Across all peer groups, salary surveys report that credit union
CEOs are paid much less cash compensation than Bank CEOs. For example,
according to numbers reported in Credit Union Magazine, the CEO
of a $100 million credit union might earn only 39% compared to a
Bank CEO; for credit unions over $1 billion in assets the number
is 57%. The gap (about 20%) is smaller for credit unions between
$100 million and $1 billion. Similar comparisons apply to other
senior managers, and the gap widens when comparing retirement benefits.
Most credit union directors are unpaid, while bank directors may
earn from $2,500 per year to over $50,000, plus the travel and expense
allowances typical for credit union directors. The gap in pay can
be much wider at individual institutions which utilize stock, or
phantom stock compensation programs as discussed below.
Correcting the compensation imbalance will require a broad based
paradigm shift, starting with director compensation; after all,
getting a raise from an unpaid director is destined to meet with
resistance. Credit union regulators too may put up barriers. Daily
talk about the "nonprofit structure" and "service
to members" influence a culture that promotes an artificial
ceiling on management compensation. Rather than fight current credit
union paradigms and risk getting trapped in a charter that fails
to address a current mission, (see discussion below) or the future
needs of members, some management teams have converted their institution
to a mutual bank or stock bank charter. As a stock bank, long time
credit union members are given the opportunity to capitalize on
the equity build up, while continuing to have an ownership stake.
Management, including directors, get to be compensated like bankers
and executives from other industries. As a mutual bank, the cooperative
ownership structure remains, but the competitive disadvantages of
credit unions, like consumer awareness, lack of access to capital,
penalties for real estate and business lending, and the statutory
requirement to hold more capital go away. Compensation methodologies
can mirror what's in place at stock banks, thus correcting an imbalance.
Members vote to convert to a stock bank because they are able to
significantly increase their net worth by purchasing shares as part
of the initial public offering (IPO). Directors and management are
also able to access the IPO shares on the same basis as members.
In addition, as incentive to remain on the team and deal with the
challenges of stock ownership, directors and management share in
a recognition and retention reserve (RRP) equal to 4% of the IPO.
The ownership vests over a five year period. For example, assume
a credit union with $50 million in capital converts to a stock bank
with an IPO amount of $100 million, directors would share a $2 million
grant of stock, and management would receive an equal grant. Each
member of a five director board would get $400,000 in stock, vested
over five years, at the IPO value. The directors would now have
the incentive to increase the stock value for the benefit of themselves
and the member owners that obtained shares in the IPO. Should management
be able to successfully execute their business plan, the stock grants
will increase in value; and a two or three fold increase to the
$1.2 million range for each director is not out of the question.
Directors also receive cash compensation, a retirement plan, travel
benefits, and vote member proxies.
In addition to the RRP, executives receive contracts with change
of control provisions, retirement benefits linked to an Employee
Stock Ownership Plan (ESOP), stock options, and typical cash and
noncash compensation. However, executives face the greater work
load and greater transparency that comes with being a public company.
Members become more interested in the stock price than saving $5
per month in check fees. The pressure to deliver results comes from
the board, members, and from personal conviction. But, the reward
for performance could lead to a $10 million plus, ownership stake
for a capable CEO. If the conversion is not made during the current
tenure, the next CEO in charge may very well realize the value.
Currently, for the same reasons banks pay directors and tap the
equity markets, credit union lobbyists are pushing for changes to
the credit union paradigm (and laws) that prevent director compensation
and access to the capital markets. These efforts validate the efforts
by the 25 or so credit unions that converted to a bank charter,
those that are planning the move, and the dozens which moved or
are planning to move to private insurance.
The ability to convert to a bank charter or private insurance may
face challenges in the future. Many claim that if credit unions
are taxed a flood of conversions to banks would occur. Unfortunately,
larger credit unions, which are the most likely to be taxed, also
provide the core financial support to the NCUSIF. To prevent destabilizing
the fund, by massive withdrawals, taxation may arrive with a moratorium
on conversions - thus trapping many in a taxpaying credit union
charter. A precedent restricting switching insurance funds has its
roots in the old savings and loan fund, which for many years prevented
savings banks from moving to the "bank insurance fund"
and ultimately required payment of high premiums and expensing a
1% recapitalization deposit.
Poor market share and an industry preoccupied with addressing political
issues like field of membership overlaps or generating the appearance
of serving the underserved, to retain a tax exemption, are in part
the consequence of these compensation gaps. In contrast, according
to credit union industry reports, banks control over 97% of deposits
and dominate the mortgage market, a key service demanded by younger
members. In addition, banks are expert in service to low and moderate
income groups with over 98% obtaining "satisfactory" or
"outstanding" ratings after CRA examinations.
For more information about the mutual bank charter, the stock bank
charter, raising regulatory capital, bank holding companies, and
other progressive growth strategies contact the authors,
Alan D. Theriault, President, CU Financial Services, at 800-649-2741;
or Robert Freedman, Esq., Silver, Freedman, & Taff, at 202-295-4502.