As the economy continues to improve and baby boomer executivescontinue to retire, credit unions are facing new pressures andchallenges when it comes to attracting and retaining executivetalent, from CEOs to executive and senior vice presidents.

“There was a time when the market had gone south for all of usand few executives were making changes and moving,” Dr. Loretta P.Dodgen, managing partner for human resources firm HCSGroup inCharlotte, N.C., said. “That has changed. We are seeing a lot moremovement among the top executives and that is creating a dominoeffect.”

Dodgen and other experts provided insights into how creditunions can develop and invest in competitive compensation packagesthat will not only attract and retain executive talent, but alsoassure regulators that the pay and benefits, as well as deferredcompensation plans, are fair and reasonable.

Generally, NCUA examiners don't scrutinize a credit union'scompensation practices, according to Kirk Sherman, a partner withSherman & Patterson in Maple Plain, Minn., which specializes intaxes, nonqualified deferred compensation and employeebenefits.

“If the credit union is healthy, then the rule is to leavethings as they are unless the practices are not safe and are notsound,” Sherman said. “One example of an unsafe and unsoundpractice is when the compensation significantly exceedscompensation paid in similar settings.”

Dodgen pointed out, however, that regulators and credit unionmembers are increasingly scrutinizing pay for performance orvariable pay structures.

She noted that members can easily find out what executives arebeing paid by accessing IRS Forms 990s, which are public financialdisclosure documents that non-profit organizations such as statechartered credit unions are required to file annually.

In the past, if there was a general understanding that anexecutive did a great job, the board would simply award him or hera $25,000 bonus, and it would be duly recorded in the meeting'sminutes. In today's business climate, however, that doesn'twork.

“You have to have a rationale for giving those incentives forperformance because it is a strategic and reputational risk,”Dodgen said.

When working with board members, Dodgen is always asked how theycan determine the right amount of compensation for theirexecutives. While it is important for credit union boards to offera competitive base salary, she said, that is only one factor thatexecutives weigh in deciding whether to stay with or leave a creditunion. Some of those factors include the credit union's locationand quality of life, as well as the credit union's challenges andopportunities.

“The bottom line comes down to can I [the executive] afford totake this job and are there other [credit unions] that are alsooffering opportunities and are offering a more competitive packageto me,” Dodgen explained. “At the same time, you have to considernot only what is good for the executive but what is good for thecredit union and its members.”

Credit union compensation databases are good tools that can helpdirectors determine the range of competitive base salaries fortheir executives, she added.

“When you start looking at pulling a number, what I wouldencourage you to do is to think more of a competitive market rangethat fits your credit union,” she advised. “And within that range,based upon other elements of the compensation package, determinewhere that individual would fall based on his or her success andexperience.”

She also noted that directors think twice before promoting asenior executive to the CEO's position in what they may consider a“bargain deal.”

“What invariably happens [in that case] is that within sixmonths, the board has a disgruntled CEO who is questioning if theboard really values his contributions,” she said. “Now the board isin the position of playing catch up, and it's hard to catch up andmaintain a competitive strategy.”

Instead, board members should look at compensation as aninvestment, not as an expense.

“If you are looking at [compensation] and say you need to cutback on expenses, then you are constraining your ability to grow,”Dodgen noted.

Poor decisions by the board involving compensation may lead tothe departure of executives, which makes matters even morechallenging for any credit union.

Large accounting firms have estimated that the cost of executiveturnover can be as high as six to eight times the annual salary ofan executive, depending on the complexity of the position, ChrisBurns-Fazzi, principal for benefits consultancy Burns-Fazzi, Brockin Charlotte, N.C., said.

“If you're losing people, your strategies and goals aredelayed,” Burns-Fazzi said. “I had a credit union tell me if theydid not hold their executive team together they could not possiblymeet their five-year goals. They are already two years into theirstrategy and they are in danger of losing some key executivesbecause of market competitiveness.”

In addition to base salary and benefits, specific executivebenefit plans such as nonqualified deferred compensation 457(f) and457 (b) plans, the Welfare Benefit: BFB Split Dollar plan and theSection 83 Bonus: BFB Restrictive Bonus plan are effective optionsfor retaining executives.

While all of these executive benefit plans have pros and cons,regulators require board directors to fully understand them andselect plans that are fair and reasonable, Burns-Fazzi said.

“It's very expensive to replace talent, so credit unions withthe talent need to make sure they have a plan in place to retainthat talent,” she said. “It's like any asset. If you take a lot oftime to cultivate and develop an asset, you don't want to just loseit. Human capital is the most important asset for credit unions orfor any institution.”

Burns-Fazzi noted that regulators are taking a closer look atthese executive benefit plans mainly for safety and soundnessreasons, but also for credit union succession planning.

“They want credit unions to develop these plans because theyknow that talent is important and expensive to replace,” she said.“So while regulators want credit unions to use these plans, theyalso want them to be careful and knowledgeable about what they'redoing. These plans can have a detrimental impact on the bottom lineif a board does not watch what's happening, and that's whyregulators want to make sure the board is doing its duediligence.”