CUES Executive Compensation Survey Briefing 2006

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CUES Executive Compensation Survey Briefing 2006
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Presented byCharles E. CarlsonScott M.
DettmannCarlson Dettmann Consulting

• 608.662.8187
• scott.dettmann_at_carlsondettmann.com
• charles.carlson_at_entrix.com

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Todays Discussion

• Review the key findings of the 2006 CUES
  Executive Compensation Survey
• Note changes in functionality of online report
• Identify the key requirements of a full executive
  compensation package
• Discuss the role of the Board of Directors in
  developing the Compensation Philosophy and
  strategy

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CUES Executive Compensation Survey

• Survey is an online 24x7 process
• Online participation supports custom report
  comparing you to the selected sample
• Very high participation rate
• Take annual snapshot to assess change and offer a
  print report
• Data continuously updated
• New Options and functionality associated with the
  online report
• New positions included in the survey this year

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High Level of Repeat Participation

• 805 credit unions participated in the past 12
  months
• Including 746 CEOs
• 71 provided data last year and this year
• Enables accurate measurement of true rate of
  change for repeat participants

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Credit Union CEO Characteristics

• Substantial majority have college degrees
• 76.2
• Extensive credit union experience
• 79.4 gt 15 years
• 91 gt 10 years

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Credit Union CEO Compensation Continues To Rise

• Faster than salaries in most of the rest of the
  economy
• 8.50 in base salary
• The largest credit unions (1B and greater in
  assets) averaged 9.6 increase
• 9.58 increase in base salary bonus/incentive
• The largest asset group averaged 8.9
• 9.75 increase in total compensation
• The largest asset group increased 8.80

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Five-Year Trend
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CEO Bonuses/Incentive Payments

• Bonuses and incentive payments in widespread use.
• 78.3 of CEOs reported receiving bonus/incentive
  payments
• Greater Emphasis on at risk compensation among
  the larger credit unions.
• 7.9 of base salary for the 50Mlt grouping
• 11.4 for the 50-70M
• 11.7 for the 70-100M
• 13.4 for the 100-200M
• 14.1 for the 200-400M
• 16.0 for the 400-600M
• 19.2 for the 600-1B
• 22.6 for the gt1B grouping

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What Appears to Drive Bonuses?

• Most cited
• Earnings (61.3)
• Board Evaluation (60.1)
• Frequently used
• Loan growth (38.3)
• IDC/CAMEL ratings (25.1)
• Member satisfaction (21.4)

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CUSO Relationship

• Compensation is typically higher when a CUSO is
  present (assets gt400M)
• Base pay average is 261,420 ( no CUSO )
• Base pay average is 288,087 ( with CUSO )
• More CUs report having a CUSO, particularly in
  large CUs
• 124 of 196 (63.2) large CUs in 2005
• 104 of 181(57.5) in 2006

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Regional Variations CEO Compensation
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Other Executives Total Compensation Increases

• EVP 7.30
• COO 7.17
• CFO 8.35
• CLO 8.07
• Branch Exec 8.95
• CUSO Exec 6.74

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Planned Compensation Changes

• Participants plan to increase executive pay by
  4.6 in 2006 and 4.5 next year.
• Participants plan to increase non-executive pay
  by 4.0 in 2006 and 4.0 next year.

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Banking Comparisons

• Significant differences continue to exist between
  total cash compensation paid to bank executives
  and credit union executives
• Base pay is getting closer
• Bonuses create the (significant) gap
• Sources Four reliable banking surveys
• Independent Community Bankers of America (online)
• American Bankers Association (online)
• BAI Executive Compensation, 2005
• Americas Community Bankers, 2005

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Comparisons to Banking Compensation CEO Base
Salary

• Asset Size
• 100Mlt
• 100249M
• 250499M
• 500999M
• gt1B

• CUs Banks
• 93,000 112,500
• 141,193 161,700
• 199,761 192,800
• 252,800 297,400
• 333,815 366,900

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CEO Base Salary Plus Bonus

• Asset Size
• 100Mlt
• 100249M
• 250499M
• 500999M
• gt1B

• CUs Banks
• 98,000 122,700
• 153,000 193,300
• 223,812 226,600
• 287,161 336,400
• 392,994 662,900

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Comparisons to Banking Compensation COO Base
Salary

• Asset Size
• 100Mlt
• 100249M
• 250499M
• 500999M
• gt1B

• CUs Banks
• 57,273 75,800
• 80,600 93,900
• 99,555 124,300
• 122,964 150,300
• 160,000 203,200

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Comparisons to Banking Other Executive
Positions

• Similar, variances exist with respect to the CFO,
  CLO and Branch/Member Services positions.

