In the early days of the financial crisis and the subsequent economic meltdown, the average Joe on the street didn't think about the difference between a commercial bank and a credit union, except for perhaps the vague notion that credit unions were like banking "clubs" you had to be a member of a specific group to join.
Now, almost two years after Bank Transfer Day, the public has a better understanding of what a credit union is, and how it differs from a bank. But as credit unions grow, expand their memberships, and offer more services to provide for the needs of their members, they may look more like banks. That has mobilized powerful banking lobbyists to call for credit unions to be treated like their banking counterparts, and to become taxable entities. But the why of a credit union's services to its members is clearly different. Credit unions have a responsibility to keep that distinction clear.
Talent Costs Money
Credit unions have earned their not-for-profit status because they operate to serve people, not shareholders. In the course of serving people, credit unions do often compete with other institutions. While they pursue "serving the underserved," they must also compete for talented leaders to grow and guide them. Talented people help the credit union to serve people better!
NCUA is separate and distinct from banking regulators, but because of the infamous abuses in other financial service sectors, there is a general cry for greater oversight of all financial institutions, and credit unions have been swept up in the backlash of reactionary pseudo-solutions.
The NCUA has increased its oversight of volunteer boards. In its focus on the decision-making process of those boards, the agency's intent is to assure that strategic decisions are informed and based upon appropriate due-diligence. Thus, there are dynamic changes going on in the arenas of financial education and training, as well as in the arenas of executive recruitment, development and succession planning.
The Reality Of Employment
The CEO's job is to run the credit union in support of the members. The most important job of the board is to hire a qualified leader that can do that. Whether that leader is found from within the credit union's executive ranks or from outside the organization, the reality is that competition for leadership is fierce. In order to attract and retain the best and the brightest, credit unions must be able to compete with for-profit financial institutions for that talent, and it is not a level playing field. Banks can offer equity as a significant compensation component, and different rules exist for how a banking executive can be receive deferred compensation and other post-retirement income.
The 2012 ECS Survey of Compensation and Benefits for the Credit Union Movement, for instance, provides several comparisons of compensation between credit unions and banks as well as the types of perquisites that can be offered. Banks are more likely to offer fringe benefits that include country club dues and first class air travel. Credit unions are more likely to offer their executives cell phones, laptops and spousal travel. Why is this? There is a fundamental belief in credit unions that fringe benefits should support the individual in integrating his or her personal and professional life, and to make the executive more efficient in doing the job.
So how does a board meet their fiduciary duty in selecting, compensating and retaining a CEO? The answer lies in what mix of compensation is reasonable, meaningful, affordable and competitive. Succession planning and attracting qualified leadership requires a more global, holistic approach. Credit union boards need to take both an immediate and a longer-term view.
In our opinion they must start with WHY. A credit union's WHY should be laid out clearly in its "compensation philosophy," its perception of its peer group, and an understanding of what the objectives of the credit union are in terms of growth and membership support. Then, they can build a pay program that flows organically from what the reality of their environment tells them to pay for the performance that the board and management targets.
Watch What Happens
The idea is to reward performance that meets or exceeds expectations, and setting those expectations at a level that factor in the needs of the membership. So our advice is: Set the pay and reward program for the CEO, allow the CEO to construct a similar program for his or her direct reports-and watch what happens.
A final note: The media has reported recently on "high compensation" for credit union executives. How to respond? Without apology. If the board has done their work, the compensation program will make sense and the CEO will earn every penny of compensation.
The alignment between the credit union's membership and the credit union's leadership will be apparent, and the issue of "how much" is paid for that leadership will be self-evident.
Bridget McNamara-Fenesy is a consultant with Executive Compensation Solutions. For info: firstname.lastname@example.org