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Increases in salary and bonuses for credit union CEOs over the past year averaged 5.7 percent, according to the 2015 CUES Executive Compensation Survey. That’s not bad. But for the first time since 2011, year-over-year compensation hikes have declined.
The average base salary for chief executives reported in the same-sample survey (limited to credit unions participating in both 2014 and 2015 to more clearly indicate trends) was $293,765 for the year ending April 30, 2015, compared to $280,919 in the previous year’s survey, a 4.6 percent increase. Average base plus bonus compensation increased to $346,066 in this year’s survey, up from $327,458; and total compensation for 2015 was $355,595, up from $336,970.
While lower than the average increases of the past three years, the rates for CEO salary and bonus increases reported in the 2015 CUES survey “still significantly exceed the projections we’re seeing in the market and the economy as a whole, particularly for financial institutions,” says Scott Dettmann of Carlson Dettmann Consulting, Middleton, Wis. He cites data from WorldatWork projecting salary boosts for executives in the financial sector at just over 3 percent for 2014-15.
After traditionally lagging behind salaries paid to community bankers, credit unions have moved into relative parity in recent years, at least for base pay, Dettmann notes. Bank CEOs still stand to earn considerably more in bonuses, with the potential for annual incentive pay of up to half of their salaries, compared to an average of under 20 percent of base pay for the largest bonuses awarded to credit union CEOs.
Hazarding a guess about the rationale for lower increases this year, he theorizes that boards may be taking a more realistic look at the wider market and what level of raises are necessary “to keep executives in place and keep them motivated.”
“Over the years, we have witnessed a consistently wide disparity between the salary increases and bonuses boards say they expect to award their chief executives in the coming year and the actual raises. Oftentimes the actual pay raise has been about double the anticipated amount in past years,” Dettmann says. “The actual salary increases and bonuses over the past year may just be more in line” with the actual increases and bonuses that actually take place.
In reviewing data from the CUES report and other salary surveys, directors should keep in mind the differing perspectives offered by median and average salaries and by different samples, he recommends. Median salary numbers typically are the best indicator of the middle of the market, while averages, especially from the “independent sample” reported in the CUES survey, are more sensitive to changes in the composition of the group, such as shifts in the relative number of smaller or larger credit unions participating in the survey.
While the “same sample” data shown in Figures 1 and 3 include only credit unions that participated in both the previous and current survey, the independent sample is not controlled in that way. But the independent sample is still useful in quantifying trends across the industry.
“They’re all pieces to the puzzle, and directors need to assemble them carefully and understand what they’re dealing with,” Dettmann adds.
For other executive positions included in the survey, the median base plus bonus increases in the same-sample group ranged from a 10 percent raise for business lending executives (to $129,297) to 0.3 percent hikes for branch/member services executives (to $121,096) and senior CUSO executives (to $157,206). All the executive positions covered in the survey are included in Figure 3, below.
Retention in Mind
Among the useful information in the survey for directors involved in executive benefits planning is the upward trend in the percentage of credit unions offering supplemental executive retirement plans (SERPs) to CEOs. More than half (52.8 percent) now have a 457(b) plan in place, and 39 percent offer a 457(f) plan; 22.9 percent are enrolled in a defined benefit plan. In 2014, 43.8 percent had a 457(b), 34.1 percent had a 457(f), and 27.9 percent were enrolled in a defined benefit plan.
“This is a good indication that more CUs are viewing these benefits as a standard practice as opposed to an exception,” says John Pesh, director of executive benefits programs with CUNA Mutual Group, a CUES Supplier member and strategic partner based in Madison, Wis.
On the potential for significant turnover in executive ranks, Pesh cites recent data from the Credit Union National Association, Madison, Wis., that 17 percent of credit union CEOs plan to retire in the next five years, and more than half (52 percent) are eligible to retire in the next decade. He has been following these trends for some time, and they have been fairly static, which suggests fairly consistent turnover. It’s an ongoing issue rather than a short-term concern, he suggests.
Open communications between the board and CEO on an executive benefits plan that reflects the credit union’s strategic aims is a way to alleviate concerns about disruptions that may occur when key executives depart, Pesh says.
“Executive benefits planning helps with the entire process of business planning,” he explains. “It’s important for any given credit union when they’re talking about how they’re going to manage their business plan over the next five to 10 years. They have to talk about what their plan is for their executive leadership team. How will they maintain consistency in their decision-making processes and maintain strategic alignment with all parties, knowing there is potential for turnover among those parties?”
An executive benefits plan contributes more certainty to long-term business planning, he adds. “If you’re asking an executive to stick around for the next five years and can dangle a reward for doing so, that helps to add teeth to the plan.”
That’s a prime reason why the number of credit unions offering 457(f) plans is on the increase—because they add extra incentives to ensure continuity in leadership.
