Operational, Philosophical Differences Broke up Portland Teachers/Oregon Community Merger, Not Compensation Issues

EUGENE, Ore. – Portland Teachers CU President/CEO Cliff Dias has to live with the fact that his 2003 $1.6 million compensation information is all over town, but PTCU is strongly denying that executive compensation had anything to do with PTCU and Oregon Community CU calling off their merger – a theory an Oregon newspaper floated. An article that ran in the July 23 issue of the Oregon-based Register-Guard newspaper strongly suggests that the Oregon state regulator’s push to have the $1.6 billion Portland Teachers CU and the $700,000 Oregon Community CU reveal the compensation packages of the executives of the merged credit union contributed to the merger being called off, but the credit unions stick by their previously stated reason of too many operational problems. If the merger had closed it would have been the largest ever in credit union history. The article states that “lavish executive compensation, and an organization’s reluctance to disclose those big paychecks” to its members was part of the reason the deal failed. The newspaper obtained Dias’ compensation via IRS form 990. State charters in Oregon have to reveal executive compensation via the 990. Federal credit unions do not, and in a related matter bankers are making noises that federal CUs should also file 990s. According to PTCU Chairman Steve Gray the regulator “recommended” that the credit unions reveal the compensation to their members prior to the merger, but did not require it. Also, according to Floyd Lanter, Finance and Corporate Securities Administrator for Oregon’s Division of Finance and Corporate Securities, the state did indeed approve the merger and had no plans to hold it up based on compensation disclosures. However, Lanter does believe the credit union, in the spirit of being a non-profit entity, should have disclosed to members executive compensation to avoid any “reputation and strategic risks.” Lanter also seemed to have a definite interest in the credit unions being open about executive compensation before members voted on the mergers. “We thought members deserved to be aware of it now rather than afterwards,” said Lanter who described the disclosure as a “moral” issue. Lanter said if these were two publicly-held companies, they would have had to reveal executive compensation to shareholders. Lanter said in his mind “good corporate governance” procedures would demand that the CUs reveal the compensation. “I think the non-profits owe it to themselves to disclose, even though they’re not required by statute or law,” said Lanter, who would not comment on whether he thought Dias’ compensation was too high. He did note the article’s statement that Dias earned almost 4.5 times the national average for CEOs in PTCU’s asset class. Gray said that fact was based on CUES’ annual executive compensation survey, which he described as having a lot of holes. According to CUES this year’s survey data for Dias’ asset category was based on the responses of 57 CUs over $1 billion in assets, a considerable sample size (see chart). According to that survey, a CEO in Dias’ asset range makes an average of $344,400 in salary and bonuses. Hoerauf earned $222,000 in salary and bonuses last year. The CUES survey finds the average CEO in his CU’s asset range ($600 million to $999 million) earned $288,500 in salary and bonuses. That data is based on responses from 64 CUs in that category. The battle at Columbia Community CU across the river may have also made the Oregon regulator a little more sensitive to the compensation issue. Lanter said with all the hoopla around the Columbia Credit Union thrift conversion in Washington, the regulator wanted to ensure that a similar situation didn’t occur in this case in terms of adverse publicity. Gray said PTCU sat down with the regulator to discuss the compensation disclosure issue after the regulator requested that the CU mail Dias’ contract to them. Gray said PTCU did not feel comfortable sending hard copy documents to the regulator in the mail for fear of who could wind up with them. Instead, PTCU invited the regulator to its offices for a meeting where they would present the compensation package. At that meeting, the regulator recommended that the CUs disclose executive compensation to both PTCU’s and Oregon Community’s members. Gray said he was caught a little off guard by this request given that under state law only PTCU members were going to vote on the merger. “They also wanted a vote of both memberships. I guess they were just concerned they said about good corporate governance,” said Gray. Of course the CUs did not legally have to disclose CEO compensation or have both memberships vote, but would they have in good faith? Gray said he wasn’t sure about Oregon Community, but the PTCU Board did come up with a plan to reveal compensation to its membership. As for votes by both memberships, both CUs were leaning against that. Gray said these issues became sideline issues however because the real problems were on the operational end. The two boards held a joint meeting on May 21, just a few days after PTCU met with the regulator. It was only the second real meeting since the two boards came together in the fall to consider the merger. “We realized there were significant differences. The management teams found out more about each other. As you learn more and more, it came down to operational issues,” said Gray. “Areas they disagreed included centralized/decentralized lending, risk-based lending, shared branching, data processing, board bylaws, 401k plans, and others. Oregon Community CEO Gordon Hoerauf said that while he thinks a merger of equals is possible, he learned it takes time. “It’s just a very long drawn out affair. One side does not dictate to the other, it takes longer,” said Hoerauf. Lanter speculated that while he doesn’t think the regulator broke up the marriage, it may have caused the CUs to do a “gut-check” and look a little deeper at the implications of the merger. As for Dias’ $1.6 million package, Gray said it’s money well spent. Gray noted that while Dias earned $1.6 million, a lot of that was based on meeting pre-set performance goals. “He’s paid more by results than base income. He not only met every single target the board set, he met and exceeded every target he set too,” said Gray, who pointed out that PTCU’s net worth has tripled since Dias became CEO in 1997. Gray said for anyone to do an analysis of Dias’ compensation from a 990 form is ludicrous, because at-risk bonus dollars do not show up on that form. Gray said PTCU would hold Dias up against any CEO in the country in terms of performance. Gray said the board brought in two executive compensation consultants, and said based on performance, Dias’ compensation was in line for an executive of his stature. Gray also noted the board doesn’t just look at numbers when determining compensation. “It all has to do with member value, and member value has significantly increased,” under Dias, said Gray. He also noted that PTCU was just ranked the third best company to work for in Oregon by one of the state’s business magazines (it has shown up in the Top 100 the last five years), and it leads state charters in Oregon in a number of performance categories. Ray Bauschke, a credit union consultant who often deals with CEO compensation packages, say some people don’t know how much a good CEO costs until it’s too late. “They know the price of everything, the value of nothing. Since 1980 we’ve gone in and managed credit unions in difficulty, and I can tell you the price of good management shows up in only one line item, compensation and benefits. The cost of poor management shows up every where,” said Bauschke, who threw in a practical example of home maintenance. “Do you want to buy five-year shingles or 20-year shingles?” He noted that when considering total compensation, there are a few CU CEOs in the million dollar ballpark, though it’s not common. He said there will be more in the near future as boards play catch up with CEOs that haven’t been taken care of well over the years. PTCU is one of Bauschke’s clients. When the PTCU and Oregon Community deal was called off, both CEOs said they might revisit the merger in the future. Gray said given what’s happened, that possibility doesn’t seem as likely. [email protected]