EXECUTIVE RETENTION & RETIREMENT PLANNING

Transcription

1 EXECUTIVE RETENTION & RETIREMENT PLANNING James L This, PhD, President & CEO, James L. This and Associates JThis@JLThis.com Rebecca Bower, President, O Rourke Consulting rebecca@orourkeconsult.com Dave Emery, Managing Partner, Emery Financial Group demery@emeryfg.com Objectives: 1. Understand current best practices in the three basic elements of CEO compensation. 2. Gain a better understanding of the types of retirement & retention benefits and the pros and cons of each. 3. Develop firm guidelines for goals and targets for retention/retirement benefits. 4. Recognize volunteer responsibilities for program fairness and financial risk.

2 JAMES L. THIS, PHD, PRESIDENT, JAMES L. THIS & ASSOCIATES REBECCA BOWER, PRESIDENT, O ROURKE & ASSOCIATES DAVE EMERY, CFP MANAGING PARTNER, EMERY FINANCIAL GROUP EXECUTIVE RETENTION & RETIREMENT PLANNING 1

3 AGENDA Introduction Compensation Philosophy Cash Compensation Base Salary Variable Compensation Standard Benefits and Perks Executive Retirement Benefits Current State Regulatory Updates Accounting/Financial Impact Offering SERPs to Other Suite Executives 2

4 INTRODUCTION 3

5 FINAL EXODUS OF BABY BOOMER INTRODUCTORY CEOS FACTS An already competitive market for CEOs and other senior executives will grow tighter as baby boomers retire in coming years. 4

6 CEO COMPENSATION FACTS CUNA s analysis of credit union and bank executive compensation from IRS 990 and SEC filings reveals that credit union CEOs earn roughly 10% less than bank CEOs at similarly sized institutions. Jordan Van Rijn, Senior Economist for CUNA December 14,

7 CEO COMPENSATION FACTS We also find that bank CEOs receive about one-quarter of their income from performancebased compensation (bonus, stock, options), while credit union CEOs receive only 9% of their income from performance-based compensation. Jordan Van Rijn, Senior Economist for CUNA December 14,

8 COMPENSATION PHILOSOPHY 7

9 Compensation Philosophy Employer Brand + Pay Brand All employers have a pay brand a reputation on how they pay, what they pay, and why they pay the way they do whether it was built with intention or developed on its own.

10 Compensation Philosophy: Components Core Values Market Pay + Performance Recognition Transparency Excerpted from documents created by Compensation Consultants*

11 Compensation Philosophy Format Compensation Philosophy Examples (placeholder for discussion on samples to be provided by JT)

12 Compensation Philosophy: Components Core Values Market Competition for talent (where people come from/go to?) Local, regional, nationwide Attract/retain how are we doing? How competitive do we want to be? In front mid-pack a little behind? Pay equity how much weight to place on internal value of a job vs. market data? Excerpted from documents created by Compensation Consultants*

13 Compensation Philosophy: Components Pay + Performance How much weight does individual performance affect base pay and annual increases Factors for allocation of bonus or incentive pay? Pay mix what percentage is at risk? Recognition Do we acknowledge above and beyond performance? What part should non-monetary rewards play in total compensation? Excerpted from documents created by Compensation Consultants*

14 Compensation Philosophy: Components Transparency How much do we want to share about our compensation program and how decisions are made? Is our level of transparency around compensation compatible with the overall level of transparency across the organization? General What are employees saying about the organization s compensation program? What is working well? What could be improved? Excerpted from documents created by Compensation Consultants*

15 CASH COMPENSATION BASE SALARY 14

16 Cash Compensation Sources of Reliable Peer Data Salary Surveys 990 s Consultants Factors Asset size Region/Market Compensation Philosophy

17 Compensation Case Study Mid Large Extra Large Survey Says! $100-$499M $500-$999M $1.0-5B Base $230,195 $351,445 $496,729 Variable $36,514 $50,644 $116, Sample Set $ M $ M $2-5.8B Base $229,492 $322,489 $616,042 Variable $37,268 $69060 $302,992

18 SOME OBSERVATIONS FROM CUES COMPENSATION RESEARCH From 2017 to 2018, CEOs base salary increased by 7.5 percent, while their total compensation increased by 7.6 percent Over that same time period, credit union chief operating officers saw the largest total compensation increase of 9.2 percent The top four factors contributing to CEO s bonuses were: earnings, board evaluation, loan growth, and membership growth 17

