Ties That Bind: Supplemental Executive Retirement Plans

By John Pesh

For a credit union to reach its strategic goals, leadership continuity is critical. Creating a strong financial tie between top executives and the credit union will facilitate your succession plan, and effective negotiation of executives’ compensation is a critical component to binding this relationship. It’s a balancing act between the credit union’s needs and those of its key leaders.

To begin negotiations with a current executive, start by looking at when your CEO expects to retire and ask about his or her goals. You should also prepare for an unexpected departure, especially if the CEO’s base compensation package is lower than that of peer credit union executives. Loyalty counts, but often not enough to turn down an attractive offer with a pay increase.

For this reason, it’s essential to regularly benchmark your base compensation packages against peer credit union data through tools such as industry compensation surveys. Once you’ve addressed plans for your CEO’s departure, ask what strategic objectives would be disrupted if no right-hand person is ready to take over, either full-time or on an interim basis. Consider what you might need to do financially to retain your second-in-command. Look at credit union milestones—typically over the next three to five years—that might prompt you to retain and reward an executive, such as:

  • A core data processing conversion. What would happen if your vice president of information technology decided to take early retirement?
  • A new headquarters. How would the building’s development be affected if your chief operations officer took a job that offered more in terms of a base salary?

Once you’ve done your research, it’s time to explore a key retention tool for your CEO and other top executives.

Why a supplemental executive retirement plan?

A supplemental executive retirement plan (aka SERP) doesn’t carry the same weight it once did, so credit unions should now think of this tool as a supplemental executive retention plan. According to CUNA’s 2017-2018 CEO Total Compensation Report, nearly 60% of credit unions offer some form of SERP to their CEO, which can provide more timely payouts than traditional retirement plans and can supplement qualified retirement plans, such as 401(k) plans, which have contribution caps. Customizing the SERP so it’s meaningful to the executive is key.

For that reason, involve your executives at the outset of the process. Negotiate a plan that will make it difficult for the executive to leave the credit union during a given period. The specifics will vary depending on the individual. A SERP can target life-stage events, such as for an executive’s children’s college enrollment or a wedding, which provides an incentive to stay at the credit union. Conversations with the executives can illuminate these events. You also can implement SERPs when hiring someone from the outside. You can build in a SERP provision into their employment agreement, so it becomes a requirement after a probationary period.

Who should negotiate SERPs?

Your board’s compensation committee should reach a deal on any SERP plans for your CEO, and report that agreement to the full board after completing due diligence. The board should delegate authority to the CEO for negotiating SERPs for other leadership team members and allow the CEO to report progress as needed.

What type of SERP you should negotiate?

Credit unions can use a 457(f) SERP plan for payouts based on a credit union’s milestones or the executive’s life events. You can make payouts every three to five years, and the payout can be defined benefit (a specific amount) or defined contribution (one based on specified contributions and any investment earnings).

Another SERP option is split-dollar life insurance. It’s a cost-effective way to enhance your executive compensation package because the credit union and executive split the cost and benefit. These plans typically require medical underwriting. Again, the timing of any benefit can be made based on amount, length of service, or other milestones.

A third alternative is a 457(b) plan. If retention is your goal, this isn’t your best solution because contributions to the plan are vested 100% from day one. Think of it as an extension of a 401(k) plan; it’s often used if the executive has been capped on contributions to qualified retirement plans.

Consider both the strategic goals of the credit union and the needs of the executives you want to retain. Maintain an open dialogue throughout the process so you can negotiate a SERP that’s a win for everyone.

John Pesh is director of executive benefits at CUNA Mutual Group, Madison, Wis. For more information, contact Pesh at 608.665.8223.

Note: the article was originally published in the May 2017 issue of CU Directors Newsletter.

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Proprietary insurance is underwritten by CMFG Life Insurance Company. Proprietary and brokered insurance is sold by CUNA Mutual Insurance Agency, Inc., a wholly owned subsidiary. This insurance is not a deposit and is not federally insured or guaranteed by your credit union. For more information, contact your Executive Benefits Specialist at 800.356.2644. Representatives are registered through, and securities are sold through, CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, 2000 Heritage Way, Waverly IA 50677, toll-free 866.512.6109. Insurance and annuity products are sold through CMFG Life Insurance Company. Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations for guaranteed by the credit union. EXBEN-2175424.1-0718-0820 © CUNA Mutual Group, 2018 All Rights Reserved