MAUI, Hawaii - Western society professes that the price tag on an item is a measure of the item's value. That rule applies to a piece of furniture, a car and even an employee's salary. Whoever earns the highest salary is considered to be the most successful. But how should a credit union gauge how much to pay its CEO to attract and retain competency? How should a credit union's board best determine the proper CEO base pay, incentive or bonus plan? CEO compensation is a mixture of elements, said Jerry Nelson, president/CEO, HRN Management Group speaking to a group-primarily made up of board members-at a session on "Everything You've Always Wanted to Know About Compensating Your CEO" at the "2000 Pacific Sun Educational Conference" sponsored by the California Credit Union League and the Hawaii Credit Union League. It includes base pay, bonuses, annual merit, recognition, and retirement benefits. A "well done" pat on the CEO's back from time to time by other credit union employees is also appreciated. Nelson referred to this type of recognition as "psychic income." "Everyone wants to be paid fairly, but how do you define what's fair?" Nelson rhetorically asked. The definition has changed. Past notions of pay said it was based on seniority and employers tended to pay as little as possible as a way to retain workers. Nowadays, pay is a means to hire and retain the best employees and an incentive to increase employee performance. Is base pay important to the CEO? Absolutely, says Nelson, it makes up over 80% of their total cash compensation. That's why the consequences of an ineffective CEO base pay program can prove to be so serious: if a credit union pays a CEO too low a base pay they risk the CEO leaving, but paying too high can prove costly to the credit union. There is no formula for credit unions to use to determine the most appropriate base pay for CEOs, although asset size and geographics have a bearing. So do annual performance appraisals. Apparently attendees at Nelson's session agreed. When asked how many do performance appraisals of their CEOs, about three-quarters raised their hands. "Annual performance appraisals are just as important for CEOs as they are for other employees," Nelson explained. "They provide the CEO with direction and allow the credit union and the CEO to set objectives. They're mutually beneficial." When designing a CEO performance appraisal model, Nelson suggests credit unions apply the following performance criteria standards: 50% to financial stability measurements including a year-end quantitative analysis of the credit union's performance in selected categories measured against a predetermined standard; 25% to a board review that takes into account an aggregate average evaluation score of the CEO by each board member using a list of valued survey questions; 25% to a management leadership review. While few credit unions dispute the importance of providing CEOs a base pay, they're less certain about how to treat a CEO bonus - is it an entitlement or a benefit? Statistics may answer that question. While 95%, 85% and 90% of industrial and insurance businesses and banks, respectively offer CEO bonus plans, credit unions lag behind, with only 65% offering them. Part of the dilemma, of course, is that since credit unions don't have stock options, they have to come up with other ways to bonus CEOs. Among the alternatives are discretionary plans. While these tend to be flexible, the downside is they're also after-the-fact bonuses, tend to be subjective and not based on any pre-set rules. In comparison, performance bonus plans are more directional and flexible and the conditions for the awards are known in advance. The most common factors performance bonus plans are based on are credit union earnings, board evaluation, loan growth, CAMEL rating, member satisfaction and share growth. No matter how amiable the working relationship, there will probably come a time when a CEO considers retiring from credit union service, and that also needs to be figured into the CEO's compensation package. "A credit union needs to ask itself three questions," Nelson advises. "Can the CEO retire at 70% of their current pay? Should the CEO be `handcuffed' to the credit union? Is there a way to accomplish these without negatively affecting the credit union and the CEO?" There are various retirement options credit unions can consider offering CEOs, he continued. Among these are 457-F plans and split-dollar insurance plans. In the end, said Nelson, the total CEO compensation package is a combination of factors that attract and retain the most qualifies candidate for the job. The contributing factors are not mutually exclusive. -
ekingoff@cutimes.com
