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Putting Members’ Interests First: Change-in-Control Agreements

For credit union boards and CEOs: how change-in-control agreements let executives weigh a merger offer on its merits, and how to structure them.

Glenn Christensen · CEO Advisory Group · April 2018 · 20 pages

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Cover of Putting Members’ Interests First: Change-in-Control Agreements
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Three findings

  1. Most credit union CEOs have no protection if a merger ends their role.

    In the 2017 CUES Executive Compensation Survey, fewer than half of credit unions (46.2%) had an employment contract with their CEO, and 59.4% of those contracts covered a change in control. Among the 200 largest US public companies, 63% have change-in-control agreements with top executives (Alvarez & Marsal Taxand).

  2. The time to agree terms is before an offer arrives.

    Once a merger is on the table, personal concerns cloud the CEO’s recommendation and rules on compensation tighten as the change in control nears. An agreement in place beforehand lets the executive team give the board a neutral view and keeps key leaders in place through the transition.

  3. Bank practice keeps change-in-control pay under three times annual compensation.

    In one West Coast bank’s proxy, change-in-control payments ranged from 2.54 to 2.97 times total annual pay, below the IRS limit of 2.99 times that triggers excise tax. Since the 2017 tax law, tax-exempt employers, including credit unions, face a 21% excise tax on pay over $1 million and on excess payments of this kind.

A merger proposal asks a credit union's CEO to give an objective recommendation on a decision that may end their own role. Few credit unions settle that conflict in advance, and by the time an offer arrives it is too late to do it well. This paper explains how change-in-control agreements let executives weigh an offer on members' interests, and how to build one that boards, regulators and partners will accept.

What does the full paper add?

  • What a change-in-control agreement covers, and the choice between single and double triggers.
  • How much these agreements typically pay, with a worked example from a bank proxy statement.
  • The tax rules that can turn a payout into an unexpected bill, and the ways around them.
  • What to include beyond the payment: vesting, timing, non-compete terms and the senior team.
  • What regulators expect to see disclosed, and to whom.
  • A case study of a small credit union approached for a merger five years before its CEO could retire.

20 pages, with contributions from compensation consultants, a CPA and a financial institutions attorney. Published in 2018; its tax and regulatory references reflect that date.
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