In the Right Gear

Compensation is at the center of one of the most important decisions a credit union board will ever make—hiring and retaining a top-notch CEO. But directors undertaking this responsibility also need to understand the range of executive benefits and the need for a productive negotiation process.

First things first, a board hiring a new CEO will want to make sure it knows what the local salary market is paying for the top executive at an institution the size of yours—and get ready to pay, according to Charles Shanley, SPHR, executive vice president of JMFA Recruitment Services, Houston, a CUES Supplier member and strategic provider for executive search.

“It’s very common to have sticker shock,” especially if a board hasn’t hired a new CEO in many years, Shanley says. “If you don’t pay market (price), you’re not going to get market candidates.”

But to land the “complete package” of an experienced, talented executive who can succeed your current CEO and lead the credit union through economic and regulatory turbulence in a competitive marketplace requires, well, a “complete package” of salary, short- and long-term incentives, and benefits agreed upon in a mutually beneficial manner that gets this new relationship off to a positive start.

“What I’m seeing today is more of an ongoing negotiation. Executives aren’t afraid to ask, and boards aren’t afraid to say no,” says Scott Albraccio, executive benefits sales manager for CUNA Mutual Group, a CUES Supplier member and strategic provider based in Madison, Wis. Like Shanley, Albraccio says the board may be in for “an eye-opening experience” in learning about the range of benefits on the table, the structure and funding of compensation and benefit plans, and the development of a “bench” of executive talent.

Given the critical importance of its charge, the board may need to step back and consider carefully the combination of compensation and benefits most likely to attract a high-performing executive, says Deedee Myers, CEO of CUES Supplier member and strategic provider DDJ Myers, Phoenix.

“If you want to be strategic, it’s not just about compensation. It’s about establishing a rewards philosophy for your organization,” Myers says. “What do you envision down the road, and what kind of leader do you need to represent the best interests of your members in that future? Your strategic recruitment philosophy and rewards philosophy have to blend.”

Because many directors may be unfamiliar with pay and benefit practices in the industry, a recruiter or compensation specialist may be able to help them “know potential blind spots and remain current on trends in rewards,” she adds.

Map it Out

Developing a compensation philosophy provides a useful foundation for guiding decisions about executive pay, short- and longer-term incentives, and other benefits, suggests Tom Telford, principal with CUES Supplier member Burns-Fazzi, Brock & Associates, Charlotte, N.C.

Whether the board opts for a broad or detailed statement, a compensation philosophy should reflect credit union size, financial performance, the norms of the region in which the CU is competing for talent, and retention goals, typically translated into a percentile range of industry salary survey data and often accompanied by a list of benefits and the basis for incentive pay and bonuses. As such, this statement becomes “a roadmap for all future hiring decisions,” Telford notes.

In working with boards to develop offers for new CEOs, Myers has seen a variety of benefits offered and suggested by executives. Long-term disability coverage for executives on the job and even into retirement is starting to be on the table, even though resistance remains in some boardrooms—and even from CEOs themselves, who don’t feel comfortable accepting perks that are not offered to other executives on their teams. However, “chief executives do have a different role than direct reports and are on the line for the entire financial organization’s risks and rewards,” she notes.

Other benefits might include additional paid time off; annual physicals; cars or car allowances, especially for executives involved in community outreach; and financial planning assistance separate from that offered by the credit union to its members.

Another possible benefit is a sabbatical after, say, 10 years on the job. “A respite from daily operations for one to three months could be for research, writing, or professional development” where the executive comes back with a board presentation on what was learned, Myers suggests. “Or it could be just an opportunity to step away.”

Candidates may also be interested in other benefits, such as an executive carve-out plan designed to provide long-term care insurance; spousal travel; and country club or private club memberships, especially with organizations that will help the new CEO connect with the member community.

“The board should be prepared going into a discussion with a top candidate about what the industry norms are and what their peers are doing in terms of total compensation,” Telford says. “In my opinion, where they get it wrong is that they don’t have an open conversation. At the very least, the board chair should be talking with leading candidates, asking ‘What are your expectations?’”

Many candidates are savvy about the range of executive benefits and may have specific preferences based on their research or compensation at a current or previous position. Asking about those preferences up front avoids the trap of just offering a candidate the current CEO’s salary plus a slight raise, Telford says.

CEO offers that JMFA Executive Search helps boards send out are typically one page long and travel to the candidate as an email attachment, Shanley says.

“Some things are not completely listed in the initial offer letter, but need to be mentioned in it,” he adds. For example, most offers will specify a particular base salary and whether a supplemental retirement plan will be put in place. It might also say that bonus pay will be determined based on the achievement of goals set and weighted later by the board and CEO—or that an employment agreement or contract will be put in place at a later time to protect both the employee and the CU.

Additionally, Shanley notes, most offer letters will discuss how the CU will handle relocation support services. For example, the candidate, upon accepting the offer, would get three bids for moving their household, and the CU would select and pay one of the bids. The offer may also specify whether a house hunting trip or temporary housing would be paid for by the CU. The problem with giving a lump sum for all relocation is that you never know if that number is not enough or too much. It is also taxable income to the candidate.

While each offer is a little different, “the ones that we do are very similar to each other,” Shanley says. This is because keeping offers concise and fairly straightforward reduces post-offer negotiating. Plus, “putting in place a SERP or an employment agreement is a lengthy process,” he adds. “It would take too long to outline the specifics of those in an offer letter, but it does need to be mentioned in the letter that a plan would be put in place in X amount of time—six  months to a year, maybe.”

