As a credit union CEO or executive, have you ever struggled to bring up the topic of adding executive compensation benefits to your board members? Ideally, a credit union board would add these types of benefits unasked—and many do—as a way to incentivize and retain top executives. It’s also mathematically impossible, at your level, to save enough in a 401(k) to replace a reasonable percentage of your pre-retirement income, which is why supplemental benefits become even more critical for executives. As critical as supplemental benefits are, bringing them up can be awkward, as the process might have to be driven by the exec requesting them, and approval necessitates buy-in of the board. How to handle this delicately?
At this point, many credit union executives would call on the expertise of Andy Sheeter, “C.U. on the Show” guest and founder of the Sheeter Group. His company specializes in supplemental executive retirement plans for credit union leaders across the country.
Andy shares that before you ask to add executive benefits, there are some factors you should keep in mind—factors such as your credit union’s size, how much education your board has regarding executive benefits, and timing of the conversation. Andy’s experience is invaluable in helping you start a dialogue with your board, so it is more receptive and inclined to implement a satisfactory executive benefits package. We also discuss vesting schedules, how mergers may affect your benefits, and what potential threats there could be to your compensation strategy in the future.
Listen to the full podcast episode for the details on tips such as:
- Show them the data. A lack of education is a common reason credit union boards do not add or expand executive benefits. Ensure you find the latest statistics that compare CEO and executive benefits at credit unions comparable in size to your own.
- Speak their language. Your board members who may have a pension may not be familiar with benefits such as a split-dollar plan. If you can present executive benefits as a percentage of income replacement rather than a dollar amount, they may be more receptive.
- Take advantage of a contract renewal. If you have an executive contract and its renewal is coming up, it’s a good time to bring up adding to or expanding your executive benefits. At the very least, you can ask for an analysis of your benefits package to determine how competitive it is within the industry and if there are any significant discrepancies.
Listen to the whole “C.U. on the Show” episode to hear all of Andy’s insights into asking your board for new or additional executive benefits.
Doug English: (00:00)
My guest today on the show is Andy Sheeter. Andy is the founder of the Sheeter Group, a leading executive benefits firm that focuses exclusively on supplemental executive retirement plans for credit union leaders across the country. In this episode, we discuss strategies on how to help the credit union executive talk to the board about adding or starting executive benefits and how that conversation differs depending on the credit union size. We also talk about incentive packages and mergers, C-Suite vesting schedules, and a potential threat to your comp strategy.
Good morning, Andy
Morning, Doug. How are you doing?
I’m doing great.
Good. How are your things in Florida?
This morning? Everything’s great in Florida. Just another perfect day here, huh?
All right. So let’s pretend you’re talking to various levels of credit union CEOs and may want to kind of start at the top, the billion plus category, and work our way down. And we want to introduce either executive benefits to begin with or additional executive benefits to the board. What I’ve heard from various CEOs we work with and recruiters is that credit union executives really struggle with asking for something for themselves and feel like they’re put in a weird position. They have a hard time bringing that up. Now, ideally, they wouldn’t have to bring it up. The board would go to an educational session somewhere and come back and say something to the executive. And that’s part of what we’re trying to do here, right. Is to create that content. But let’s say your board just went on the cruise, but never goes to the sessions. How do you bring up? Not just collateral assignment, but just the whole idea of either executive benefits or additional benefits starting with let’s say, they’re a billion dollar plus.
So the good news is as a newly hired CEO, when you use a search firm, that search firm is going to inform the board about them. So they should be well aware of them from that point of view. If that’s not the case, then it’s really up to the CEO to start the conversation. The best thing to do really in my opinion is to give them statistics. You know, we have a lot of statistics. There’s a lot of statistics from other avenues that a CEO can go to. And what they’re going to show is that virtually all CEOs of billion dollar plus shops have an executive benefit plan. From there, you can educate the board on why credit unions put them in there. They’re put in to retain the executive is the key thing, ultimately reward him or her. So you have to start with the education and you could hope that you’ll give them enough information that they’ll want to invite somebody like myself to come in and give them just an overall education on executive benefit plans, one-on-one, why you put them in, how do they put them in, how does it impact your credit union? You know, what are the advantages and disadvantages of different types of plans? And typically the boards are receptive to that.