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2006 and Beyond - The Emerging Picture for
Executive Compensation

• Progressive credit unions continue to develop
  their Compensation Philosophy, and are becoming
  more open about articulating how this will be
  achieved on a go forward basis.
• Credit Unions measure competitiveness on a number
  of different levels.
• Continued attention to being open and
  well-documented in compensation determinations.

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Total Compensation Planning

• Base Compensation
• Incentive/Bonus Opportunity
• Benefits
• Retirement plan benefits are key
• Perquisites

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Making the Data Work For You

• How do we turn this information into pay plan
  policy?
• Most appropriate to start by defining strategic
  objectives

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Understanding Market Variances

• Average is just the average
• Actual pay varies substantially around that
  number
• Example
• CEO base compensation CUs 400-599.9M assets
• Average 238,422
• 10th percentile 179,842
• 25th percentile 205,801
• Median 235,000
• 75th percentile 265,514
• 90th percentile 299,700

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Causes of Pay Variance

• What causes pay variance?
• Variance in asset size in the sample
• Differences in pay philosophy
• Differences in credit union and executive
  performance
• Key questions
• What is your credit unions compensation
  objective for executive pay?
• If your credit union is performing above average,
  should executive pay be above average, too?

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Compensation and Performance

• How can performance and compensation be linked to
  strategic objectives?
• How will expected performance be defined?
• How will performance be measured?
• What is the best mix between base pay and
  incentive pay?
• Interest in variable compensation continues to
  grow

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Market Testing

• Check appropriate market data to see where you
  stand.
• Develop a short and long term strategy to
  implement necessary changes.

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A Changing Executive Compensation Environment

• Continued high level of interest by the press
  regarding executive compensation
• Executive scandals and high level felony
  convictions continue to promote legislative and
  regulatory reform
• Changes will affect the way credit unions set and
  report executive compensation in the future
• Boards and compensation committees increasingly
  will be held to higher standards of performance

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The Impact

• Disclosure, documentation and alignment of
  compensation outcomes with good measures of
  organization effectiveness are a clear trend.
• Passage of American Jobs Creation Act of 2004
  creates new regulatory standards aimed at
  controlling abuse of non-qualified deferred
  compensation programs (NQDC).
• Including 457 plans

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Regarding Non-Qualified Deferred Compensation
Plans

• Credit unions should (again) review with
  appropriate counsel, all existing non-qualified
  plans and deferred compensation arrangements,
  whether funded by the employer, employee or both,
  to make sure the plans comply with new IRS Code
  Section 409(a) standards by year end 2006. Final
  regulations have been promised by the IRS this
  summer.

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Emerging pay governance standards

• A well-defined governance process regarding
  executive compensation is very important.
• Best practices
• Establish board level compensation committee,
  with a clear mandate and charter
• Define independent roles
• Use good data to make decisions
• Document actions

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Strong Governance Steps

• Relationship of the compensation committee to the
  board well defined
• Controversial or complicated matters should
  always be reviewed with the full board prior to
  final approval and implementation
• Transparency and disclosure philosophy of
  full disclosure solves a wide range of problems
  before they occur

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Appropriate Actions

• Decide on a compensation philosophy
• Establish program objectives
• Identify the role of each element
• Target markets for comparison
• Measure market position
• Develop links between performance and pay

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Indicated Actions

• Test on an annual basis whether pay practice
  meets with intent
• Take account of all elements of compensation when
  making incremental decisions
• Deciding on each element in isolation, can yield
  unexpected and disappointing results
• Document what you have in place now
• Conduct detailed orientations for new board and
  compensation committee members

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Conclusion

• Executive pay continues to be an increasingly
  complicated, important topic for credit unions
  and their boards.
• Boards need to become increasingly sophisticated
  in their governance and well informed in their
  approach to executive compensation.
• A comprehensive, well designed compensation
  package is your best assurance that you will
  receive a high return on your investment in
  executive leadership.

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• Summary prepared by
• Scott M. Dettmann Vice President and Principal
  Consultant of Carlson Dettmann Consulting