Market-Driven Salary and Performance Pay Adds Up to CEO Sticker Shock
Credit union boards replacing retiring baby boomer CEOs, especially those who haven't shopped for top execs in years, are doing double takes when they look at today's executive compensation packages, said Susan Mitchell, CEO of O'Rourke, Mitchell and Associates.
Sometimes the disparity between retiring and incoming CEO pay is so large, the retiring leader feels resentful, particularly if he or she worries about outliving retirement savings. And, adding insult to injury, boards often expect the retiring CEO to train the new hire, she said.
"Retiring CEOs put in years building trust with their boards," Mitchell said, "and for their replacement to come in and ask for that much money...and get it...goes against the grain of boomer thinking, that you should work your way up."
Board members, often 60 or older, aren't comfortable with the new compensation packages, either. Those who retired from the workforce years ago may be out of touch with the rate of inflation. And many use their former salary, or salaries within their select employee groups, as improper benchmarks.
In fact, some boards are thrown so "emotionally off balance" when replacing a long-standing CEO, Mitchell said, they often retire along with the manager, creating an even bigger transition for the institution.
"It has to start with a transition plan and an educational plan, so the board can become aware of the issues, work them out ahead of time, including an issues that arise with the current CEO," Mitchell said. "That way, when it comes tie to sit down and start the recruiting process, everyone is already six months into it, and can make clear headed decisions."
Gordon Dames, president and CEO of $2.5 billion Mountain America FCU, will retire at year-end after putting in 17 years in the corner office. The industry legend grew Mountain America from a $265 million cooperative into one of Utah's top retail institutions, and he said he's been blessed with a board that has kept his compensation in line with the going rate. However, he said CEO sticker shock is nothing new.
"That's been going on since I got into credit unions," Dames said with a chuckle. "I remember 25 years ago, I was sitting at a roundtable meeting with a CEO who was retiring after 20 years on the job. He said, 'Well, now I know how it feels to retire. I finally know what I'm really worth.' Apparently, the new CEO was getting paid $50,000 more than the guy who had built the credit union, and he was very bitter about it."
Dames said boards could avoid that resentment if they involve the CEO in the compensation process throughout the executive's tenure. He said he's personally experienced a board that mistakenly used SEG pay scales and structure to determine his pay and refused to pay incentives because the FOM industry didn't.
In contrast, Mountain America volunteers met with Dames at the beginning of each year during his reign, taking time to discuss the past year's performance and upcoming year's goals. In contrast, many CEOs never receive annual reviews or have any idea what determines their raise or bonus.
Mitchell said incentive pay is a common issue among her clients. Today's new 30- and 40-something CEOs want a market-driven core salary, but they also prefer that up to half of their compensation be based on key performance measurements. And, they don't want a limit on how much they can achieve, and in turn, earn.
"The new leaders want to be recognized for the work they put in," Mitchell said. "We're seeing more of an entrepreneurial sprit today because this generation has seen their parents forced into early retirement or heard news stories about unethical corporations losing workers' pensions. They don't trust the old guard; they want to be in control of their own destiny."
Today's executives also expect excellent benefits, a good retirement plan and a company car. Mitchell said some credit unions are also assisting in relocation, given today's economy and real estate market.
Even though he had nothing but praise for his board, Dames said the succession won't be entirely pain-free. The CEO estimated he's only had 10% board turnover in nearly two decades, and volunteers are nervous about the uncertainty of change.
"We've had a lot of success, and according to my directors, the CEO has been responsible for that," Dames said. "Now that they have to find a replacement, they keep thinking about that progress we've had, and their human inclination is to sigh and wonder if we can keep this up. They worry about finding someone with the same demeanor, who will be as effective. It's a tough decision, but the fact is, there are plenty of leaders who are ready and willing to step into our shoes."
Dames said Mountain America received 500 applications for the high-profile position, but with the help of staffing firm D. Hilton Associates, the board has narrowed the field down to a handful of finalists. Dames said he isn't directly involved in the selection process, but said he would tell the board if he disapproved of one of their finalists. For the record, he approves of them all.
"If they pick an internal candidate, they'll get a gem. If they pick an external candidate, they'll get a gem," he said.
However, both Dames and Mitchell said skill sets aren't enough to ensure a new CEO is successful.
"This isn't about selecting the cheapest bidder, it's about finding somebody who totally understands your culture," she said. "Quite often, the board decides to look for somebody who's completely different, somebody who will embrace innovation and all these sexy things. They automatically assume the next step must be out with the old, in with the new, and that's usually not the case."