Steps Toward Designing A SERP That Is Competitive & Affordable
In a new survey of executive compensation and benefits in the credit union movement indicates that Supplemental Executive Retirement Plans (SERPs) are an increasingly important component of a credit union’s chief executive officer total pay.
Many provide a SERP benefit to several additional key employees in executive positions because higher earning employees in any sector cannot rely on their qualified retirement plan and Social Security income alone to provide a suitable post-retirement income level. They need some sort of supplemental program, whether that is additional personal savings or an employer-provided benefit. Due to government restrictions on tax-advantaged, employer-provided qualified plan programs, a higher wage-earner cannot replace the same percentage of income from these sources as the average wage-earner.
SERPs fill that retirement gap in a tax-effective way and, as a result, they are high on the list of “must haves” for every executive. Many financial planners expect that more than 50% or more of an executive’s retirement income will need to come from a supplemental plan. This is especially true in credit unions, where stock or equity compensation is simply not available.
While SERPs have been around for a long time, it does not mean that they have not evolved. In fact, quite the opposite is true. In the past, credit union SERP design was pretty straightforward. The standard design provided a fixed obligation payable upon retirement, typically at a designated age. Often the amount to be paid was determined at the CEO’s hire and never changed, even when the credit union and the business climate underwent substantial upheaval. Sometimes the amount to be paid was determined under a very complicated formula and other times the amount was a shot in the dark at a fair number.
As a result the payment did not bear any relationship to the success or growth of the credit union. At times it did not bear a relationship to the retirement gap that drove the need for the plan in the first place. In many cases, obligations were uncertain and costs were unpredictable. At some point SERPs became, for many credit unions, not much more than an entitlement offered in a vacuum to an executive group that did not understand or appreciate the value of the ultimate benefit.
These issues have led organizations to rethink that old approach and now a new type of SERP design is emerging.
First, well-designed SERPs should provide a meaningful benefit, efficiently and appropriately delivered. That means that boards and executives need to understand the role of SERPs in retirement planning and how much a SERP needs to provide to fill the retirement income replacement gap (taking into account IRS rules).
Balancing Exec’s Needs With CUs’
Second, boards and executives will need to understand that SERPs need to work for both the exec and the CU. New generation SERPs often include some degree of performance-based contributions. Setting long-term goals is a difficult task in the best of times, but boards understand that problem and are turning their performance metrics to a simple set of goals and a few key objectives, such as growing the CU in a financially responsible way, fulfilling the mission of meeting member needs, etc.
Third, a well-designed SERP will be responsive to changes in the economy. When unforeseen changes take place, a SERP should be flexible enough to adapt. This could translate into design components such as a sliding scale of benefits or flexible distribution options within the SERP.
Finally, the correct SERP design needs to be both competitive and affordable, taking into account not only the executive’s retirement income gap but also what is reasonable for the CU’s specific situation is imperative. Questions about the competitiveness of the benefit in relation to the credit union’s peer group need to be considered and addressed. Also, a board needs to understand and communicate not only the long-term cost of the plan but also how to pay for the program.
An ideally designed funding program should not only consider the overall cost of the benefit, but also the cost of the funding vehicle itself, as well as the cost of funds. In other words, credit union members should not pay for the benefit–they should be made whole.
To compete for the best talent and still hold the key value creators in the organization, boards will find it crucial that their total compensation programs have long-term plans that are flexible enough to meet the planning and retirement needs of their executives, provide a strong incentive for long-term loyalty, and safeguard the credit union and its members in both the short and long term. Alignment of interests translates to a successful program.
J. Michael Nash is principal with Executive Compensation Solutions, LLC, Covina, Calif. For info: www.ecs-m.com.