America's CU Conference

Prepare for High CEO Turnover

Make sure compensation plans include entire executive team, urges Albraccio.

July 1, 2012

In years past, credit union compensation plans focused primarily on the CEO. But the status quo is beginning to change, and credit unions must now recognize the need to address proper compensation for their entire executive team.

It's important to build a compensation structure that will maintain the executive team and provide stability during a time of transition, said CUNA Mutual Group’s Scott Albraccio, executive benefits sales manager on Monday, during a Discovery breakout session at CUNA’s America’s Credit Union Conference.

During the next five years, credit unions across the country will be challenged with the task of replacing their existing CEOs. The CUNA 2011-2012 CEO Total Compensation Survey suggests 21% of credit union CEOs will retire during that time.

To prepare, credit unions should develop proper compensation packages for executives and their top lieutenants. Deferred compensation plans for C-level executives can create “golden handcuffs” that will prevent them from leaving if a new CEO joins the team, while providing continuity during the transition period.

Albraccio said without a proper executive benefits package in place, credit unions risk losing potential CEO replacements to other organizations, competing banks, and other credit unions. “Credit union compensation plans can no longer just focus on the CEO,” he said. “We also need to look out for our C-level executives, those who are likely to be the future CEOs.”

At the same time, existing CEOs face a potential compensation gap when they do decide to retire. The guidelines illustrated by ERISA (Employee Retirement Income Security Act) restrict the amount of money highly compensated employees can contribute to their 401(k)s, compared with lower-compensated employees.

On average, retiring executives receive 38% of their current income upon retirement, whereas front-line employees receive 60% to 65% of their income. Albraccio suggests credit unions begin implementing Supplemental Executive Retirement Plans (SERP) to eliminate the large disparity and avoid the potentially troublesome guidelines of ERISA.

SERPs provide many benefits for credit unions and their executives, including the ability to maintain continuity of strategic decision making while addressing financial needs of senior executives, so they can focus on their credit unions' long-term strategic goals and financial success.

Albraccio also advised attendees to have a formal CEO succession plan in place that includes an executive development component along with financial incentives to retain top talent. Only 63% of credit unions have a formal succession plan in place.

Some have a “real” succession plan while others have what he termed a “break in case of emergency” plan, which prepares the credit union for the death or rapid, unexpected departure of the CEO. It’s a short-term disaster recovery plan to keep the institution going until a new, permanent CEO is hired.

“The ‘break in case of emergency' plan is important, but 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.”  

Albraccio noted that during the next five years 52% of employers in the U.S. will be challenged with filling critical positions. Competition for competent CEOs will be highly competitive, creating a high level of urgency for a useful succession plan.

Although few CEOs are likely to depart between now and 2013, it’s crucial that credit unions have a plan in place for such a scenario. SERPs can be a valuable part of a succession plan and will encourage a smooth transition if the CEO departs.

Some examples of SERPs include:

  • 457 Supplemental Retirement Plan (b and f)
  • 7872 Split Dollar Life Insurance Plan
  • Executive Bonus Plan
  • Executive Long-Term Care Insurance
  • Executive Supplemental Disability

“Begin developing and implementing succession plans and SERPs now before it’s too late," urged Albraccio. "It’s imperative to recruit, retain, reward, and retire our key employees or we risk losing to our competitors.”