Guest Opinion: Executive Pay Question Need Real Answers
It seems that not a day goes by without a headline screaming about outrageous executive pay, with allegations of the fox robbing the henhouse and the inequities of compensation in our capitalistic society.
Let’s be honest here – we are hearing so much from the 99% because our world seems to be more and more divided between the “haves” and “have-nots,” and the “haves” seem to have no limits with respect to how deeply they will dip into the coffers for their own good.
The latest debacle involving JP Morgan Chase tells us that we don’t yet have a handle on the abuses that can happen in our financial system.
But before we break out the pitchforks and torches, we owe it to ourselves to dig deeper into the numbers behind executive pay and how they are reported. In the credit union movement, state-chartered credit unions have a requirement that they file an annual Form 990, which, among other things, requires disclosure of compensation for the top executive team at the credit union. In looking at the form, strange anomalies can appear, and if one is not aware of what one is looking at, the urge to cry foul can arise before all the facts are known.
A Form 990 is an imperfect reporting tool at best. Its purpose is to provide greater transparency in tax-exempt entities. This is a noble undertaking – seems hard to object to that goal, doesn’t it? But the reporting boxes that credit unions are forced into in an effort at full disclosure can sometimes result in warped and confusing results.
Part VII of the Form 990 is the place to go to learn about officer, director and key employee compensation. But take note: the Form 990 does not ask what the compensation philosophy was that the board used in establishing the compensation package for the executive team that appears there.
It does not ask for a break down of compensation. It does not ask what portion of the reported income is a bonus, and if the bonus is for the current reporting period or for multiple years. It does not ask if the bonus paid was actually a performance-based incentive plan that required that the executive achieve specific targets in order to be paid the bonus. And, it does not ask if the reportable income might include any very long-term or retirement income.
Building on those themes, the very nature of credit unions, because they are nonprofit entities, lends to the Form 990s in some cases not reflecting annual compensation levels realistically at all. As such, they are governed by the arcane rules under Internal Revenue Code Section 457 regarding deferred compensation. Under those rules, specifically for nonprofits, if an amount that might be deferred for an executive is vested and no longer subject to a substantial risk of forfeiture, then the executive is taxed currently on that amount whether that amount has been paid or not.
No one in their right mind voluntarily signs up to pay tax on money they have not received. That’s a red flag if they do.That leaves credit unions with the additional challenge of providing their value creators with a reason to stay at the credit union for the long term.
Credit unions cannot install a deferred compensation plan that allows for vesting of benefits that are paid at the end of a long and successful tenure for a job well done, as their for-profit, banking counterparts can. Instead, credit unions must design plans that either vest all at once at the end of a long career, or are vested and paid out during the executive’s working career. Either way, the resulting payments, without benefit of separation, explanation, and context with the bigger picture, can look strange indeed when lumped together on the Form 990.
A better way to measure reasonableness of a credit union’s compensation is to find out what the market pays, what the individual credit union pays, and most importantly why. Credit union members may be surprised to learn that the ratio of CEO pay to the average employee in the Fortune 50 is 213:1.
In the credit union movement, the ratio is typically under 10:1. There are surveys available that not only show salary and bonus data, but also show the nuances of executive pay that may take the form of performance-based long-term incentives, retirement income, or other forms of long-term pay that are tied directly to value creation for the credit union members. That is where we should be focused, not on an arcane government form.
The question that should be asked is, “Is the membership getting the value for their money, when that money is allocated to attract, retain and reward the key leadership team for devoting its talents to growing the credit union for the benefit of the members?” If the compensation is driving value for the credit union and its membership, is affordable and competitive given the credit unions size, then it most certainly would be considered reasonable.
Credit union board of directors, which are made up of volunteers from its membership, are charged with the daunting task of assuring that the credit union has a strategic direction, that it has the right people in place to move toward its strategic goals, and that it has the means to keep that leadership motivated in the long term so that the credit union can continue to grow and benefit its members.
Compensation is one of the tools the board uses to structure a strategic plan that includes leadership, vision, continuity and reward. While the reward, at first glance, may appear to be excessive, as credit unions face increased competition for talent from within and even outside the movement, they will need to adjust the way they approach executive compensation and also the way that it is structured.
The amounts we see will increase for sure, but what is most important is that the resulting compensation plans are performance based and linked to specific results that drive value for the credit union membership. And, when properly structured, it is the membership that wins.
So, the next time you scan a headline that purports to uncover the latest abuse in executive pay, read beyond the headline, and know the right questions to ask to assure that you are comfortable that your credit union is paying its leadership team right, now and into the future.
Guy Collins is the principal at Executive Compensation Services. Contact (626) 914-2333 or email@example.com.