I would think they would know in the billion dollar plus category, at least from what I’ve seen, it seems like everybody has some form of a retention program, right? That the golden handcuffs of the Collateral Simon or other programs. What I hear from CEOs sometimes is that they really struggle with the difference between the life and compensation experience of their board versus the compensation experience they receive. And, you know, the county employees, state employees, telephone company employees don’t usually get split dollar programs as part of their benefit package. What kind of strategies have you seen to deal with those differences?
Yeah, the best strategy is to target a benefit as a percentage of income replacement. So if you’re dealing with teachers or county or government employees, they’re typically going to have nice pensions and they’re going to be targeting a certain percentage. So let’s just say it’s 60%. So when you’re talking benefits to those people, you should be talking about a target income replacement, not necessarily a dollar amount. And when we’re working with the board, when we know we’re in a good position, it’s when they start talking to us about income replacement percentages instead of dollar amounts. So if the conversation starts going to we want to provide 60, 65 or 70%, when you start to hear that, you know you have that conversation going the right way, for sure.
That makes sense. You’re talking their language. Because they get the permanent replacement, not 20-year replacement. The way I’m used to seeing split dollar plans—it’s just for a period of time that they get that replacement, right?
Yeah, 20 and 20 is a good average. A lot of it depends on the age at which an executive is going to retire and also their tenure with the organization. So if somebody is going to retire at age 67, and at that time they’re going to have about 10 years of service with a credit union, your benefit periods probably gonna take you to maybe to age 85, which would be 17 years of benefits. But typically if somebody retires at age 60 or 65, it’s usually going to be that 20, even sometimes 23 years of benefits.
All right. Very good. So in the billion dollar plus category, let’s say that the executive already has a benefit—call it split dollar. And as you know, from the various surveys and the industry, at the billion dollar plus category they tend to have a lot of additional benefits as well. The 457 B, maybe F, other services paid for. Any thoughts around how to bring those additional services up with your board?
Yeah. So the good news is that at that level, we’ve had a lot of instances where the directors have gone to these conferences or heard about them and they actually bring them up, which is always great. But getting back to the directors who just went on the cruise and enjoyed the cruise, and didn’t go to any of the breakout sessions, in those particular situations, it typically starts with the CEO wanting to seek out some alternatives and really an overall analysis of their total executive benefits package. In doing so they’re probably going to learn, number one, is my benefit level competitive today, because what you might’ve got put in place five or 10 years ago was competitive back when you put it in, but it might not be competitive. Now, then number two are the strategies being used today still the best strategies that I have available? Is there something else that’s going to work better? And as you start to sift through those at the CEO level, if you see a glaring issue, it’s best to get the board involved. And usually what you do is you start with the board chair and you try to get the board chair on board. And if you can get the board chair on board, then you start to move through the process, which sometimes involves just going to the committee next and then going into the full board, or it could be just going to the full board. Typically, we find it works best as if you move it in pieces, start with a chair, go to committee, then go to full board.
Great. So that’s a significant takeaway. So then what I’m hearing is make sure your board chair at the very least goes to conferences, make sure they actually attend sessions, and then talk to them about that experience and about the things they learned. And that might be the beginning of the conversation around executive benefits, especially in the large credit union space. Now, if we come down in the capital structure, say, we come down to maybe the 500 million range. How does it change, uh, in a credit union like that?
Yeah. So in those situations, the further you go down, the less common benefits are, but it’s not a huge night and day difference. So roughly 80% of the CEOs have benefits versus essentially all CEO’s in that billion dollar plus have benefits. And so, it adds a little bit more of a challenge. But still, I mean, that’s a pretty good argument; 80% of CEOs haven’t even moved out further than that. That number goes smaller. And then the more quote unquote selling you have to do as a CEO to your board, to let them know these benefits are out there, get them introduced to them and talk about why they should have them.
Yeah. Is there any portion of the board’s fiduciary duty that they are covering by putting in some kind of executive plan that protects the continuity of the executive team or the ability to get the next executive team?