19 MEDIAN TOTAL COMPENSATION $1,200,000 $1,030,600 $1,000,000 $800,000 $599,310 $600,000 $400,000 $192,180 $283,720 $380,740 $200,000 $0 $100 - $200 $200 - $500 $500 - $1B $1B - $3B $3B Plus Source: CUNA CEO Total Compensation Survey Credit Unions $100M Plus 18

20 SIZE AND PAY One would expect that cash compensation would be heavily influenced by the size of the credit union. As the chart shows, there is a casual relationship between CEO earnings and assets, but not to the degree you might have thought. Clinton Koker Is Your Credit Union s Compensation Justifiable? Credit Union Business March 21, Data 19

21 PAY AND PERFORMANCE We read in salary surveys and credit union publications that credit union executives are rewarded for performance factors like ROA, loan growth, net chargeoffs, member satisfaction, etc. To test the relationship we ran an analysis of long-term (three years) results for each credit union in our study using a model that measures financial results, growth results, and asset quality. Each credit union was evaluated against the model and ranked based on the results, from 1 to 550, with 1 being the best. Our assumption was that there would be some relationship between compensation and performance. Is Your Credit Union s Compensation Justifiable? Credit Union Business March 21, Data 20

22 FACTORS AFFECTING COMPENSATION Compensation practices at sponsor group Personalization of CEO pay Is Your Credit Union s Compensation Justifiable? Credit Union Business March 21, Data 21

23 Compensation philosophy COMPONENTS OF A GOOD COMPENSATION PROGRAM Pay for performance Objective variable pay component 22

24 Reliable Peer Data 990 s Case Study showing actual data from surveys (CEO at a $XXM credit union) Perhaps bring the book (borrow an older one from Rita?) Factors Asset size Region/Market Qual: Comp Philosophy (all employers have a pay brand whether intentional or not HBR)

25 VARIABLE COMPENSATION 24

26 CEOS AND VARIABLE PAY Bonus + Incentive 15% Neither 17% Bonus Only 46% Incentive Only 22% Source: CUNA CEO Total Compensation Survey Credit Unions $100M Plus 25

27 INCENTIVE AS A MEDIAN PERCENTAGE OF BASE SALARY 45.0% 40.1% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 10.0% 12.0% 16.9% 23.4% 0.0% $100 - $200 $200 - $500 $550 - $1B $1B - $3B $3B Plus Source: CUNA CEO Total Compensation Survey Credit Unions $100M Plus 26

28 COMPONENTS USED IN STRUCTURED BONUS PLANS ROAA Loan Growth Net Income Growth Member Growth Delinquency Net Worth Strategic Initiatives Expense Ratios Board Eval Asset Growth Savings/Checking Growth Charge-offs Mbr Satisfaction Efficiency Loans to Shares CAMEL Source: NAFCU BFB Exec Compensation & Benefits Survey: % 10% 20% 30% 40% 50% 60% 27

29 STANDARD BENEFITS AND PERKS 28

30 MOST COMMON BENEFITS Long-Term Care Travel Accident Exec Life Short-Term Disability AD & D Term Life Long Term Disability Health/Vision/Dental 11% 12% 32% 61% 69% 80% 85% 92% 0% 20% 40% 60% 80% 100% Source: CUNA CEO Total Compensation Survey Credit Unions $100M Plus 29

31 CEO PAID LEAVE AVERAGES Vacation and Sick 25.1 vacation annually 10.1 sick annually Paid Time Off 22.1 days per year Source: CUNA CEO Total Compensation Survey Credit Unions $100M Plus 30

32 EXTRAORDINARY BENEFITS 31

33 Extraordinary Benefits CEO Expectations SERP Paid Premiums for Healthcare (extraordinary may include wellness incentives/perks) Supplemental Life Insurance, LT Disability Paid Time Off (extraordinary = unlimited) Auto Tech/connectivity cell; laptop/tablet; data (extraordinary = virtual/work-life balance) Club Membership if/when applicable Professional association affiliation and/or professional development Extraordinary focused on Individual Motivators Mission, Legacy, Giving back corporate purpose (HBR) - part of something (cty/social justice/sustainability, having a voice (importance of intentional Employer Brand) Succession future opportunity Experiences! Loqules Student loan incentives (pay-down/reduction) Creative relo: SF Bay Area down payment loan TFCU case study SERP across c-suite more common may need to compensate (signing bonus) for lost benefit