While parts of an offer may be complex to implement, he adds, “making an offer isn’t rocket science in and of itself; you don’t want to overcomplicate it.”

From Offer to Acceptance

When the board has settled on a top candidate and is ready to make the offer, a face-to-face presentation, with the details set out in writing ready for the prospective CEO’s review, can be a solid next step, according to Bill Stevenson, senior consultant with ProCon Group.

“That’s the opportunity to reinforce ‘why we want you to come and join ABC Federal Credit Union, and here’s what we are prepared to offer you,’” he says.

The fundamental constructs of the package are usually in place by this time, based on the board’s planning and general discussions about compensation and benefits during the interview process, though there may be final negotiations for a few add-ons, the start date, and other details.

“It’s perfectly fine as a part of the pitch to serious candidates to give them an idea of your benefits package, and you’ll likely get clues or prompts from candidates who might say, ‘I have in my current position this benefit…’ or ‘Have you considered … ?’” Stevenson says.

The ideal is that the first offer is accepted by both parties, which is typically the result of multiple pre-offer conversations about expectations. If there are details to work out, a board working with a recruiter might consider leaving the final negotiations to that partner, Myers suggests.

Typically, she says, the first call to the top candidate comes from the board chair, who might say something like, “We think you’re the stand-out candidate. Now we’re moving on to the next stage, and we’re relying on our recruiter to go over the details of the offer with you.”

Before that point, the board should already be familiar with what levels of compensation and benefits executives are drawing in current market conditions, what expectations top candidates have, and how the credit union’s financial performance and the demands of the open position will shape the offer. In other words, she suggests, “you should know what Jeff or Mary is going to say yes to.”

Toward that end, DDJ Myers often develops a minimum three- to five-year track record of candidates’ salary and incentive compensation, with an emphasis on how executives contributed to their existing or previous organizations to earn their bonuses. That assessment focuses on tangible results and whether the criteria for incentives at other organizations emphasized tactical or strategic gains. The recruiting firm may also do a “deeper dive” with the top candidates about their goals and salary and benefits expectations over two or three conversations.

“If we know what the CEO candidate is currently making, especially if she or he is being fairly compensated, that’s a good place to start,” Myers adds. As a result of those discussions, “the candidate might have a counteroffer, but by that point, there should be no big surprises—just a matter of fine-tuning from the board’s and the CEO’s point of view.”

A trap to avoid is thinking that an internal candidate will be happy with less than an external candidate, Shanley cautions. “Whether an internal or an external candidate is chosen, you can’t think about what a senior executive makes now, and then offer an increase of a few percentage points” to become CEO. “They won’t be satisfied with that.”

Especially when a credit union makes an offer to an executive coming from a bank or another financial cooperative, he or she might push back a bit to raise the board’s awareness about expectations based on prior compensation. The aim is not to be adversarial, but the interactions might take on that air if there are multiple back-and-forth written offers. As an alternative, Telford suggests that if a candidate has questions or counteroffers to the board’s first proposal, a conversation might be a simpler and more effective route to start the relationship out right.

Compensation plans and regulatory issues are constantly changing, so directors with committee duties related to executive compensation and benefits need to stay informed, he adds. “Compensation is a process—and a key part of running the business.”

Eyes on the Future

Agreeing on a recruitment strategy, a rewards philosophy, and the mindset that the CEO’s compensation and benefits package is an investment in leadership talent is a process that may take some time.

“If your CEO is retiring in three years, this is the year to start having that conversation,” Myers says. “Many boards are saying, ‘We don’t know when our CEO is retiring, but our CEO is 62 years old.’ It’s the board’s responsibility to manage risk, and CEO turnover represents a huge risk. So it is appropriate to request one or two years notice for retirement and then invite your CEO into the conversation” about succession planning, recruitment, and compensation.

Many experienced executives have likely discussed long-term compensation options and tax implications with their own financial advisors. Boards—especially those that haven’t hired a chief executive in a decade or more—should do the same, Stevenson recommends.

“They don’t do this frequently, hopefully, and things change over time, so the board can benefit from professional assistance to put together a cohesive package that makes sense to the person they’re making the offer to,” he notes.

To set the stage for just a few of the mindset shifts that may be necessary throughout this process, Albraccio cites a recent CUNA study projecting a 17 percent turnover rate among credit union CEOs over the next five years and 50 percent over the next decade. One implication is that the board should be prepared to negotiate with younger executive candidates more interested, at least initially, in shorter-term rewards over their first seven to 10 years with the organization than in retirement funding.

In this environment, the board will also need to work with its new CEO to develop retention and succession strategies to protect the CU’s intellectual property, in the form of the professional development of its executive team. Developing long-term compensation benefits to aid retention of key executives other than the CEO provides “safety and a cushion for everyone involved” whether the next CEO is hired from within or needs to rely on a solid team when joining, Albraccio says.

Once a new CEO is hired, risk-based capital rules proposed by the National Credit Union Administration may complicate investment options to fund the executive compensation plan, which will likely lead to another “very complex conversation” with investment advisors, he adds.

“We try to break it down to its most basic elements, talk through the options, and weigh the pros and cons,” Albraccio explains. “The fundamental question is: What do you want the plan to do? Is your primary aim retention or retirement? First you determine your objective, and then the funding mechanism will follow.”

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