Originally published by CU Times.
In the quest to recruit and retain top-tier leadership, organizations face unprecedented challenges. Whether your cooperative’s long-term CEO is planning to retire in the near-term or your strategy requires the addition of a new key executive position, now is the time to ensure that your credit union is prepared to effectively compete in the war for talent.
Shifting Industry Trends and Candidate Expectations
Boards, leaders and HR professionals should understand the latest industry trends and candidate expectations in terms of executive compensation. For example, we’re finding that most offer letters to new CEOs from credit unions with over $750 million in assets now include an agreement to implement a Supplemental Executive Retirement Plan (SERP) within 12-18 months after the new executive’s start date.
As asset size increases, the number of other senior leaders, beyond the CEO, who are offered 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 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.
Taking a Strategic Approach and Defining Objectives
Start by defining your objectives before you jump into evaluating specific plans. 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 always begin with your institution’s strategy.
Once an organization’s strategic objectives are clearly defined, it’s essential to create a benefit that also considers the needs of the individual. 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.
For example, consider the following questions: 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?
Adopting a modern-day approach to executive benefits planning could be a key factor in ensuring that your institution remains attractive to top-tier talent. Gone are the days of a one-size-fits-all solution that may be irrelevant to some of your key executives. Blending traditional plan design concepts with present-day strategies is vital for meeting the unique needs of all key stakeholders.
Ensuring All Costs Are Taken Into Account
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 for some solutions which can be 30-40 years away.
When providing 457(f) benefits, a common type of SERP, 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.
Taking a Fresh Look to Remain Competitive
As we consult with credit union executives across the country, 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.
That’s why taking a fresh look at creative compensation strategies is so important. Supplemental 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 that help organizations win the war for talent. There are many options available with various pros and cons. Your credit union may want to enlist the help of a benefit design specialist to create a new plan or enhance an existing one.
