Should Members Know What the CEO is Making? What's at Stake if Compensation Goes Public?

WASHINGTON – Trying to find out what a CEO earns at a federally-chartered credit union has traditionally been protected under tax-exemption shelters, but compensation figures may be among the next layer of disclosures banking groups are pushing to expose. For several years, FCUs had to file IRS Form 990 or a Return of Organization Exempt From Income Tax form, but with the passage of the Omnibus Budget Reconciliation Act of 1987, Congress added section 6104(e) to the Internal Revenue Code, which exempts organizations that are tax exempt, including credit unions, under Section 501(c)(1) of the IRC from having to file or making such returns available for inspection. It’s a long shot to reverse an act of Congress, experts agree, but hypothetically speaking, what, if anything, would be at stake if executives at FCUs were required to list their salaries. “People want to satisfy their curiosity,” said Ray Bauschke, president of Ray Bauschke Associates, Ltd., a management consulting firm. “It’s majoring in minors.” Currently, state-chartered credit unions are required to file the form, but the American Bankers Association and America’s Community Bankers have recently urged House Ways and Means Committee Chairman Bill Thomas (R-Calif.) to re-impose a tax-filing requirement on FCUs. A NASCUS representative acknowledged that leagues file the Form 990 on behalf of credit unions but said no one was available to comment on its impact with banking groups. Portland Teachers CU CEO Cliff Dias’ $1.6 million compensation for 2003 raised eyebrows among state regulators who wanted his pay disclosed to members prior to them voting on a merger with Oregon Community CU. One local newspaper floated the idea of the CUs not wanting to disclose executive compensation to members as one reason the merger failed, which the CUs adamantly deny. “I think the newspaper’s spin on it was incorrect,” said Bauschke, who counts Portland Teachers CU as one of his firm’s clients. “The breakdowns in mergers tend to occur when (there’s a dispute) on what the new name will be, who’s going to be on the board, and who’s going to be the CEO.” Bauschke said calling the compensation issue a deal breaker is a “stretch.” Still, he encourages board of directors to include a disclosure in the employment contract that says salary is confidential. Dias’ compensation is also piquing the interest of various segments of the industry, some wondering if it’s too much money, others wondering if it’s anyone’s business but the board. “What’s the difference if a CEO earns $200,000 or $300,000,” Bauschke asked. “If he or she is doing a good job, it’s only going to reflect on one line on the ledger sheer – compensation. If they’re doing bad, it’s going to show up all over the place.” Most state leagues have resources to assist credit unions with preparing Form 990s just so they will be prepared should an audit take place. “In the course of an examination, say of expenses, if we see something out of line, we can ask for more details,” said Paul Foster, assistant commissioner of the Credit Union Division of the Tennessee Department of Financial Institutions. Yvonne Evers, president of Middleton, Wis.-based HRValue Group, said she serves on the board of a $750 million credit union and speculates if FCUs were required to disclose what their executives make, there probably wouldn’t be any sweeping compensation changes. “We would still need to be competitive,” Evers said. “Boards would continue to take the compensation package very seriously – they may have to justify it more.” Hypothetically speaking, Evers said that some may say, `why didn’t (the board) take the internal candidate, you wouldn’t have to pay him more.’ “But the members have trusted and elected the board to pick the right person for the job,” said Evers, who recently spoke at NAFCU’s annual conference on strategies for attracting and retaining top employees. “I think (the members) are more concerned about the quality of service. Some members would be dumbfounded (to learn what the CEOs earn). Some are just curious.” Revealing what CEOs earn may prove to be a “tempest in a teapot” for banking groups as many boards are resistant to offer extravagant salaries, said Robert Rutkowski, an attorney with the credit union division at Weltman, Weiberg & Reis in Cincinnati. The firm represents more than 300 credit unions in Ohio. “Boards tend to fight big salaries tooth and nail,” said Rutkowski, who has served as a director at Hartville, Ohio-based Lake Community Federal Credit Union. “It just doesn’t make sense. Are bankers hoping to find some expos on lavish salaries?” Rutkowski said there are a few exceptions but the rule of thumb is most boards will gather pronouncements from several sources to justify the salary they’re offering. Even then, an employment contract is more apt to include things like a company car rather that a hefty salary. Do members even care? It might depend on the size of the credit union, Rutkowski reasoned. “If it’s a billion dollar credit union, then probably not, but if it’s a $30 million credit union, some members might care,” he said. According to the 2004 CUES Executive Compensation Survey, with 879 credit unions participating, the median base salary and bonus CEOs earned in 2003 was $135,500. [email protected]