Credit Union Executive Compensation Slows Slightly

After years of steady increases in CEO base salaries and bonuses, credit unions of all asset sizes have slightly pumped the brakes on wages and bonuses for their top executives because of uncertainties in the U.S. economy, according to CUES’ Executive Compensation Study for 2019.

Among the deferred compensation plans used to retain executive talent, however, credit unions will have more certainty in avoiding paying the new 21% excise tax on executive compensation thanks to recent regulation changes, Andy Roquet, a senior executive benefits specialist for CUNA Mutual Group, reported.

In 2018, credit union CEOs received an average increase in their base salary of 7.4%. In 2019, however, that base salary increase declined slightly to 7.1%. Interestingly enough, the base salary plus the CEO’s bonus package increased, but only marginally, from 7.3% in 2018 to 7.4% this year. Among the 19 different top executive positions aside from the CEO position, more than half also showed only small increases in base pay.

“So everyone went up in pay, but they just didn’t go up necessarily as high as the previous year,” said Mike Becher, a CPA and vice president at the Dublin, Ohio-based Industry Insights, which conducted the online survey of 343 credit unions from around the nation and from every asset group. Since 1980, Industry Insights has conducted executive compensation, financial benchmarking and customer satisfaction surveys for associations and organizations.

Economic uncertainty that began to surface this year may have contributed to the slight declines in executive compensation, Becher surmised.

“Especially right now, the stock market’s going all over the place, and for the last five years economists have been saying that in the next year there’s going to be a recession, but we haven’t really seen it yet,” Becher explained. “So we think what’s going on is that things have been going really, really well for so long that there is a little bit of concern, a little bit of conservatism, with looking into the end of this year and going into next year where credit unions, and really companies in general across all industries, are pulling back just slightly. They are waiting to see what’s going to happen. That way, if something does happen, they’re not necessarily beholden to paying out higher increases in pay going forward.”

CEO bonuses rose ever so slightly higher than salaries. This enabled credit unions to reward their top executives for performance but in a more finite way.

“So if you increase the base salary, that’s something you’re going to have to continue to pay moving forward,” he said. “Instead, if you’re doing a one-time bonus that might be a little bit higher, that’s only for that one year, and the following year you’re not obligated to pay that.”

According to the CUES survey, the mean CEO compensation, which includes base salary and bonus, amounts to $127,747 among credit unions with assets of less than $50 million. Among credit unions that manage assets of $50 million to $199 million, the median CEO compensation ranged from $132,451 to $197,250. For credit unions with assets of $200 million to $599 million, the median compensation was from $270,915 to $334,545.

The median CEO compensation was $461,859 among credit unions with $600 million to $999 million in assets, and for credit unions with more than $1 billion in assets, the median CEO compensation amounted to $644,843, according to the CUES survey.

Among other top executive positions, such as COOs, the median base salary and bonus within all credit union asset categories increased 6.8%, from $186,931 in 2018 to $199,674 in 2019. For CFOs, however, the median compensation increase was only 3.9%, from $219,505 last year to $228,108 this year.

Credit union chief lending officers saw a median compensation increase of 6.2%, from $179,266 in 2018 to $190,467 in 2019. The median compensation for marketing executives rose by 5.8%, from $129,470 last year to $137,000 this year, and for human resource executives, the median compensation increase was 6.9%, from $161,997 to $173,100.

In addition to salary and bonus compensation, deferred compensation is an important tool for credit unions looking to attract and retain executives. And it’s expected that strong deferred compensation plans will become even more important considering that about 500 CEOs are expected to retire over the next two years, according to Andy Roquet, senior executive benefits specialist for CUNA Mutual Group.

Because credit unions, including national industry organizations, leagues and associations, will be required to pay a 21% excise tax on executive pay that exceeds $1 million in total salary, bonuses, incentives and deferred compensation, Roquet said he is seeing more credit unions considering loan regime split dollar plans. This type of deferred compensation is not subject to the 21% excise tax because the IRS considers the plan as non-compensatory to the executive.

Under this arrangement, the executive purchases a life insurance policy with a loan from the credit union, which pays for the life insurance premiums. This type of plan can also be set up to supplement an executive’s retirement income. When the executive dies, the life insurance policy repays the credit union’s premiums plus interest.

However, experts warned it is fundamentally critical to make sure credit unions understand the underlying assumptions, stress test those assumptions and look for structural alternatives to the split dollar plans that make them more resilient to lower-than-anticipated rates of return.

Roquet pointed out the split dollar plan does not work in those cases where an executive is not insurable because of health or medical reasons. An alternative long-term compensation plan is the 457(f) option. CUES estimated nearly 37% of credit union CEOs participate in this type of plan.

Because of proposed regulation changes that are expected to be adopted at the IRS, the 457(f) will not be subject to the 21% excise tax, but only if the payouts are structured properly. “This is a fairly new change that is going to be helpful,’ Roquet said.

He explained the new regulations allow the 457(f) payments to be paid out after the executive retires. “That’s kind of a new thing because previously the 457(f) plan payouts had to be distributed while the executive was still employed.”

For credit unions to avoid the 21% tax liability, they can now spread out lower 457(f) payouts over three years. For example, if the executive total compensation package, including the 457(f) plan, is worth more than $1 million, they can now arrange to be paid one-third of the total compensation package on the retirement date. If they sign a non-compete agreement, the executive can then receive two additional payouts, each amounting to one-third, over two years after retirement. Because these three payouts are well under the $1 million threshold, credit unions can eliminate the 21% excise tax liability.

Roquet also said he is seeing defined benefit retirement programs become more popular than defined contribution retirement plans. The defined benefit program, established ahead of the executive’s retirement, is calculated on a number of factors, such as the executive’s compensation history and length of service. The credit union manages the investment risk for the plan. The benefits paid out are usually guaranteed for life and may increase to cover the cost of living.

“That’s more of a defined calculation and defined benefit that has more of a defined amount that the executive can receive, versus, here’s an investment [in a defined contribution plan] and you get the gain, but if [the investment] goes underwater, there is no gain,” Roquet said.

This scenario actually happened to executives during the Great Recession, which forced many of them to delay their retirement.