By: Clinton Koker, Koker Nelson Gregoire & Co
Jerry Nelson, Koker Nelson Gregoire & Co
John Gregoire, Koker Nelson Gregoire & Co
Mike Higgins, Mike Higgins Associates
why, if your credit union has adequate net worth to meet its strategic objectives and maintain reasonable reserves, do you need more?
Truth is you don’t. The additional money added to net worth (capital) comes from profits (ROA). Profits come from members. So in effect, adding excess net worth is taking economic value away from members.
What does this have to do with executive compensation? Lots. Credit unions are chartered to improve the economic well being of their members. Or, stated in another way, to provide economic value to their member/owners. Yet, most formal incentive and merit increase programs reward executives for incremental increases in ROA and Net Worth.
Before you dismiss this article, please understand that the financial stability of a credit union is clearly critical to the credit union’s ability to provide valuable and vital financial services to its members. We therefore do not ignore the value of financial profitability and net worth in a reward system.
We are simply suggesting a change in the way executives are rewarded. If Net Worth is adequate, and that is critical, why not reward executives for being resourceful and providing members with greater economic value. Let that be the basis of the incentive and merit increase, in addition to financial measures like ROA and Net Worth.
The pyramid below, loosely based on Maslow’s Hierarchy of Needs theory, is a reflection of a program we believe balances the need for financial soundness with member value and employee rewards. As with Maslow’s pyramid, you must satisfy the lowest level before you can effectively operate at the next level1.
In this model executive rewards are based on a maintaining adequate net worth, first and foremost. Once that is satisfied, the measure of performance should be how efficiently the credit union utilizes its member-subsidized resources to create economic value for its participants.
So the first step in changing the compensation paradigm, which is primarily focused upon financial results, is to recognize that more ROA is actually taking economic value from members. That is not to say ROA is not important, it is.