Goldilocks and Executive Pay

Whether you view Goldilocks (of fairy tale fame) as a juvenile delinquent guilty of breaking and entering, or a precocious bon vivant, there’s something to be said for getting it “just right.” When it comes to executive pay, is it possible to get it just right? Yes, and no.

The process of getting it just right begins with understanding where you are today. Assessing executive pay starts with benchmarking total compensation against the market and peer group. Total compensation includes four important elements: base salary, annual bonus or incentive, strategic long-term incentive, and perquisites. These elements reflect the board’s values and act as levers to achieve the balance between the retention needs of the credit union and the compensation needs of their executives. Benchmarking helps a board understand if their executive is underpaid or overpaid, and what it would cost to replace that executive in today’s market. In other words, is your porridge too hot, too cold, or just right?

Executive Pay is an Investment 

Executive pay is tied to your ability to retain key leaders. And retention is the foundation of your succession plan. It’s a necessary business expense, but you’ll get more out of it if you view it as an investment in the future of your credit union.

You can maximize your investment with a ratio of fixed to variable pay that rewards high achievers. For example, setting total cash as 70% salary (fixed) and 30% target incentive (variable) means nearly a third of the take-home amount is based on achieving annual performance goals. Pay-for-performance models can be highly effective when properly designed and managed.

Your investment should reward loyalty and service. Nonqualified benefit plans are commonly used as long-term incentives or retirement benefits. Using a vesting schedule supports longevity while protecting the credit union.

Executive Pay is Related to Asset Size, But …

Although asset size is the primary driver of compensation, there are several other important considerations when assessing executive pay. Individual performance is the next important consideration. Other considerations include organization performance, years in the role, total years at your credit union, organizational complexity, recruiting difficulty for your market, and regional pay differences, to name a few.

The pressure to retain and recruit Chief Executive Officers is driving higher compensation. This pressure comes from a renewed focus on succession planning amid an aging talent pool. Many boards will soon be faced with filling a CEO vacancy as three in ten credit union CEOs are aged 60 years and older.  Competing for top tier candidates comes at a higher monetary cost, but don’t forget the power of what makes your organization unique: work-life balance, mission, the opportunity to make an impact, and culture.  

Benchmarking Resources

There are several industry executive compensation and benefit surveys available that provide data as a starting point for discussion. To help understand the data behind the data, boards should engage a consultant. Using a third party, experienced, and objective partner helps boards navigate the issues—and emotions—that come with setting executive pay. 

Sticker shock is inevitable when a CEO has been at the helm for a long period, such that a board has not had to deal with recruiting in recent memory. Your consultant can help a board manage the nuances of their organization’s needs and limitations. A fair and competitive compensation package signals the board is in partnership with, and invested in, their executive.

Your consultant will evaluate each element of total compensation and show how it compares to credit unions of similar profiles. Banking executives have a different compensation structure but in some cases, it is useful to include banks in the comparison. The consultant can evaluate CEO compensation, the rest of the C-suite, or the entire leadership team. 

Proceed with Caution

The NCUA examiner’s guide cautions against unsafe and unsound compensation practices. One such example is “Compensation arrangements that significantly exceed compensation paid to persons with similar responsibilities and duties in other insured credit unions of similar size, in similar locations, and under similar circumstances, including financial health and profitability.”  A thoughtful and thorough approach will help you avoid running afoul of the intent here.

More importantly, the membership’s best interests should guide a board’s decision on executive pay. In particular, the long-term viability, competitive strength, and ability to serve members are directly related to your executive talent. To come up short, may not yield optimal results. 

Getting it Right

For CEO pay, boards should engage a consultant to help navigate sensitive and nuanced issues. Your consultant has access to additional data not available in salary surveys and offers an objective perspective. They can educate the board on current trends and methodologies. As soon as you know you will be recruiting for a new CEO, get started on learning what the current market pay is. Document your decisions so future board members will have a reference point. 

As for the rest of your executives and leadership, retaining a strong team should also be a priority. The effectiveness of your succession plan depends on retaining key individuals in critical roles. Credit unions should engage a consultant to benchmark each position to understand the retention risk.

Consider an annual bonus or incentive with a formal structure, such as a scorecard. This helps align executive performance with the board’s strategic goals. An informal structure, meaning a bonus is given at the board’s discretion, may not consistently recognize strong performance. 

Don’t forget about perquisites. These can be customized to the executive’s preferences. Non-cash benefits like executive long-term care have a high perceived value with the likely need for such assistance and rising healthcare costs.

Summary

When it comes to setting executive pay, you don’t have to run out into the street screaming like Goldilocks. It’s as much art as it is science, but you can get it just right with the right data, partner, and mindset. 

Liz Santos, Chief of Staff, Gallagher Executive Benefits Team has consulted with credit unions, trade associations, nonprofits, and financial services organizations to achieve their strategic goals for more than 20 years. She supports the service teams as well as develops client communications and educational resources for the Executive Benefits team. Liz also oversees research projects such as the annual Gallagher Executive Compensation and Benefits survey.

2024 Gallagher Executive Compensation and Benefits Survey Report
NCUA Examiner’s Guide, Chapter 7-22