34 MOST COMMON PERKS RECEIVED Health Club 7% Low Interest Loans 10% Tuition 16% Spouse Travel 28% CU Provided Auto 36% PC/Laptop 55% Cell Phone 66% 0% 10% 20% 30% 40% 50% 60% 70% Source: CUNA CEO Total Compensation Survey Credit Unions $100M Plus 33

35 AUTO ALLOWANCE Median annual reimbursement for use of personal car - $7,072 Gas Maintenance Source: CUNA CEO Total Compensation Survey Credit Unions $100M Plus 34

36 Development Opportunities Programs: CUDE, WCMS, Filene i3, CUNA, CUES, Cardwell 306/2,C.Myers, CFO Immersion, Center for Creative Leadership Benefits / ROI Industry education Network, resources Engagement/Retention Performance and Succession

37 Development Opportunities Programs Benefits and Return on Investment

38 Types of Plans Expected Outcome of Adopting a Plan Who Has Them and Why EXECUTIVE RETIREMENT BENEFITS CURRENT STATE

39 Types of Executive Benefit Plans Nonqualified Plans (Top Hat Plans) provide exemption from most of the funding, participation, vesting and disclosure requirements imposed on qualified plans. Deferred compensation falls under ERISA for the Top Hat Plan Exemption Tax-exempt corporations fall under Section 457 of the IRS Code. Plans include: 457(b) - capped annual contribution by employer or employee, vested, taxed as withdrawn 457(f) - no limit on annual contribution, no vesting, taxed when substantial risk of forfeiture lapses Deferred compensation plans must comply with (or be exempt from) 409A NCUA regulations for reasonableness and informal funding apply

40 Types of Executive Benefit Plans Welfare Benefit Plans involve benefits for executives such as life, health, disability, long-term care and postretirement medical. Split Dollar falls under ERISA for claims and review procedure Split Dollar is under Treasury Regulations sections (Endorsement) and (Loan Regime) NCUA Regulations for reasonableness apply Bonus Plans involve payment by the employer into a life insurance policy the executive owns. The employer retains no interest in the policy. The premiums are taxable to the executive under Section 83 of the tax code Employer may pay a gross-up bonus to cover executive taxes due NCUA regulations for reasonableness and informal funding apply

41 457 Plan Key Components 1. No IRS limits on benefits or payment structures. 2. The Credit Union has an annual expense to accrued promised benefit. 3. The benefit is payable at stated vesting date. 4. The benefit is taxable upon vesting and is paid in a lump sum. 5. At its option, the Credit Union can utilize otherwise impermissible investments for cost recovery. 6. The Credit Union promises to pay a benefit in the future if the Executive remains employed until stated date(s). Observations Executive taxation is under Section 457 of the tax code. Cost recovery investments are owned by the Credit Union, as allowed per NCUA Plan ends at Executive s retirement.

42 Split Dollar Plan Key Components 1. The Credit Union makes a loan to the Executive who buys a life insurance policy with two components. 2. One component creates a fund from which the Executive borrows tax-free to supplement retirement income. 3. The other component provides death proceeds that: Repay the Credit Union its loan plus interest and provide additional key person coverage. Provide a tax-free death benefit to the Executive s beneficiary Details Split Dollar is governed by, and compliant with, Treasury Reg NCUA opinion letter and OGC Opinion support the use of Split Dollar. In accordance with the same Treasury regulation as noted above, interest must be charged to the loan at least annually in order to avoid income tax to the Executive. The interest rate on the Credit Union s investment is fixed for the Executive s lifetime at the compounded long-term applicable federal rate (AFR) in effect at the time the investment is made. The long-term AFR is the minimum required rate of return according to the final regulations published in In accordance with Emerging Issues Task Force (EITF) No (also referred to as Topic 715, Subtopic 60 under the new Financial Accounting Standards Codification), on at least an annual basis, the Credit Union should record an adjustment to the loan receivable balance as the financial institution may only recognize the loan receivable balance up to the lesser of the Split Dollar loan plus interest balance or the cash surrender value of all life insurance policies.

