Scott Albraccio, executive benefits sales manager for CUNA Mutual Group, has advice on how to design executive deferred compensation plans that won’t handcuff future boards. Albraccio says setting executive salaries may not always be an easy task for a credit union board, but the process of arriving at equitable numbers usually isn’t complicated. Supplemental benefits such as deferred compensation plans, on the other hand, 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 cost for competitors to poach them,” he says.
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 the 18.8 percent in 2016).
Non-qualified deferred compensation 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 non-CEOs.
Albraccio outlines his checklist ideas below:
A 7-Point Checklist for Creating Prudent SERPs
Faced with implementing or updating supplemental deferred compensation plans, it’s understandable that some boards consider “off-the-rack” products—a plan pre-configured for a specific executive level or length of service.
Another 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 in NQDC plans—and also 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 this conclusion?
- Compare plan design options and show why you chose this 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. This 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 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.