Executive Compensation: The More It Changes, the More It Stays the Same

By Kristina Grebener
Senior Research Analyst
Credit Union National Association

As the post-recession economy gets stronger the demand for executives is heating up. The Herman Group, a firm concentrating on workforce and workplace issues, has been monitoring key measures of workforce demand such as labor statistics, economic factors, and demand for executives by retained search firms. Based on these measures, the group has identified at least one major U.S. metropolitan region that has already moved from an employer’s market to an employee’s market. Furthermore, the group has also identified ten other regions poised to make the move in the future.

A tight labor market is a time of great leverage for executives with proven leadership and competitive compensation packages are essential in attracting and keeping high performing executives. However, the corporate scandals of the past few years have brought executive compensation under the scrutiny of regulators, Congress, and the public. In response, companies across the nation are reexamining the way they compensate executives.

According to Mercer Executive Compensation Consulting, corporations are striving to create executive compensation programs that are fair but responsible and above reproach. Packages are being streamlined with more emphasis placed on cash and its link with executive performance.

Cash compensation is the largest component of the total compensation package of CEOs working at credit unions with $100 million or more in assets, according to CUNA’s 2004-2005 CEO Total Compensation Survey. In 2003, base salary accounted for an average of 81% of a credit union CEO’s total compensation package. Moreover, total cash compensation – base salary, bonuses, and incentives – comprised 90%, on average, of a CEO’s total compensation package (see figure).

Interestingly, the likelihood of a credit union CEO receiving variable pay – bonuses and/or incentives – dropped slightly from 84% in 2002 to 80% in 2003. The average amount of variable pay, however, remained relatively steady at 14.5% of base salary ($26,500 in 2003 compared to $25,800 in 2002). Earnings and loan growth were the top criteria used in determining performance-based pay.

Credit unions not only compete among themselves for top executives but among banks and other financial institutions. When evaluating your credit union’s CEO compensation package, it is essential to use comparisons from similarly-sized credit unions as well as similarly-sized banks.

However, for right now and the foreseeable future, the average credit union CEO earns less in cash compensation – base salary combined with variable pay – than the average bank CEO (see figure).

Regardless of the increase in demand for executives and the changes in the way they are compensated, the key to remember is that executive compensation is not driven by a single element such as salary. Executive compensation is a package consisting not only of base salary but bonuses and incentives, supplemental benefits, and perquisites. Components of a successfully crafted package work together in a complementary fashion with each element treated and negotiated in the context of the others to achieve the desired goals.

Understanding the principals of a competitive compensation package is the first step in competing for and retaining top CEO talent. The second step is making sure your CEO compensation package measures up against that of peer institutions. 2004-2005 CEO Total Compensation Survey presents nationwide figures categorized by asset size, region, and many other points of comparison for that purpose.

CUNA’s Center for Research & Advice also publishes the 2004 Complete Credit Union Staff Salary Survey, the 2004 Geographic Customized Salary Survey, the 2004 Small Credit Union Staff Salary Survey for credit unions with less than $20 million in assets, and the 2003/2004 Credit Union Staff Benefits Survey. For more information, visit http://advice.cuna.org/ and click on "Reports".

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Credit Union Compensation Trends: Salary Increases Down, the Use of Variable Pay Up, and Change Is on the Way