Design Executive Deferred Compensation
May 1, 2018
Setting executive salaries may not be an easy task for a credit union board, but the process of arriving at equitable numbers usually isn’t complicated. On the other hand, supplemental benefits, such as deferred compensation plans, can involve so many variables that it can be a full-time job to narrow down the choices.
Even so, boards are increasingly turning to non-qualified deferred compensation (NQDC) plans to give their CUs an advantage in attracting the best leaders—and to increase the costs for competitors who want to poach them.
According to the CUES 2017 Executive Compensation Survey report, 44.1 percent of CEOs now have 457(b) plans, 35.6 percent have 457(f) plans, and 25.7 percent have split-dollar life insurance—a big jump from 18.8 percent in 2016.
NQDC plans also continue to spread beyond CEOs. CUNA Mutual Group reports that half of the 3,700-plus CU executives who had 457 plans and/or collateral-assignment split-dollar programs with the company were not CEOs.
A 7-point checklist for creating prudent SERPs
Faced with implementing or updating supplemental deferred compensation plans, it’s understandable that some boards may consider “off-the-rack” products—plans pre-configured for a specific executive level or length of service.
A key point to be wary of is the word “guarantee.” In the context of NQDC plans, boards and executives must be vigilant and understand exactly what is guaranteed within a given plan design. Be sure you have guidance from experts on NQDC plans—and on the underlying funding products—before agreeing to any plan.
For the sake of your executives, and that of future board members who must follow through on your commitments, be methodical and transparent in how you choose supplemental executive retirement/recruitment plans (SERPs). Use this seven-point checklist to guide your process.
- Clarify why your credit union is offering a plan. It will help guide the plan’s design and product mix if you clarify its purpose(s) upfront. Is the plan part of an employment agreement you’re negotiating with an applicant for a top executive position? Are you putting “golden handcuffs” on an executive you’re grooming for COO or CEO? Are you rewarding a long-tenured executive nearing retirement?
- Identify the credit union’s financial constraints in offering the plan. Is this plan prudent given your CU’s current and projected financials, and how did you arrive at that conclusion?
- Compare plan design options and show why you chose a plan over others. Show a side-by-side comparison of the multiple benefit structures you’ve considered and explain the advantages of the plan you chose. Compare the funding commitment, accounting impact, opportunity cost, and return of funds to the CU, among other factors. These efforts can help you craft plans for other executives more efficiently.
- Document how the benefit target was derived. Be able to say yes to this question: Could a neutral third party—who is not an executive-benefits expert—use your documentation to calculate a similar benefit target?
- Assess your CU’s risk from this plan. What could possibly go wrong? How could you adapt to overcome difficulties that may arise? Follow the NCUA’s due diligence guidelines for risk assessment.
- Determine how much ongoing maintenance the plan requires. Future boards and executive teams will need to know the CU’s and executives’ annual obligations under the plan for as long as it may be active.
- Define a wind-down process for the plan. Your CU should have a set procedure for ending any plan, agreed to by the executive. Again, make sure to document the risks to the CU of ending a plan, such as potential payout amounts under varying rate environments.
Your overall goal in completing this checklist is to demonstrate that the board is using the members’ capital as wisely as possible, and to help future boards (and, potentially, regulators) understand your decision-making process.
Because these plans can reach far into the future, you’re serving the next generation of boards by leaving a clean balance sheet and roadmap they can follow to do the same for their executives.
Posted in Strategic Link.