The CEO & Director Salary Imbalance Is Corrected By Converting To A Mutual Bank

Salary surveys report that credit union CEOs might earn only 39% compared to a bank CEO. Alan Theirault, President, CU Financial Services outlines his insight into what steps he believes may be necessary to correct the compensation imbalance.


By CU Financial Services


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.


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Aug. 5, 2002


  • Sleazy, indeed. Paradigm shift my rear end. This is a money grab for Theriault and his company.
  • Shows the real reasons for conversions, greed personified.
  • In light of negative press about satisfying Wall Street analysts, stockholders, and paid Boards, Credit Unions have the perfect opportunity to capitalize on our strengths. This is the time to emphasize the trust that consumers place in us and espouse the benefits of our not-for-profit status! Let's not go down the dirty road of becoming a "bank". Sure, let's pay better, but let's stay true to our credit union roots!
  • As CEO of a 68M CU, compensation and the "ability" to agressively compensate is always hot... It doesn't go away with size...