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Executive Benefits: Recruiting in Today’s Market
NCOFCU, September 2016
Rob Fitzgerald, Area Vice President
Agenda
• Overview of executive compensation strategies
• Overview of executive benefit plans• Trends in marketplace• Compliance• Q&A
Attracting Executive TalentCompensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction.
1. Competitive market for talent2. Increased scrutiny and regulatory changes3. Pay for performance − variable pay4. Strategic and reputation risk 5. Fair and reasonable − executives, credit union, and
members
Attracting Executive Talent: Compensation Strategy
• Implement well defined and consistent strategy linking business and HR choices
• Make decisions grounded in competitive strategy
• Consider the needs of today and potential evolution in the future
• Consider compensation as an investment• Competitive compensation is a succession
planning tool
What is the cost of executive turnover?
Executive Turnover
• Delay in achieving strategic goals• Negative impact on performance• Negative impact on morale, motivation• Poor impression on constituents, potential
candidates• Lack of leadership in day-to-day
operations
What is the value of retaining key personnel for career service?
Retaining Executive Talent
• Long-term return on investment• Strategic vision is advanced, uninterrupted• Stronger connection to constituents• Institutional knowledge stays in-house
Compensation Package
• Systematic approach to providing monetary value to employees in exchange for work performed
• Achieves several purposes assisting in recruitment, job performance, and job satisfaction
Compensation Components
Base salary
Bonus/incentives
Benefits
Perquisites
Board Responsibility
Board provides for hiring and compensation of officers and employees
Federal Credit Union Act
The Role of the Board of Directors
Key concepts• Understanding the market• Understanding the options• Understanding the needs of the credit
union’s executive team• Importance of the board retaining the
consultant (rather than the executives)• Ongoing executive compensation oversight
Executive Benefits: Why?
• Better candidates• Faster processRecruit• Continuity• Material impactRetain• Share in organization’s success• LongevityReward
Executive Benefit Plan Types
Deferred Compensation
• 457(b) – 403(b) excess plan, no vesting date
• 457(f) –Employer-funded benefit, with vesting date
Welfare Benefit – Split Dollar
• Tax-free income to participant
• Vesting date for retention
• Cost mitigation to institution
Section 83 Bonus
• Deferred compensation and welfare benefit
• Tax-free income to participant
Nonqualified Deferred Compensation Plan: 457(f), SERP, SIP
Features• Benefit defined by and paid for by credit union• No IRS limitations on expense/contributions • Flexibility in benefit amount and payment
schedule• Typically benefits are “at risk” - they are
generally forfeited following voluntary termination or for cause prior to vesting date
Nonqualified Deferred Compensation Plan: 457(f) Plan
Accounting• Credit union records annual expense to accrue
the intended benefit• Benefit is payable upon the stated vesting date• Benefit is taxable upon vesting• Benefit is payable in lump sum
Nonqualified Deferred Compensation Plan: 457(f) Plan
PROS• Predictable expense• Plan ends at executive’s termination• Option for cost-recovery investment
CONS• Legal promise with associated ongoing expense
and liability
Nonqualified Deferred Compensation Plan: 457(b) Plan
Features• Annual contributions made by the executive
and/or the credit union• Combined annual contributions may not exceed
IRS limit ($18,000 for 2016)
Nonqualified Deferred Compensation Plan: 457(b) Plan Accounting• Credit union records an expense each year to
accrue annual contributions• Earnings on contributions are based on the
executive’s allocation among offered investment options (similar to 401(k) plan)
• Contributions and earnings grow tax-deferred• 100% vested at all times• Distributions are taxable to the executive when
received
Nonqualified Deferred Compensation Plan: 457(b) Plan
PROS• Predictable expense• Plan ends at executive’s termination
CONS• IRS limits can make accruing a meaningful
benefit difficult
Welfare Benefit Plan: BFB Split Dollar
Features• Credit union pays premiums on life insurance
policy owned by the executive• Premium payments are treated as loans from
credit union to the executive• Credit union is repaid the premiums plus interest
from the policy death proceeds• During retirement, executive has access to tax-
free income from policy values
Welfare Benefit Plan: BFB Split Dollar Accounting• Executive owns the policy, so the IRS treats the
premium payment as a loan• “Loan” is nonrecourse to the executive and
estate, but credit union’s recovery is secured by collateral assignment of policy’s cash values and death proceeds
• Interest rate is locked in at the long-term applicable federal rate (AFR) when premium is paid
Welfare Benefit Plan: BFB Split Dollar
PROS• No promised benefit• Built-in cost recovery• Flexibility regarding vesting• Benefit caps
CONS• Long term commitment – 30 year Mortgage• Interest rate is fixed
Section 83 Bonus: BFB Restrictive Bonus Plan
Features• Credit unions pays premiums on life insurance
policy owned by executive• Premium payments are taxable income to the
executive• Credit union bonuses executive for taxes due• During retirement, executive has access to tax-
free income from policy values
Section 83 Bonus: BFB Restrictive Bonus Plan
Accounting• Credit union can choose to offset cost through
the use of institutional insurance or annuities • Premiums and bonus are expensed as paid• No liability accrues on the books
Section 83 Bonus: BFB Restrictive Bonus Plan
PROS• Predictable expense• Plan ends at executive’s termination• Option for cost-recovery investment
CONS• Ongoing expense and bonus commitment until
termination
Trends
Trend #1
Executive benefits are growing in usage
201022% of credit unions
201628% of credit unions
NAFCU-BFB Survey
201663% of credit unions offer nonqualified plans
$75M assets and greater
NAFCU-BFB Survey
Why Is This Happening?
70%+ aged 50+
3 out of 10 retiring
soonRecruiting
frenzy
Trend #2
Boards are increasingly using compensation studies to ensure
fair and reasonable compensation
NCUA Background
Federal Credit Union Act
Reasonableness
Examiner’s guide
Compensation Study1. Responsibilities / duties2. Credit union size3. Location4. Circumstances
Compensation Study5. Related industries6. Alignment with
compensation philosophy7. Regulatory compliance
Trend #3
Executive benefit plans are customized to each individual
credit union and executive
One Size Does Not Fit All
Variables
• Compensation philosophy• Strategic needs• Performance measures• Executive’s experience• Executive’s retirement horizon• Credit union profile• And more!
