Executive Benefits: Recruiting in Todays Market NCOFCU, September - - PowerPoint PPT Presentation

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
• perations

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

Board provides for hiring and compensation of officers and employees

Federal Credit Union Act

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?

• Better candidates
• Faster process

Recruit

• Continuity
• Material impact

Retain

• Share in organization’s success
• Longevity

Reward

Executive Benefit Plan Types

Deferred Compensation

• 457(b) – 403(b)

excess plan, no vesting date

• 457(f) –

Employer- funded 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

• ptions (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 tax-

free 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 tax-

free 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

2010 22% of credit unions 2016 28% of credit unions

NAFCU-BFB Survey

2016 63% of credit unions

• ffer nonqualified plans

$75M assets and greater

NAFCU-BFB Survey

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