WASHINGTON – On its face a "phantom" stock plan doesn't sound like something that would have much of a chance in the non-profit credit union industry, but as competition for CU execs becomes more fierce it and other like plans may become a compensation option considered by more credit unions. According to Richard Garabedian, a financial institution lawyer with the Washington D.C.-based Jenkens & Gilchrist law firm, a phantom stock plan mimics stock option plans that for-profit banks can offer. "As a cooperative, a credit union does not have the ability to provide its employees with equity based benefits such as stock options or grants of free stock. Credit unions may however offer employees plans that can replicate such benefits in many ways," said Garabedian. "These `phantom' stock plans are a valuable tool to attract, motivate and retain talented employees." Stock option plans are common in large public companies and commercial banks, and even in the community bank realm, the financials most closely comparable with CUs, they are prevalent. About 60% of community banks offer some sort of stock option plan that they can use to lure top talent. Garabedian said the goal of the plan should be to encourage and reward employees for making the credit union successful. Here's how a phantom stock plan works. The credit union's board authorizes a pool of shares to be distributed among participants. Participants can include just upper management, or the stock shares can be available for all employees. Each participant receives shares at no cost. There can be a formula for awarding shares or shares can be distributed at the board's discretion. The board then sets a performance benchmark, such as Return on Assets, Return on Equity, or others that the stock's value is tied to. Garabedian offered the following working example: Assume that an employee is given 100 shares at an initial value of $10 for a total of $1,000. If the CU is using a combination of ROA and ROE for its benchmark, and the CU exceeds its target by 20% in the first year, that $1,000 worth of stock is now valued at $1,200. If the CU exceeds its goal by another 20% next year, the value is now $1,440. One potential danger of these plans is credit union employees doing whatever it takes to meet the board's goals for their own personal monetary gain. Garabedian says dangers like that already exist with CEOs that are awarded performance bonuses, and that goals can be established that limit that risk. "You establish a target that's reasonable and will not cause people to emphasize profit over service to the membership," said Garabedian, who said goals can range from increasing the loan portfolio, to reducing the delinquency ratio. "It's really just another type of bonus plan that's styled differently." Garabedian, who has a number of CU clients, said he knows of no CUs doing this at this time, but similar plans are present in the thrift industry. Also, he noted that he has not checked with NCUA but said he doesn't see any reason a CU couldn't implement a phantom stock plan. "It's in the nature of other compensation plans for execs. Credit unions have 401Ks, profit sharing and supplemental retirement plans. It's just a different type of benefit plan," said Garabedian. An NCUA spokesperson said that no legal opinions have been issued on these plans, and a full request would have to be submitted in writing for the agency to give its legal opinion. Joe Tripalin, assistant vice president of the executive benefits division of CUNA Mutual Group, said with a number of CU CEOs expected to retire in the coming years, and a new crop of candidates coming from the banking industry, credit unions are going to have to get more competitive on the compensation side. "It's something that people have been trying to do for awhile. Really what it's trying to do is put together an option program tied to a particular stock like if you worked for a corporation and had the opportunity to buy your corporation's shares of stock," said Tripalin. Tripalin said the intentions behind phantom stock plans are probably good, but CUNA Mutual, which recently launched a mutual fund option plan to help CUs get more competitive with compensation, has some concerns. "The reason we didn't feel comfortable with it is we didn't see any precedent out there in cases or comments by the IRS that would allow something like this to be used," said Tripalin. The main problem, according to Tripalin, is that there is no exchange of cash for property like in public stock. "It's not tied to any real property. The credit union isn't going out and actually buying a thousand shares of whatever stock. They're not physically buying a thousand shares. They don't really have the shares to transfer to the individual," said Tripalin. Garabedian said his firm's tax department has reviewed phantom stock plans, but has not gone to the IRS for an opinion. "Our tax department doesn't see any problems. I suppose if the need ever arose we could get a private letter ruling from the IRS, but you're not issuing equity," said Garabedian. Just as financial advisers warn against employees keeping too much of their 401K stock in their own company's stock, Tripalin said employees also shouldn't be banking solely on the credit union's phantom stock. "Even if we could figure out a way for the credit union to go out and buy shares in their own stock, we don't want employees putting all their eggs in one basket," said Tripalin. Garabedian said CUNA Mutual's options program is similar to a phantom stock program on the option side, however it does not give the employees any stake in the credit union. Tripalin said interest in CUNA Mutual's options program has been high. "It gives a credit union real flexibility. They can put together programs just to attract IT professionals. It doesn't just have to be for the CEO." [email protected]

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