To Build a Better Benefits Package, Start With Compensation Philosophy

The dynamic nature of top-tier talent and an ongoing evolution of industry practices are pushing more credit unions and their boards to refine their compensation philosophies. Rather than simply allowing long-standing practices, such as paying at the midpoint of each salary range, to dictate an organization’s philosophy, it’s vital for cooperatives to ask why they are paying a specific way and start with their overall strategy in mind when making certain decisions related to compensation.

Ensuring Your Philosophy and Policy Sync Up With Goals

When boards have a more thorough conversation regarding all the various tools and mechanisms available to help oversee and evaluate a CEO’s performance, which include scorecards and CEO evaluations in addition to compensation plans, it often becomes clear that a more sophisticated compensation philosophy is required to meet their strategic objectives.

For example, many boards now expect their CEOs to consistently deliver above average performance. Yet their compensation philosophy and policy may still be stuck in the past, paying an average range or missing opportunities to incentivize such performance in a way that resonates with all their key stakeholders.

While compensation is merely one piece of the talent management puzzle, the approach you take can and will shape behavior throughout the organization. For example, you may decide to take a retention-focused approach to emphasize financial stability for your employees (e.g., higher base salaries and lower incentives) or a performance-based approach (e.g., lower base salaries and generous incentives) that provide higher overall earning potential.

Depending on your strategic goals, choosing a single approach, a mix of several, or even individualizing plans for key leadership roles may make the most sense. Whatever the path forward, your compensation philosophy should also apply to the benefits side of the equation.

Revisiting and Updating Your Philosophy and Policy

If developed and implemented correctly, a compensation philosophy should stand the test of time. However, there are trigger events that might necessitate a review or even a revision such as a global pandemic, merger or key leadership change. At these milestones, it’s helpful to ask: Are your current philosophy and practices enabling or impeding your strategy?

An independent, strategic advisor can assist you in defining or evaluating your compensation philosophy and policy. Compensation research, which is typically conducted every one or two years and should include multiple sources, can help a credit union better understand where they stand relative to the market. As publicly available data is not widespread and CEOs tend to talk to each other, it’s vital to integrate the latest research into a broader philosophical context and ensure it aligns with your strategy. That context should also include an intentional exploration of stakeholder objectives, including a CEO or other key leader’s desires.

Understanding Candidate Expectations

Increasingly, Supplemental Executive Retirement Plans (SERPs) are an expectation of c-suite candidates. Benefits like these are a key part of what attracts high performers to new opportunities or helps retain them.

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. From a recruitment standpoint, a generous plan that pays out in the long-term does not always retain the high-performing executive that is enticed with nearer-term payouts at another organization. Design specialists help reveal those nuances to ensure the plan has the intended effect.

Needs Based Approach to Benefit Plan Design

As we consult with credit union executives, it’s clear that one size does not fit all in terms of executive benefits plans and that fully understanding the impact of potential SERP options is key. Blending traditional plan design concepts with present-day strategies, while considering the needs of the individual, is vital to meet the unique needs of each organization.

Executive benefits plans should complement existing incentive structures and take both individual and organizational objectives and time horizons into account. The financial impact of the plan, on both the credit union and the individual, should also be considered. This includes P&L, cash flow, executive taxation, potential excise tax to the credit union and the long-term nature of cost recovery strategies.

Remaining Attractive to Today’s Leaders

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.

Remember, compensation philosophies and executive benefits plans can be highly flexible in their design. Employers have the discretion to structure their philosophical approaches, policies and specific plans in ways that align with the organization’s goals and the needs of the executives.

Peter Myers is SVP for the Phoenix, Ariz.-based executive search and leadership development firm DDJ Myers.

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