43 Restrictive Bonus Plan Key Components 1. The Credit Union pays premiums on a life insurance policy owned by the Executive. 2. Legal agreement and form filed with insurance carrier provides the Credit Union with flexibility and options: The Credit Union can add a vesting schedule. Prorated vesting prior to stated age/date; 100% vesting at stated age/date. The Credit Union determines timing of Executive taxation. Taxation of the BFB Restrictive Bonus Plan is under Section 83 of the tax code. With 83(b) election, Executive taxed annually on the premiums and no further taxation upon vesting. Without 83(b), Executive taxed annually on imputed income on death benefit coverage and taxed at vesting on policy cash value. The Credit Union chooses whether to bonus the Executive for taxes due, and whether to provide a gross-up to cover tax due on the bonus. The Credit Union can require return of all or a portion of the current year s unearned premium, and/or the entire policy can revert to the Credit Union, if the Executive terminates prior to 100% vesting. 3. Premiums and tax bonuses cease at the Executive s termination of employment. 4. In retirement, the Executive determines when and how to access policy values. Taking loans from the policy would be tax-free as long as the policy does not lapse during the Executive s lifetime.

44 Restrictive Bonus Plan Observations The Board determines how much premium to pay from year to year based on fair and reasonable level of compensation. With the Executive owning the policy, accumulating values are protected against a Credit Union financial failure. Following termination of employment, the Credit Union will not contribute any further premiums. The Credit Union can choose to offset the cost through the use of institutional insurance or annuities. Premiums and bonuses are expensed as paid, no liability accrues on the books.

45 Excise Taxation NCUA Due Diligence Evidence What Your Examiner May Request of You REGULATORY UPDATES

46 Impact of Tax Reform Overview New Section 4960 provides for excise tax on: 1. Compensation in excess of $1 million 2. Parachute payments Both excise taxes are paid by the employer, and both are at the regular corporate tax rate from time to time in effect. Under the Tax Cuts and Jobs Act (TCJA), the current corporate tax rate is 21%, resulting in a current excise tax rate of 21%.

47 Impact of Tax Reform How It Works 1. Excise tax on compensation in excess of $1 million (per person, not cumulative) Applies to the top 5 highest-compensated employees, and may include more if an employee was previously in the top 5 Compensation is generally compensation as defined for income tax withholding purposes This is primarily Box 1 compensation reported on the W-2

48 Impact of Tax Reform 2. Excise tax on parachute payments Applies to all payments that are contingent on separation from service whether or not there has been a change of control Applies with respect to any employee who is highlycompensated under the IRS qualified plan definition (i.e., $120,000 in 2018) To be subject to the tax, total severance payments must equal or exceed three times the employee s five-year average W-2 taxable income

49 Impact of Tax Reform Opportunities and Process 1. Restructure existing 457(f) plan to reduce or eliminate excise tax Simple amendment to legal document Opportunity to review a competitor s plan Opportunity to sell BOLI/additional BOLI in cases where payments are made earlier to spread out the excise tax 2. Change plan to Split Dollar (Preferred option) Executive needs to be insurable and go through an underwriting exam New legal document for the split dollar plan and for the rescission of the 457(f) plan Split Dollar payments do not count as compensation in the excise tax calculation Split Dollar can convert the benefit from being a liability to a growing asset while avoiding the excise tax

50 A Regulatory Perspective Key Questions to Consider Fair Was there a logical approach taken to determine the appropriate benefit amount? Is the benefit amount consistent with benefits being provided by the credit union s peers or is the benefit consistent with benefits provided by the credit union s sponsoring organization? Does the benefit reflect the value that the executive brings to the organization? Reasonable Can the credit union afford the cost of the benefit? Did the credit union utilize an efficient plan design or cost offset strategy? Is the plan structure accomplishing the goals (Recruit, Retain, Reward)?

51 A Regulatory Perspective Safety (Investments) What are the risks? (Interest Rate, Credit, Liquidity, Concentration, Reputation) Soundness (Investments) Does the investment make financial sense? Can the investment lose money? Are the risks justified by the potential gains from the investment? Is the plan design efficient?

52 What do these plans cost? How do credit unions invest funds to help offset new costs ACCOUNTING AND FINANCIAL IMPACT

53 How prevalent are C-Suite plans OFFERING SERPS TO OTHER SUITE EXECUTIVES

54 What can go awry? Causes for unwinding plans o How often o What are root causes o Impact to members