Yeah. You know, any credit union should have a succession plan in place, which would involve that continuity of the leadership. So certainly, fitting executive benefit plans into that should be an important part of that business succession planning. Pretty much any credit union should have that, whether or not it’s a fiduciary duty that’s required. I’m not real sure, but it really should be done.
So let’s talk about when you’ve seen it not work. Can you think of some situations where this is, how not to do it, to bring up executive benefits? What sort of things come to mind?
Where it’s not worked is where CEOs, for lack of a better term, got a little too greedy. So they came in with really astronomical requests for their benefits. And this is more the case in your smaller credit unions, pretty much requesting benefit levels that aren’t aligned with what their peers are getting and really aren’t in the credit union’s best interest because they’re too big. So whenever you come to your board and ask for a benefit, I always recommend having pure information, peer data on what’s acceptable, and being able to prove to your board that, hey, what we’re suggesting here is in line with what other credit unions are doing. You can do that, you know, you should be in a pretty good position. It’s really a fine line that I see with CEOs requesting benefits in terms of them feeling self-serving, you know, looking for a benefit just for themselves versus having to push the board along because frankly, some boards do need that, that little shove, okay, we need to talk about this. And then once you start talking about it, to continue talking about it, because I’ve seen plenty of situations where we’ve had a meeting, it’s been a nice meeting, and then the board just decides that they have better things to do, and don’t want to bring it up again. And then what happens is two years go by, everybody forgot what you talked to them about. So now you’re starting from scratch. And so once you get it introduced so long as there’s interest there, the CEO sometimes has to be the driver of that to continue to move the process forward.
That’s some really great feedback. So what do you think the timeline should be? So you get a new board chair, let’s say, let’s say you’ve been stuck, right? You can’t get traction with executive benefits; you get a new chair. And so you feel like you have a bit of a refreshed start. So you kinda just walk me through what you would consider to be the ideal series of steps in the timeline, if you were in that situation.
Yeah. If it was me, I would develop some sort of relationship with that chair first. I don’t think that’d be the first thing to bring up; I’d be patient from that point of view. Let him or her get settled into their position, start to get comfortable. Then I would just bring it up as an educational point of view. You could present the board chair with your own information that you gathered from a website or any information you get from us. That’s one tactic. The other is to encourage that person to go to a conference and sit in on an educational session. I know there’s certainly conferences out there that are exclusive to CEOs and their board chairs. So that’s a perfect example, when you’re sitting together and can learn about them. And that’s how you start the dialogue. Now, when that happens in the process just depends on how that board chair develops a relationship with you. I’d say a good rule of thumb would be three months or so. And then you can start to work on that process. Another really good time to address executive benefits if you want benefits but haven’t gotten any traction with your board is if you have an employment contract, when that employment contract is renewable. That’s the other great time to incorporate the executive benefit conversation,
That makes a lot of sense. So your contract is going to come due in a few months and you introduce the subject, just write the math of the situation. You can’t possibly replace a reasonable percentage of your pay with what you can save in traditional retirement plans. Right. We both know that’s just not mathematically possible, which is the reason these whole things exist. Right. And yeah, there’s just no way to do it.
Yeah. And that’s another great time, not just to bring up if you don’t have a benefit, it’s also a good time to bring up evaluating an existing benefit. So do I want a benefit increase? Do I want some sort of analysis to see if my benefits are still competitive? We have a lot of success bringing that up at the contract renewal.
Yeah. Now talk to me a bit about mergers. There’s this tremendous amount of merger activity going on in the industry and what do you see happen when that occurs? Do they leave the benefits as it is? Do they true them up, but what, what sort of activity have you seen?
Yeah, so generally the takeover of benefits obviously is all settled before the merger. It has to be disclosed what benefits will be coming over from the merging credit union. Typically there’s triggers in there for changing control for that executive that’s coming into the new entity. So they’re all vested in their benefits.
That’s sort of done and set aside and one’s locked in.
