Balance Interests When Determining Executive Perks

CEOs must assess their own needs while keeping CU goals in mind.

IT'S A GIVEN THAT competition within the financial services industry will heat up as the economy improves. But credit unions increasingly are aware that the competition won't be limited to vying for more members. It also will mean competing for good leadership.

Creating competitive CEO compensation packages will include taking another look at perquisites, or perks, along with executive benefits.

When companies' extravagant compensation packages grab headlines, executive perks become a source of embarrassment. That-along with the 2002 Sarbanes-Oxley Act, which makes boards and committees of public companies more accountable for financial transactions and auditing procedures-is causing companies to reexamine the perks they offer their CEOs.

The perks picture will change, according to the Credit Union National Association's (CUNA) 2004-05 CEO Total Compensation Survey report.1 Companies of all sorts will offer fewer controversial perks, such as corporate jets and club memberships. Instead, they'll focus more on helping CEOs balance work and home life, offering cash allowances for travel or tailored retirement packages.

Credit unions, while seeking to offer competitive perks, likely will follow the trends in providing lower-profile compensation packages-good for the membership and for the CEO.

According to the survey, about 90% of credit unions with $100 million or more in assets either provide their CEOs with vehicles or reimburse CEOs for use of their own cars. Beyond that, 90% of CEOs in the survey can receive one or more additional perks.

Cell phones are by far the most common perk (offered by 80% of the credit unions surveyed), while paid spousal travel for business meetings is the next most common (58%). More than a third of the credit unions (35% to 45%) offer textbook and tuition reimbursement, computers, personal digital assistants, or community-based organizational memberships.

Roughly 15% to 20% of surveyed CEOs can receive memberships in country clubs or professional associations or low-interest loans. Other less common perks are health club memberships, tickets to sporting events, and paid parking.

Being flexible

This apparent variability in compensation packages, along with ever-growing competition, implies that credit unions are being flexible, tailoring their packages to their own situations. Indeed, they must do so, says James Gray, president/CEO of Texas Trust Credit Union, Grand Prairie. Texas Trust has 61,000 members and $460 million in assets.

"Credit unions need to look at their goals and explore all options," Gray says, "so they know the packages they're creating will accomplish credit union goals as well as those of CEOs."

For example, says Gray, a country club membership isn't appropriate for all credit unions. But for those with business lending programs, the CEO should be active in the business community. Such a membership can be invaluable for those credit unions.

True, says Frank Berrish, president/CEO of Visions Federal Credit Union in Endicott, N.Y., with 110,000 members and $1.5 billion in assets. Credit union compensation packages vary, depending on whether the credit union is large or small, urban or rural, and community-based or singlesponsor. Community standards should govern the board in negotiating compensation packages, Berrish says.

Berrish has seen examples of when compensation wasn't tied to the bottom line, and the results weren't good. By the same token, if a board wants to retain an executive who has helped the credit union succeed, Berrish suggests the board be willing to offer more expensive perks, such as first-class travel to business meetings.

It's no different for smaller credit unions. Flexibility is the key to getting and keeping good executives, according to Barbara Nall, president/CEO of LA Financial Federal Credit Union in Pasadena, Calif., with 40,000 members and $291 million in assets. Nall argues that boards must balance institutional needs with those of their executives, and they must be willing to adapt over time.

For example, while people are raising families, they might need more life insurance. When the nest is empty, they'll have other needs. If boards want to retain good CEOs, they must adapt as the executives' needs change over time.

Setting up a retirement program may be the best example of this, says Nail. "It's absolutely critical that credit union boards do something to establish sufficient retirement programs for all employees, as well as for CEOs, to get good, qualified people to come and stay," she says.

In Nall's case, her board was creative in its use of 401(k) plans. Internal Revenue Service nondiscrimination rules prohibit the highest paid employees from benefiting greatly over other employees. To lessen those limits, LA Financial Federal's board agreed to commit 3% to 401 (k) plans for all employees and then set up a separate account for Nail to use for her maximum contribution. Her retirement plan was thereby strengthened, and all credit union employees benefited. In addition, the board is setting up a supplemental executive retirement plan (SERF) to which she can contribute in coming years.

Gray notes that SERPs can be set up in various ways-some better for credit unions than others. Some plans might bring only short-term benefits to the CEO, where others do that and bring a return for the credit union as well, depending on how the investments are structured.

Staying out of trouble

Excessive compensation packages have landed some companies in trouble, and member-owned institutions especially must be careful to avoid that fate. How do credit unions keep from crossing the line?

"We must keep in mind that we're spending members' money," advises Nall.

Strong executive compensation packages are important, she says, but cars, club memberships, and other perks must be justified. Are they necessary for achieving the credit union's goals? Do they make sense in the community? Can the credit union afford them? These are straightforward questions, says Nall, but they must be asked and answered honestly.

And boards must take an active role in establishing and managing compensation packages to avoid crossing any legal or ethical lines, says Gray. If management of the SERF investment is left to the CEO and the CEO takes big risks, the nest egg might be lost, but the credit union also might lose. The board, therefore, could limit the types of investments allowed or could choose professional managers to administer the investments. At any rate, the board should share responsibility for setting up such programs to minimize risks to the credit union, Gray concludes.

Parting advice

How should a credit union CEO consider perks? That's a difficult question, most executives agree.

A CEO can appear to be standing with a hand out, says Gray. Executives should handle negotiations on their compensation delicately, he says, honestly assessing their own needs in light of credit union goals.

To help with that, says Nall, find individuals on the board with whom you can communicate openly and honestly. Executives need clear feedback on how well they've performed and how the board perceives their performance. She has seen cases where greed and ego clouded CEOs' judgments about what they deserved.

What seems obvious is essential for credit union CEOs to remember, Nail advises: The credit union's interests are as important as your own.

1 Call 800-356-8010, press 3, or visit buy.cuna.org.

Ask for Stock No. 25735.

Copyright Credit Union National Association, Inc. Feb 2005
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