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Observations From 2015 CUES Executive Compensation Survey Eighty-five percent of CEOs were eligible for bonuses, up from 78.5 percent in 2014. The average bonus in this year’s survey worked out to 13.8 percent of base pay, compared to 12.9 percent the previous year. Reflecting a long-standing trend, the larger the credit union, the more likely the CEO is to receive a bonus; the bonus-to-salary ratio also increases with asset size. About 60 percent of chief executives at credit unions with less than $30 million in assets were eligible for bonuses over the past year, and bonuses paid in that tier averaged 2.3 percent. In comparison, 92 percent of CEOs of $1 billion-plus credit unions were eligible for bonuses, and their incentive pay averaged 19 percent of base salary. CU earnings were once again the most common key performance indicator, with 60.3 percent of participating credit unions citing this factor in determining incentive pay (compared to 61.2 percent in 2014). More credit unions cited a reliance on board evaluations as a top factor, with 59.5 percent this year compared to 54.5 percent in 2014. Loan growth was cited as a key indicator by 47.3 percent of credit unions (46.2 percent last year). The most common benefits offered to CEOs are supplemental life insurance (39 percent), medical insurance premium reimbursement (27 percent), split-dollar life insurance (21 percent), and supplemental disability insurance and executive long-term disability coverage (12.5 percent each). More than 9 in 10 CEOs (95.5 percent) were enrolled in a 401(k) plan over the past year. |
“It’s vitally important for boards to understand executive compensation and what the trends are,” he adds. There’s a lot of information out there accessible to both boards and executives. It’s much easier for executives to compare pay and benefits across the financial services industry, with insurance and banking as well as other credit unions. And aspirational executives looking to move up in the credit union movement can compare compensation practices in their own asset range and up a tier or two. “They may not be content to stick with a $250 million credit union. They may want to move up to a $500 million organization.”
Directors need to be aware of the availability of compensation data and how it may drive the aspirations of high-performing executives, Pesh concludes. At the same time, boards at larger credit unions might be looking at high-performing executives in lower asset tiers, trying to recruit talent for less. So credit unions may be competing not only with peers in the same asset range to stave off efforts to recruit their executives but also from the next asset range up.
“Part of the conflict is that it’s difficult for CEOs who are aware of executive benefits trends to go to the board and say, ‘Hey, we should do this’ without seeming self-serving,” he adds. “It may be in the best interests of the credit union, but if it appears self-serving, the board may forego taking these steps because of that perception. It’s important for board members to be proactive in getting educated about these options so they can initiate that planning rather than the executive.”
The average turnover for CEOs and other high-ranking executives is five to seven years, Pesh notes, so boards need to revisit this regularly to assess the impact of market and regulatory changes; they should be working with an experienced, knowledgeable partner on these plans.
Compensation Decisions
Industry Insights, Dublin, Ohio, administered the CUES survey and, for the second year, conducted a statistical analysis of the survey data to pinpoint variables that have the most consistent and significant impact on executive compensation decisions in the CU industry: asset size, the number of years the executive has worked in financial services, highest level of education, and Certified Chief Executive (CCE) designation.
Taken together, these four factors account for 79 percent of the variability in total compensation for CEOs and also correlate strongly with pay and bonuses for other executives: 75 percent for chief lending officers and second executive officers, 74 percent for chief operations officers, 72 percent for executive vice presidents and chief financial officers, and 71 percent for information systems/e-commerce executives.
That these variables influence compensation awards may not be an unexpected finding, but the analysis quantifies how each factor increases compensation across the industry. In terms of credit union size, a CEO’s salary is typically 0.42 percent higher for each percentage point his or her credit union’s assets are greater than another credit union’s. A similar relationship of asset size to salary was found among other executives. For chief lending officers, for example, the variable by asset size is 0.30 percent.
Along the same lines, each additional year of experience in the financial services field adds 0.6 percent to a CEO’s total compensation. This effect was strongest for chief operations officers, who typically earn 1.2 percent more for each additional year of service, and second executive officers, who earned 0.8 percent more. Among the CEOs participating in this year’s survey, more than four in five (82.7 percent) have worked in this field for more than 20 years.
In the area of education, CEOs with a four-year college degree typically earn 10.7 percent more than peers with a two-year degree or high school education. Chief executives with a master’s degree earn 10.5 percent more, with an MBA 13.5 percent more, and with a doctorate 16.2 percent more. Among CEOs included in the survey, almost half (48.8 percent) reported a bachelor’s degree as their highest level of education; 14 percent have earned a master’s degree, 21.8 percent an MBA, and 1.3 percent a doctorate.
Achieving the CCE designation for completing CEO Institute returns a typical premium of 7.9 percent for CEOs, 12.2 percent for chief financial officers, and 4.3 percent for chief lending officers. Among executives surveyed, 18.5 percent of CEOs have earned this designation, along with 7.3 percent of chief financial officers, and 5.3 percent of chief lending officers.
The statistical modeling of the survey data related to the CCE designation shows “the value that it adds to executives in terms of their development as potential credit union leaders is recognized in a significant bump in pay for those with the designation,” Pesh notes. This finding supports the benefits of continuing education to CU leaders.
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, Middleton, Wis.
