Include ‘Golden Handcuffs’ with Succession Plans

CUs face increased risk of losing top talent to other organizations.

May 12, 2012

Many credit unions have a so-called CEO succession plan in place. But unless that plan has an executive development component and financial incentives, credit unions risk losing top CEO talent to other organizations, John Moreno, CUNA Mutual Group executive benefits specialist, told CUNA Human Resources/Training & Development Council Conference attendees in San Antonio.

Credit unions should take a hard look at their succession plans and determine if they have a real plan or a “break in case of emergency” plan, he said.

The latter is an emergency CEO succession plan that prepares the credit union for the death or rapid, unexpected departure of the CEO. It’s a short-term disaster recovery plan designed to keep the institution going until a permanent CEO is hired.

“The ‘Break in Case of Emergency Plan’ is important to have, but it shouldn’t be the only plan,” Moreno said. “Essentially, it is the proverbial sealed envelope in the board chairman’s desk that names the next CEO. It’s not adequate by itself.”

A true succession plan doesn’t just choose internal successors to a credit union’s top executive positions; it prepares internal successors, which provides more stability and consistency with the organization’s strategic plan.

Moreno cited 2011 research from Purdue University’s Krannert School of Management that indicated CEOs hired as part of an organization’s internal succession plan tend to stay longer and perform better—for less initial compensation—than the average new CEO.

“It’s about building bench strength, to use a sports analogy, and involves staff development rather than replacement,” he said. “That requires nurturing and developing people, and it requires active involvement of the board of directors, CEO, and human resources [HR] functions.”

But even with a true succession plan, credit unions can still lose potential internal CEO successors to competing organizations, including other credit unions. Linking executive development with financial incentives is critical.

Subscribe to Credit Union Magazine“A successful HR pro is going to look to bring in talent by finding candidates who are already succeeding in other organizations,” Moreno said. “Unless you also provide monetary incentives to keep your top talent at your credit union, you run the risk of having your staff poached by others.”

This necessitates creating “golden handcuffs” to keep top talent who could be a flight risk, he said. Doing so makes their decision to leave the credit union difficult, if not costly. Plus, it makes it more expensive for the acquiring organization.

Moreno suggested aligning nonqualified deferred compensation arrangements with a sound succession and development plan. “Part of creating a sustainable ethic of succession is building in a cost, beyond salary, for competitors to acquire your next-in-line executives. A properly structured supplemental executive retirement plan adds to a competitor’s cost while creating a deferred compensation incentive for your executives to stay.”

Executive salaries have increased commensurate with the size and complexity of credit unions over the years. But tax regulations can limit credit unions’ contributions to pension and defined-contribution retirement plans.

Executives also face Social Security maximums and potential limitations on disability insurance and corporate-purchased life insurance.

As a result, highly paid executives can generally expect a much larger gap than other employees between their pre- and post-retirement income.

Moreno suggested considering multiple options for closing this gap, such as:

  • "Nonqualified” plans such as a section 457(f) plan. This plan is a promise of payment to the executive under agreed-upon circumstances, such as when the executive reaches retirement age or certain milestones provided he or she stays with the credit union until that date.
  • A split-dollar life insurance program that can be used with, or instead of, nonqualified plans. This plan uses a combination of credit union-financed premiums, a permanent life insurance policy, and the tax treatment of life insurance to provide benefits to executives in retirement.

Due to potential tax and legal risks inherent in a plan design, he advised working with a  qualified attorney and experienced providers for any type of non-qualified deferred compensation plans.

“As with your entire succession plan,” he said, “review them regularly so the next time your credit union must replace a top executive, the right person is already on board.”