Boards Told To Pay Attention To Compensation Trends

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Credit union boards that ignore fast-changing trends in executive compensation are "living on the edge" and jeopardizing the future prosperity of their credit unions and their executives' long-term financial future, according to one person.

Joe Tripalin, vice president of executive benefits for CUNA Mutual Group, told attendees at the company's Discovery Conference here that there are steps credit unions can take to create effective and responsible compensation programs.

Tripilan said the biggest changes in compensation are incentive-related and deferred compensation programs. Likewise, turnover at the CEO and senior management levels is increasing, as 25% of these individuals will leave or retire during the next five years, he added.

"Credit unions continue to grow in size and complexity and boards will need to attract outside executive talent, many from the banking industry. That will be challenging, because bankers are used to more generous and complex compensation packages," he said.

Tripalin said bank executives make considerably more than credit union executives with the most dramatic differences at institutions with more than $500 million in assets. "Bank executives make almost twice as much as credit union executives in $1 billion organizations, and long-tenured CEOs fare even worse," Tripalin said.

Despite these challenges, Tripalin believes credit unions can establish compensation plans that are enticing enough to attract and retain executives and address retirement shortfalls. More credit unions are offering Supplemental

Executive Retirement Plans (SERPs) to create "golden handcuffs" for their executives. These arrangements set aside money and/or other benefits for the executive in exchange for that individual's continued service to the CU.

Components of SERPs could include deferred compensation programs, life insurance, long-term disability income and financial and estate planning.

To be effective, Tripalin said SERPs need to provide benefits that:

* Are large enough to retain an executive.

* Adequately address any retirement shortfalls.

* The current board (and future boards) feel comfortable providing.

* Regulators understand and support.

Likewise, credit unions should avoid certain pitfalls, particularly those that commit the credit union over the long term. "Avoid obligations that are difficult to change or that last until the death of the executive," he said.

With increasing life expectancies, a CEO that retires today at age 62 could conceivably live for another 25 to 30 years. That's a long commitment for a credit union," Tripalin said.

According to Tripalin, more credit unions are committing their own funds to establishing SERPs for CEOs, generally setting aside 2% -4%of credit union assets into an investment fund. Larger credit unions are earmarking a slightly smaller percentage. After a set amount of time, perhaps 10 years, the executive receives the growth on the invested amount while the CU gets back the original amount invested, plus cost of funds.

"If the credit union recoups its original investment plus recovers cost of funds, say 1%, the true cost for the program is 1% to 2% percent per year. Is retaining your CEO worth 1% per year based on the money set aside?"

Tripalin also alerted credit unions to an Internal Revenue Service (IRS) announcement expected later this month that will provider broader guidance on a 2004 Private Letter Ruling that stated credit union deferred compensation plans aren't covered by IRS Code Section 457.

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