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DURHAM, N.C. – The components that make up an executive’s compensation package are pretty standard but a popular strategy being adopted by many credit unions considers performance tied to short-term cash incentives. That was one of the findings shared at a recent Mid-Sized FCU CEOs Roundtable here. Representatives from eight credit unions attended the session, which covered a range of executive compensation topics such as the balanced scorecard, credit union branding, a regulatory update and an open forum. Hosted by Duke University FCU, the Roundtable sponsors included CUNA Mutual Group, First Carolina Corporate CU, and NAFCU. The typical compensation strategy involved paying for skill and experience with base salary up to 35% above the median for longevity and a modest bonus, said Tim O’Rourke, president/CEO, Matthews, Young Management Consulting, one of the Roundtable presenters. The new strategy currently in place by 85% of credit unions employs pay-for-performance with base salary up to market median and “aggressive” short-term cash incentives. With the new trend, CEOs forego some of their market base salary. The incentive potential is increased, allowing for competitive total cash opportunity and acknowledging a riskier situation for the CEO, according to O’Rourke. A CEO’s incentive potential should be at least 25% of the base salary. It is important for the board to understand what kind of people they are trying to attract or retain, he pointed out, adding “it’s time for base salary to climb through the range.” “It typically takes five to seven years for [a] CEO to reach [the] midpoint between a poor performer and a top performer,” O’Rourke told attendees. One performance gauge being used by more credit unions is the balanced scorecard. It ties daily operations to overall strategic objectives, including measuring member service as well as credit union safety and soundness and financials. To effectively implement a balanced scorecard (BSC) takes about five years, said Lee Fogle, president/CEO of $69 million Duke University FCU. Logistically, the COO and senior management are responsible for the three-year tactical plan, which drives the BSC one-year plan. Senior management is also responsible for the BSC and the annual budget while the CEO functions in the role of consultant for the tactical and BSC plan. “The beginning of the BSC process is translating the vision,” Fogle said. “The board of directors and the CEO are responsible for the five-year strategic plan and vision. This is communicated to the entire staff and the tactical planning process begins.” Fogle said the BSC has four perspectives: financial, member, business, and learning. While financials are “lagging indicators,” they’re still key because in order for a credit union to do well in this category, they must do well in the others. “Each quadrant has a set of critical measures,” Fogle said. “The difficulty is to identify and collect data that is relevant. Prioritizing which measure to select is done by considering the importance of the measure and the cost/difficulty of getting the measure.” The Roundtable participants also engaged in an open forum. One thought shared was a CEO’s contract should be about three years because it “protects the CEO if the board decides to change direction.” The growing number of credit unions expanding to community charters was also up for discussion, specifically when there is field of membership overlap. “There is resistance in the community when credit unions become community charters,” it was said. “A credit union needs to demonstrate that they are not targeting members of existing financial institutions.” The very controversial topic of credit unions converting to mutual savings bank captured the attendees’ attention during the open forum. About 20 credit unions have converted to mutual savings banks, it was said. “There is concern that members do not fully understand what this conversion means to them. It would be good for NCUA Bylaws to require that 50% of the membership should attend the meeting to vote on conversion,” a participant pointed out. Another perennial topic was credit unions maintaining their “cooperative spirit.” There is a fear that “many (of them) are becoming more competitive and aggressive and there is concern that (they) could lose the cooperative spirit,” a participant said. While some larger credit unions have taken over smaller ones, mid-sized credit unions “should consider merging with smaller CU’s, just like large CUs are doing.” Working against a one-hour deadline, the Roundtable’s participants brainstormed for the “60 Ideas in 60 Minutes” session. The $68 million Henrico FCU came up with the idea of posting ACH one day earlier for its core members. To share ideas of providing better service to members, $131 million Arlington Virginia FCU proposed “Continental chats” where suggestions are shared over Continental breakfasts held in each department. The $49 million Bellwood FCU suggested providing board members with slips highlighting “political issues” on one side and a contribution form on the other. To motivate staff, First Carolina Corporate CU said washing an employee’s car might help while $47 million American Partners FCU actually packaged and sold two $500,000 loans to Fannie Mae. Duke University FCU opened an express service center, which sold automated services and $29 million National Science Foundation FCU suggested collecting cell phones and giving them to the police and fire department to donate to the needy. The $43 million Choice Community CU was a big proponent of training, recommending that federal holidays be turned into staff training days. To help out charitable organizations, $45 million Entrust FCU came up with the idea of contributing income collected from debit/credit cards. Former NAFCU Regulatory Affairs Director Gwen Baker provided a regulatory and legislative update on CURIA, bankruptcy reform, charter conversions, “bankers’ attack” on the tax-exemption, and deposit insurance reform. Other issues discussed were the Bank Secrecy Act, overdraft protection guidance, FASB’s “pooling of interest going away,” and RESPA reform. Of the latter, NAFCU voiced concerns about the proposal due to lenders’ costs and the potential for consumers receiving less disclosure on bundled services. The trade group is seeking feedback from credit unions on what the impact might be for the long term. The next Mid-Sized FCU CEOs Roundtable will be hosted by $110 million Carolina Trust FCU in Myrtle Beach, S.C. Feb. 16-17, 2006. [email protected]

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