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Is your CEO’s Compensation Justifiable?

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BY CLINTON KOKER

Not long ago the Omaha Herald published a series of articles on the executive compensation practices of the CEO of Goodwill Industries, a non-profit organization in Omaha, NE. The articles did not present a favorable picture and Goodwill Industries had a major public relations problem to resolve.

If the media asked you about CEO compensation practices at your Credit Union, how would you respond and what kind of public relations issues would be created for the Credit Union? Most likely you would respond that the CEO’s experience, the credit union’s performance under the CEO and the size of the Credit Union are the factors that determine the CEO’s compensation. But is that really the case?

In an attempt to answer that question we did a little study on CEO earnings (salary and incentive) as it compares to 1) asset size and 2) three year average Credit Union performance. The study reviewed 2014 W-2 earnings (salary and incentive as reported to the IRS on Form 990) for over 550 $100 million plus credit union CEOs throughout the United States.

One would expect that cash compensation would be heavily influenced by the size of the credit union. As the chart below shows, there is a casual relationship between CEO earnings and assets, but not to the degree you might have thought.

Babe Ruth, when asked if it was appropriate that he be paid more than President Hoover responded “What the hell has Hoover got to do with it? Anyway, I had a better year than he did.” As Mr. Ruth so succinctly put it, pay should be based on performance, but is it?

We read in salary surveys and credit union publications that credit union executives are rewarded for performance factors like ROA, loan growth, net chargeoffs, member satisfaction, etc. To test the relationship we ran an analysis of long-term (three years) results for each credit union in our study using a model that measures financial results, growth results, and asset quality. Each credit union was evaluated against the model and ranked based on the results, from 1 to 550, with 1 being the best. Our assumption was that there would be some relationship between compensation and performance.

This content is for CU BUSINESS eMagazine , Special Deal: 2 websites , and NEW! The Leadership Team Builder Group Subscription members only.
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