Executive Benefits Packages That Weather Merger & Acquisition Storms

As credit unions prepare merger and acquisition deals, it’s important to lean into best practices and lessons learned. Key among them is the importance of maintaining executive employee satisfaction. After all, leadership succession (or a lack thereof) is often the root or a contributing cause of a combination.

It’s an increasingly critical practice to have effective executive compensation and benefits in place as part of a well-designed succession plan. Doing so may even stave off an unwanted acquisition. Even if M&A becomes a part of the credit union’s future, however, hanging onto and adequately caring for top talent is vital for the success of even the most amicable of deals.

Regardless of which side of the deal a credit union is on, adequate attention should be paid to the executive experience before, during and after the transaction. One way to accomplish this is through well-designed executive benefits packages that have contingencies in place should M&A come into play.

What follows are a few considerations for board members and HR leaders to think through as they strategize the most optimal benefits programs for their current and anticipated circumstances.

Level up compensation: The traditional means of designing competitive compensation packages is to conduct a peer review and pay executives fairly based on what is discovered among like-sized and similarly regulated financial institutions. In today’s highly competitive talent market, this strategy is no longer sufficient. Credit unions should instead review the compensation paid to executives serving within credit unions at least one asset class above their own. Either through the poaching of executive talent or by becoming an acquiring entity, these organizations often present the largest threat to a credit union’s leadership continuity. Bonus points to the credit union that also investigates the compensation of banks in the next highest asset class. The sheer volume of options that for-profit financial institutions have for incentivizing in-demand leaders may force credit unions to get more creative in the design of their own plans.

Defined benefit or defined contribution: Each of these structures brings with it a different set of implications. Executives know with certainty what is going into a defined contribution arrangement; they don’t necessarily know what is coming out. The inverse is true with a defined benefit. Which has been granted to a credit union executive can make a difference to how receptive that leader is to another suitor’s offer. Credit unions whose sustainability relies heavily on a CEO remaining in place may elect to pursue a defined benefit arrangement. Not only does that strategy inject more certainty into a CEO’s compensation calculation, but it may also entice them to stay put at least until its payout.

Change of control provisions: Integrating change of control provisions into a benefits plan is one way to avoid on-the-fly, stressful decision making during an M&A transaction. Thinking ahead allows a cooperative to strategize for ways to compensate executives who are not retained by acquiring entities; it helps to give acquiring credit unions an up front and crystal clear understanding of their obligations to the acquired cooperative’s top talent.

Agility and alignment: Ideally, an executive benefits program is designed in consideration of a credit union’s succession plan. If, for instance, a CEO is expected to retire in five years, the retirement package would be on a five-year vesting schedule. Simply rolling that package forward to the successor may work out just fine if the new CEO is on a similar timeline. If, on the other hand, the new leader is decades away from retirement, the credit union will want to have the flexibility to develop a more attractive incentive. This is true for all credit unions, not only those contemplating M&A prospects.

Annual reviews: Likewise, every credit union, regardless of a foreseeable combination, should make it a practice to review its compensation philosophy each year. Rapid-fire changes in workforce dynamics, regulatory requirements and economic conditions all combine to make set-it-and-forget-it strategies untenable. It can be helpful to get an outside perspective when conducting these reviews as well. External resources, particularly those with deep roots in the credit union industry, often have a larger context to draw from when comparing incentive and compensation structures for top talent.

To be sure, each party participating in a business transaction has different priorities. For acquiring credit unions, retaining top talent maintains institutional knowledge and reduces stress on incoming employees. For the entity agreeing to be bought or combined, making sure the people who dedicated their careers to the financial wellness of their members is paramount.

In most circumstances, both parties in a credit union combination are governed by a people-first mentality that may make gaining support for their endeavors to reward dedicated, tenured contributors an easy lift. Ensuring their own chiefs are cared for during the transaction is central to the mission and something every credit union would do well to plan for.

John Pesh is a director for the Madison, Wis.-based TruStage who consults with credit unions on insurance, investments and advanced planning, including executive compensation, benefits packages and leadership continuity.