it believe in upside pay for upside performance?  The board needs to ask these questions and work to answer them until they can clearly articulate their philosophy.
3. How can we align our objectives for the credit union with the goals of the CEO and senior management team?  Presumably, the board has worked closely with the CEO to identify the most important goals of the credit union, and identify time horizons for those goals to be obtained.  By tying performance pay to the attainment of those goals, the board can align the interests of the credit union and its membership with the compensation package of the CEO and executive team.  Everyone rows the boat in the same direction.  If the credit union achieves its goals, the executive shares in the reward.  This type of performance-based incentive program works in both a short-term environment (annual incentives) and in a longer-term environment (long-term incentives and/or retirement income).  Long-term incentives may have the added value of serving as a retention tool, as the executive needs to stay with the credit union until a designated payout date in order to receive the benefit.  These goals can be a mix of both institution-level goals, and individual goals that fall directly within the purview of that executive.  The executive should see the goals as attainable, but not effortless.  Tying the goals to something the executive can directly impact makes the goals, and therefore the reward for achievement, meaningful.
4. What is uniquely important to our CEO?  Every individual has a unique set of circumstances, and there is nothing wrong with tailoring a package to the needs of a particular executive.  Perhaps your CEO has young children, and is concerned about saving for college educations.  In that instance, the development of a long-term incentive plan that is designed to make interim payments to the CEO at times when additional funds may be needed will not only address a specific need of that CEO, but will serve as an important retention tool as well.  Knowing that there is a payment out in the future, at a time when that payment is particularly helpful to the individual, will not only keep the CEO focused on the attainment of the goals needed to receive the incentive, but also retain him or her at the credit union while working toward that goal.  The same can be said of perquisites.  Your last CEO may have valued spousal travel as an important perquisite of the job.  But if the new CEO is unmarried, it is irrelevant.  A car allowance for a CEO who travels extensively between branches and on other credit union business may be an invaluable perk for one person, while viewed as unnecessary for another.  It’s okay to learn what’s important to your CEO.
5. How do we position our credit union for the future?  The average tenure of a credit union CEO is twelve years.  Even if your CEO is very happy and has no intention of leaving the credit union, things happen.  The board cannot be complacent about the reality of the need for a succession plan.  This means paying attention to not only the needs of the CEO, but also the development of the senior executive team.  If the board puts in the effort to understand the development needs and desires of the senior management team, it can support those interests in a manner that benefits both the individual and the credit union.  Components of the pay package should be supportive of that objective, whether that includes longer-term incentives, such as those suggested above, or paid educational and development programs that will make the executive that much more valuable to the credit union.

Such developments may make the executive more valuable to others as well.  This brings us back to knowing your competition and making decisions based on a compensation philosophy.  What goes around truly does come around.

A credit union board should make well-informed compensation decisions that address both the needs of the individual and the needs of the credit union.  It is possible to align the two.