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Executive Benefits: Recruiting in Todays Market NCOFCU, September 2016 Rob Fitzgerald, Area Vice President Agenda Overview of executive compensation strategies Overview of executive benefit plans Trends in marketplace


  1. Executive Benefits: Recruiting in Today’s Market NCOFCU, September 2016 Rob Fitzgerald, Area Vice President

  2. Agenda • Overview of executive compensation strategies • Overview of executive benefit plans • Trends in marketplace • Compliance • Q&A

  3. Attracting Executive Talent Compensation 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 talent 2. Increased scrutiny and regulatory changes 3. Pay for performance − variable pay 4. Strategic and reputation risk 5. Fair and reasonable − executives, credit union, and members

  4. 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

  5. What is the cost of executive turnover?

  6. 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

  7. What is the value of retaining key personnel for career service?

  8. Retaining Executive Talent • Long-term return on investment • Strategic vision is advanced, uninterrupted • Stronger connection to constituents • Institutional knowledge stays in-house

  9. 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

  10. Compensation Components Base salary Bonus/incentives Benefits Perquisites

  11. Board Responsibility Federal Credit Union Act Board provides for hiring and compensation of officers and employees

  12. 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

  13. Executive Benefits: Why? • Better candidates Recruit • Faster process • Continuity Retain • Material impact • Share in organization’s success Reward • Longevity

  14. Executive Benefit Plan Types Deferred Welfare Benefit Section 83 Compensation – Split Dollar Bonus • 457(b) – 403(b) • Tax-free income • Deferred excess plan, no to participant compensation vesting date and welfare • Vesting date for benefit • 457(f) – retention Employer- • Tax-free income • Cost mitigation funded benefit, to participant to institution with vesting date

  15. 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

  16. 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

  17. 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

  18. 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)

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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

  27. Trends

  28. Trend #1 Executive benefits are growing in usage

  29. NAFCU-BFB Survey 2010 22% of credit unions 2016 28% of credit unions

  30. NAFCU-BFB Survey 2016 63% of credit unions offer nonqualified plans $75M assets and greater

  31. Why Is This Happening? 3 out of Recruiting 70%+ 10 retiring aged 50+ frenzy soon

  32. Trend #2 Boards are increasingly using compensation studies to ensure fair and reasonable compensation

  33. NCUA Background Federal Credit Union Act Reasonableness Examiner’s guide

  34. Compensation Study 1. Responsibilities / duties 2. Credit union size 3. Location 4. Circumstances

  35. Compensation Study 5. Related industries 6. Alignment with compensation philosophy 7. Regulatory compliance

  36. Trend #3 Executive benefit plans are customized to each individual credit union and executive

  37. One Size Does Not Fit All

  38. Variables • Compensation philosophy • Strategic needs • Performance measures • Executive’s experience • Executive’s retirement horizon • Credit union profile • And more!

  39. Thank you! Rob Fitzgerald, Area Vice President Rob_Fitzgerald@ajg.com 877-332-2265 ext. 533

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