2024 Trends & Opportunities in Executive Compensation

Headlines welcoming new CEOs and other key executives seem increasingly frequent within the credit union industry. As these institutions prepare for leadership transitions, adopting a modern-day approach to executive benefit planning has been key – one that blends traditional plan design concepts with present-day strategies. This combination is vital for meeting the unique needs of each organization.

Whether or not your credit union has an executive retirement on the horizon, now is the time to understand how current factors impact the latest trends in executive benefits planning and identify opportunities to ensure the effectiveness of your talent management strategy to recruit, reward and retain top talent.

One-Size Does Not Fit All

When we consult with credit union executives, we occasionally hear stories about benefit plans from past experiences. While some success stories are shared, it’s not uncommon to hear what didn’t work. The takeaway is almost always that merely offering the benefit is not enough. It’s essential to create a benefit that considers the needs of the individual in addition to the needs of the organization. While all executives in their 50s are not alike, their needs are definitely not the same as executives in their 40s or 30s. Executive benefits planning, done right, considers the needs of the individual.

Consider questions such as:

• What is the time horizon for the individual and the organization?
• Are there life events these benefits could help financially support, like college tuition or a wedding?
• How does the credit union currently reward executives for performance?
• How can the executive benefit plan complement existing incentive structures?

With this approach, you can design a plan that effectively retains and rewards. Just don’t forget the needs of the organization.

The Art and the Science

As reflected by their technical names, executive benefit plans are permitted and regulated by the IRS. Plans are designed within the parameters of these tax laws, and we see this in vesting, benefit payment years, benefit liability accrual and financing. This is the science. Using the information gathered about individual and institutional needs along with factoring in current economic trends to design the plan is the art. One economic trend that is affecting the design of Collateral Assignment Split Dollar plans is the Long Term Applicable Federal Rate (AFR). The AFR has increased nearly 2% in the last two years.

Scenario #1: A first year CEO in their 30s is leading a credit union with aggressive growth goals in the next five to 10 years. The executive has a young family. Base salary and incentive compensation are at or above market.

The routine approach would be to complete a benefit analysis to project retirement income and use the shortfall to design a standard collateral assignment split dollar benefit targeting retirement income at age 65. Chances are that this approach will not do its job as an effective reward and retention tool. The benefit is likely too far in the distant future for the executive. Additionally, the interest on the premium loans for the 20- to 30-year timeframe at current high rates could drive up the credit union’s outlay for an extended time.

Instead, cooperatives in this scenario should consider a multi-staged approach starting with the mid-term using 457(f) benefits in years that have meaning to the organization and individual, following the fact pattern of time-based needs, such as paying for college. Discuss the strategy and timing for creating the next stages of the overall benefit plan; for example, utilizing split dollar when the executive is about 10 to 15 years from retirement.

Scenario #2: CEO is in their mid- to late-50s and does not have an executive retirement plan in place.

In this example, a retirement income analysis will help quantify the retirement need. If collateral assignment split dollar is selected as the appropriate plan design, the credit union has options in choosing the plan design features that meet the plan objectives given current economic conditions and its impact on loan interest rates and life insurance projections.

The plan design decisions include the treatment of loan interest, timing of cost recovery to the credit union, product selection and premium funding strategy, to name a few. These work in tandem; when you pull one lever, you impact another. Understanding the plan objectives and limitations will help determine which levers to pull.

Understanding the Financial Impact

Benefit plans have direct and indirect costs. It is critical for institutions to understand how the different plans impact P&L and cash flow and create potential excise tax when annual compensation to an executive exceeds $1 million. Credit unions should also understand the longer-term costs and the timing for cost recovery, which can be 30 to 40 years away.

When providing 457(f) benefits, cooperatives have options for informally funding the benefits. These strategies can assist with cash flow planning or can be used to offset the costs of the benefit on a P&L basis. The investing authority outlined in the NCUA’s guidance Section 701.19 allows credit unions to hold investments that would otherwise be impermissible to finance employee benefit expenses. Among the options for financing 457(f) plans are guaranteed interest rate contracts and dedicated investment portfolios. The latter approach uses investments that closely maturity-match plan distributions for cash flow planning or target expected returns to offset annual benefit plan expense.

Whether or not your credit union utilizes a financing strategy, it is important to understand the benefit costs and develop a plan to manage those costs.

Remaining Competitive

Most offer letters to new CEOs from credit unions over $750 million in assets now include an agreement to implement a Supplemental Executive Retirement Plan (SERP) within 12 to 18 months after the new executive’s start date.

As asset size increases, the number of other senior leaders, beyond the CEO, who are offered a SERP increases as well. Significant jumps occur when credit unions reach $500 million and $3 billion in assets. Plans are commonly offered to the entire C-suite, and as credit unions continue to grow, they are subsequently offered to all or most SVP/vice president level executives.

According to the latest industry survey data compiled by DDJ Myers, an ALM First company, approximately half of all CEOs in the credit union industry are over 55. The percentage of leaders approaching retirement age is even larger for credit unions with $3 billion or more in assets.

Keeping pace with the industry and remaining attractive to both current and future leaders, who are vital to the long-term success of any credit union, should begin with your institution’s strategy. Start by defining your objectives before you jump into evaluating specific plans.

As discussed, retirement plans can be highly flexible in their design. Employers have the discretion to structure the plans in ways that align with the organization’s goals and the needs of the executives.

The most common types of SERPs are 457(b) plans, 457 (f) plans and Split-Dollar. Designed strategically, these can be effective retention and recruitment tools. To truly understand the pros and cons of the many options available, you may want to enlist the help of a benefit design specialist to create a new plan or enhance an existing one. Explore the possibilities today to ensure a stronger executive talent strategy tomorrow.

Shirley McMillan is Director, Executive Benefits for ALM First Executive Benefits, a subsidiary of ALM First Financial Advisors in Dallas, Texas.

Tom Sievewright is Director, Executive Benefits for ALM First Executive Benefits.