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 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
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 Federal Credit Union Act Board provides for hiring and compensation of officers and employees
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? Recruit Retain Reward Better candidates Faster process Continuity Material impact Share in organization s success Longevity
Executive Benefit Plan Types Deferred Compensation 457(b) 403(b) excess plan, no vesting date 457(f) Employerfunded 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 taxfree 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 taxfree 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
NAFCU-BFB Survey 2010 22% of credit unions 2016 28% of credit unions
NAFCU-BFB Survey 2016 63% of credit unions offer nonqualified plans $75M assets and greater
Why Is This Happening? 70%+ aged 50+ 3 out of 10 retiring soon Recruiting 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 Study 1. Responsibilities / duties 2. Credit union size 3. Location 4. Circumstances
Compensation Study 5. Related industries 6. Alignment with compensation philosophy 7. 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!
Thank you! Rob Fitzgerald, Area Vice President Rob_Fitzgerald@ajg.com 877-332-2265 ext. 533