Aligning Executive Compensation With Member Interests In A Merger

When a change in control occurs in a credit union, the board of directors must consider the best interests of its members. This means not only ensuring the financial health of the organization is stabilized, but also putting the right leadership in place as the institution grows.

As the top leaders in their organizations, CEOs earn top compensation; however, in the face of a possible merger, it’s not uncommon for credit union CEOs to question what their futures will look like, particularly in terms of their compensation. 

Of course, the NCUA’s fiduciary responsibilities require credit union leaders and boards to ensure the benefits of their members and communities above all else. So, how can a CEO ensure he or she is protected as an individual while simultaneously maintaining the health and prosperity of his or her organization?

Planning for a Change in Control

Credit union boards are required to keep executives’ compensation within reasonable and appropriate limits, factoring in elements such as the following:

• The executives’ tenures with their organizations
• The executives’ levels of experience
• The size and financial standing of the organization
• Competitive compensation within the industry

The NCUA strictly prohibits executives from receiving “golden parachutes” as part of their severance packages if their credit unions are considered to be financially troubled. This means it’s important to have a solid plan in place and in writing long before a merger agreement is laid on the table. 

According to a new tax bill, IRC § 4960 imposes a 21% excise tax on compensation of more than $1 million. Between base salaries, incentive bonuses, and retirement payments, many CEOs will breach this threshold if they choose to leave their organization after a merger. This can cause a negative impact on the credit union’s member, but there are ways to offset the cost.

1. Stagger payments over two or more tax years. This enables the credit union to take advantage of smaller payments that can be more easily budgeted, while avoiding the excise tax mentioned above. 

2. Employ the executive in another role. CEOs who are nearing the end of their careers are particularly fit for service or advisory roles, in which they can pass on their knowledge and leadership skills for three to five years after the merger, in exchange for future-dated income tax recognition at the time the merger takes place.

In this world of constantly changing rules and regulations, credit union boards are best to seek the assistance of third-party compensation experts who can help them navigate the waters of their upcoming merger.

Change-in-Control Agreements

Change-in-control (CIC) agreements are common in most industries, although they’re not often utilized in the credit union world. Over the past few years, the number of credit unions has fallen dramatically, while the average asset size of credit unions has increased substantially. With this ongoing shift in the industry, CICs are likely to become more common.

Before a merger can take place, CICs must be disclosed to the NCUA for review. If the regulatory agency finds the CIC offers excessive payment to the CEO, or affects the soundness and security of the surviving credit union, it could raise red flags. This ensures protection for both the CEOs and their memberships.

A change-in-control agreement is just one way you can protect yourself as the CEO of your credit union. If you’re interested in learning more about how a CIC may work well for you—or if you’ve been approached as a potential merger partner and want to maximize the possible benefits—reach out to a third-party merger firm to optimize your opportunities.