It seems that not a day goes by without a headline screamingabout outrageous executive pay, with allegations of the fox robbingthe henhouse and the inequities of compensation in our capitalisticsociety.

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 limitswith respect to how deeply they will dip into the coffers for theirown good.

The latest debacle involving JP Morgan Chase tells us that wedon’t yet have a handle on the abuses that can happen in ourfinancial system.

But before we break out the pitchforks and torches, we owe it toourselves to dig deeper into the numbers behind executive pay andhow they are reported. In the credit union movement,state-chartered credit unions have a requirement that they file anannual Form 990, which, among other things, requires disclosure ofcompensation for the top executive team at the credit union. In looking at the form, strange anomalies can appear, and if one isnot aware of what one is looking at, the urge to cry foul can arisebefore all the facts are known.

A Form 990 is an imperfect reporting tool at best. Its purposeis to provide greater transparency in tax-exempt entities. This isa noble undertaking – seems hard to object to that goal, doesn’tit? But the reporting boxes that credit unions are forcedinto in an effort at full disclosure can sometimes result in warpedand confusing results.

Part VII of the Form 990 is the place to go to learn aboutofficer, director and key employee compensation. But take note: theForm 990 does not ask what the compensation philosophy was that theboard used in establishing the compensation package for theexecutive team that appears there.

It does not ask for a break down of compensation. It does notask what portion of the reported income is a bonus, and if thebonus is for the current reporting period or for multiple years. Itdoes not ask if the bonus paid was actually a performance-basedincentive plan that required that the executive achieve specifictargets in order to be paid the bonus. And, it does not ask if thereportable income might include any very long-term or retirementincome.

Building on those themes, the very nature of credit unions,because they are nonprofit entities, lends to the Form 990s in somecases not reflecting annual compensation levels realistically atall. As such, they are governed by the arcane rules under InternalRevenue Code Section 457 regarding deferred compensation. Underthose rules, specifically for nonprofits, if an amount that mightbe deferred for an executive is vested and no longer subject to asubstantial risk of forfeiture, then the executive is taxedcurrently on that amount whether that amount has been paid ornot.

No one in their right mind voluntarily signs up to pay tax onmoney they have not received. That’s a red flag if they do.Thatleaves credit unions with the additional challenge of providingtheir value creators with a reason to stay at the credit union forthe long term.

Credit unions cannot install a deferred compensation plan thatallows for vesting of benefits that are paid at the end of a longand successful tenure for a job well done, as their for-profit,banking counterparts can. Instead, credit unions must design plansthat either vest all at once at the end of a long career, or arevested and paid out during the executive’s working career. Eitherway, the resulting payments, without benefit of separation,explanation, and context with the bigger picture, can look strangeindeed when lumped together on the Form 990.

A better way to measure reasonableness of a credit union’scompensation is to find out what the market pays, what theindividual credit union pays, and most importantly why. Credit union members may be surprised to learn that the ratio ofCEO pay to the average employee in the Fortune 50 is213:1.

In the credit union movement, the ratio is typically under 10:1.There are surveys available that not only show salary and bonusdata, but also show the nuances of executive pay that may take theform of performance-based long-term incentives, retirement income,or other forms of long-term pay that are tied directly to valuecreation for the credit union members. That is where we should befocused, not on an arcane government form.

The question that should be asked is, “Is the membership gettingthe value for their money, when that money is allocated to attract,retain and reward the key leadership team for devoting its talentsto growing the credit union for the benefit of the members?” If the compensation is driving value for the credit union and itsmembership, is affordable and competitive given the credit unionssize, then it most certainly would be considered reasonable.

Credit union board of directors, which are made up of volunteersfrom its membership, are charged with the daunting task of assuringthat the credit union has a strategic direction, that it has theright people in place to move toward its strategic goals, and thatit has the means to keep that leadership motivated in the long termso that the credit union can continue to grow and benefit itsmembers.

Compensation is one of the tools the board uses to structure astrategic plan that includes leadership, vision, continuity andreward. While the reward, at first glance, may appear to beexcessive, as credit unions face increased competition for talentfrom within and even outside the movement, they will need to adjustthe way they approach executive compensation and also the way thatit is structured.

The amounts we see will increase for sure, but what is mostimportant is that the resulting compensation plans are performancebased and linked to specific results that drive value for thecredit union membership. And, when properly structured, it is themembership that wins.

So, the next time you scan a headline that purports to uncoverthe latest abuse in executive pay, read beyond the headline, andknow the right questions to ask to assure that you are comfortablethat your credit union is paying its leadership team right, now andinto the future. 

Guy Collins is the principal at Executive CompensationServices. Contact (626) 914-2333 or [email protected].