Employment Contracts Benefit Both Parties

By Vicki Lenz Joyal
Vice President, Research Services
Credit Union National Association

CEOs with written employment contracts or agreements enjoy higher base salaries and bonus awards, according to results of a new survey of large credit union CEOs from CUNA’s Center for Research & Advice. CEOs with employment agreements earn, on average, 10% more in base salary and 47% more in bonus pay than CEOs without contracts.

But a higher salary and better bonus is more of an added benefit than a primary motivator for establishing an employment agreement. In fact, a written employment agreement can be mutually beneficial to prospective CEOs and boards alike. And negotiating a written contract with a new CEO should be a standard step in the hiring process, especially for boards of directors in highly competitive larger asset-sized credit unions. Unfortunately, less than half of CEOs of credit unions with $100 million or more in assets (46%) have an employment agreement.

A written contract acts like a safety net for both parties. Advantages to the credit union board include:

• receiving a commitment from the newly-hired CEO to stay with the credit union for a specific period of time;
• having an established set of procedures for ending the relationship, with or without cause; and
• minimizing the likelihood of a wrongful termination lawsuit.

Advantages to the CEO include:

• gaining a sense of job security;
• clarifying job requirements, expectations, and level of authority;
• identifying executive benefits; and
• establishing a severance package should the relationship deteriorate.

The average initial term of a credit union CEO’s employment contract is 3.4 years. This provides some assurance to the board that their newly-hired CEO won’t be seeking other opportunities for at least three years. However, initial contract terms vary considerably. For example, 22% of large credit union CEOs have an initial contract term of just one year; and at the opposite extreme, 11% have an initial contract term of six years or more.

Two-thirds of CEO contracts include a provision for automatic renewal beyond the initial term. After the initial term, an open-ended contract can be established with attachments that can be updated on a periodic basis to reflect changes in compensation and benefits. In other words, the first contract is likely to be the most difficult to draft and negotiate, but your initial investment in time and attorney fees is likely worth it in the long run.

Most CEO contracts (82%) include a severance provision in the event the contract is terminated for non- criminal reasons such as merger or performance. The severance package provides for, on average, 13 ½ months of salary in the event of termination. More than half of CEO severance packages (60%) cover salary for at least a full year.

In addition to contract terms and severance provisions, the first ever E-Scan’s 2003-2004 CEO Total Compensation Survey from CUNA’s Center for Research & Advice gives comprehensive detail concerning every facet of CEO compensation, including:

• Base salary,
• Incentives and bonuses,
• 15 perks,
• 10 benefits, and
• SERP (supplemental executive retirement plan) offerings and circumstances.

Designed exclusively for credit unions with $100M+ in assets, the report also includes estimated values of the CEO total compensation package comprised of cash compensation (base salary plus variable pay), the cost of benefits and perquisites provided by the credit union, and the average annual value of car and car allowances received.

Over the next five years, 30% of CEOs from large credit unions plan to retire. An additional unknown percentage of CEOs will be looking to further their careers by moving upward or onward. By utilizing a CEO employment contract, both employer and employee will receive an assurance of stability in this high turnover market environment.

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