Yeah. And what I’m seeing a lot now, and I have been for the last five years is credit unions are merging into large credit unions. The smaller credit unions may have a CEO that does not have a plan. They’ll provide a plan to the smaller credit union that will take care of the key executives pre merger. So that way, when the merger happens, the smaller credit union executives are getting some benefits to give them some retirement protection, because sometimes they come over and work for the new entity; other times they’re happy they’re merging into the credit union because the CEO or some key executives are getting ready to retire. So this allows them to have a more reasonable retirement package. So it’s really used as an incentive to bring in smaller credit unions and merge them into your larger entity.
Yeah. It seems like sometimes those mergers where you stay on don’t work out. And that way, if you had a vested benefit prior to the merger, you would be financially protected against it not working out. Now tell me about the vesting. Do you see CEOs ladder the vesting so their C-Suite doesn’t all get fully vested at the same time and head out the door, or do they not concern themselves with that so much?
Yeah. They typically ladder them. The most common laddering that I see is going to be on the senior VP level. So for instance, I have several clients who have a CEO who’s going to retire in the next four years, for example. So what they’ll do is they’ll put in vesting for those senior VPs that require them to stay with the credit union, let’s say for six years or five years. So they want to keep them around a year or two after the CEO retires so they have some continuity there. If they stick around, they’re more inclined to possibly stay for the long term. And so they do that quite a bit, with the vesting schedules to keep that continuity, otherwise vesting is more completely customized. It’s different for every organization, but typically you’re trying to balance with vesting, you’re trying to balance the retention aspect with the reward aspect. So we leave the CEO around, and as they start to get closer to retirement, vesting becomes less important. So it becomes a lot more liberal for the CEO. So if they originally want to stay though 65, but then at 63 they’re just done, ready to retire, the vesting tends to be a little bit more liberal to give that individual the freedom to be able to retire.
Awesome, Andy. Well let’s circle back to the key takeaways for the senior executive or other members of the C-Suite who are trying to get either executive benefits started or additional executive benefits into the equation, into the discussion. So the first point I heard is to focus on your chair, start with your chair, build a relationship with that person and look to introduce the conversation there. And second takeaway was to focus on income replacement percentage, not dollar figures, but percentage of replacement, especially if you have a board that is made up of people with pensions who have a fixed percentage of replacement income. That’s a conversation that will resonate perhaps better than a high dollar figure that they could have a harder time swallowing, right. Then the third was to get your board to attend conferences, to go to the meetings and to be educated about the way to retain top talent in the credit union industry, the way to recruit top talent in the credit union industry. And then what’s normal, what we see in the surveys across the industry, and what is kind of working its way down, as far as maybe even the hundred million dollar level for credit union asset size. With that settled, Andy, I’ll ask you to look forward for a second to regulation, or other changes that you see coming in the industry that are either a threat or an opportunity to executive suite compensation strategy.
Yeah. I think one threat, and this really isn’t from a regulatory point of view, but one threat really to all retirees is low interest rates and the impact those have on dividends that life insurance companies pay. That also impacts your annuity payouts because obviously new annuities are tied to interest rates. So making sure you understand how this low interest rate environment impacts your benefits by running reproductions to make sure the plans you put in place are going to accomplish what they were meant to accomplish based on where we’re at today versus where we were at five or 10 years ago. That’s certainly an important factor. The second thing is the excise tax. It’s been around since December of 2017. I have a feeling that’s here to stay. So knowing how benefit payments that might be paid 10 years from now are going to impact the credit union is certainly an important thing to look at and continue to evaluate and determine if things need to be changed. Obviously, regulations get a little more scrutinized. It seems like every year, as it relates to executive benefit plans, regulators are paying more attention to them. They’re learning more about them, knowing what to look for, which I think is a really good thing. Especially if the credit union is prepared to be able to answer the questions and provide the material that regulators want to see. And that’s something you really need to focus on when you’re looking at providers is making sure you’re using a provider that can help you when that examiner or auditor comes in, and has you prepared to be able to answer all the questions they may ask you.
Excellent. Well, thank you, Andy, for what you do for the credit union movement and for helping us try to build a content that will allow the leaders of the credit union movement to get the benefits they need to have a reasonable replacement of their pre-retirement income. Yeah. Thanks Andy, for your time today.
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