Wednesday, February 29, 2012

Strategic Planning for 2012 ? Executive ... - Credit Union Business

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By Bridget McNamara-Fenesy

As the turn of the calendar page moves us into a new year, credit union boards and senior management are focused on strategic planning and goal setting for 2012. Of course, the budgeting process is front and center at this time of year, and as the economy moves in fits and starts, the focus continues to be on doing more with less, creating greater efficiencies, and monitoring the bottom line.

But finding financial efficiencies is not always about cost-cutting. In fact, the greatest impact on a credit union?s financial health will probably have little to do with quarterly, or even annual, numbers. In order to truly make an impact on the financial health and viability of the credit union, boards and senior management need to be thinking long-term, and they need to be thinking strategically, not tactically.

To build a successful financial institution, credit unions must have the right people in the right places doing the right things at the right time. This does not happen by accident. Credit union boards must focus their attentions on who can lead the credit union into the future, and then assure that they have the programs in place to keep those leaders aligned with the goals of the membership.

One of the primary ways to do this is through a comprehensive and competitive compensation package. But this does not mean that a credit union should simply find out what local competitors are paying, meet that for their own CEO, and consider their job done. The first step in creating an effective compensation program is in developing a compensation philosophy that is unique to the credit union. What is your charter? What are the goals for your members? How can those goals be integrated into the compensation philosophy for your credit union? How is that philosophy translated into an effective compensation package for the CEO? And how does what is developed for the CEO become integrated into the compensation package for the rest of the senior management team? Everyone in a senior management position should understand the goals of the credit union, and what their role is in making that happen. If that is clear, then reward systems, both in the short-term and the long-term, can be built to support those objectives.

In the newly published The Survey? 2011: Employee and Executive Compensation and Benefits for the Credit Union Movement, some important findings on executive attraction, retention and reward systems come to light. Compensation planning and development is becoming more complex.? Credit unions, especially the larger ones, compete with not just other credit unions for top leadership talent, but with banks and other financial service companies. Recruitment is no longer a local process, but can be national in scope. To attract and retain the best talent, credit unions must develop programs that tie reward to performance, and provide that reward proximate to the actions that gave rise to the performance. But performance-based compensation programs are only effective if the board knows what performance is desired on an objective and measurable level. Credit unions are increasingly assigning the job of development of a strategic compensation plan to a specific board committee, most often the Compensation Committee.

Just a few short years ago, executive reward programs were driven primarily by a retrospective look at performance, with board discretion serving as the leading factor in establishing executive bonus levels.? If the credit union had a good year, the board gave the CEO a pat on the back with a bonus that was determined after the fact, and based upon a general feeling of a job well done. The Survey 2011 reports that incentive compensation is increasingly based upon measureable and objective pre-determined performance factors, with loan growth and ROA utilization reported in 2011 as the leading factors in establishing performance based compensation systems. This is not surprising, given an environment where loan demand is weak and placement of funds is difficult. Board discretion has dropped from a 46-percent preponderance just two short years ago to a 26-percent preponderance today.

Credit union boards are prudent in retaining a degree of discretion in the calculation of CEO bonuses, to allow for a subjective component in the mix, as well as to allow for some flexibility in the event of unforeseen events that may impact the credit union?s goals. However, tying bonus awards to metrics that are consistent with the strategic goals of the credit union and communicating these targets in advance assures an alignment between compensation philosophy and practice. The criteria will likely include attainment of financial goals for the credit union as a whole, people or management goals, as well as specific targets that will be important to the credit union in a particular performance evaluation period.

It is also important to tie performance factors for an executive to areas in which the executive can actually make a difference. As the CEO has ultimate responsibility for leading the credit union successfully in all arenas, the CEO?s performance factors should be far broader than the other executive team members. But all performance factors should be supportive of the overall credit union objectives, so that when the members win, so too does the executive team.

This focus on tying pay to performance is not limited to annual bonus awards. In fact, pay-for-performance is becoming an increasingly utilized strategy in the development of long-term incentive plans. These plans, when properly structured, not only provide a reward program for the executive team, but they serve to create a retention and succession program by keeping the entire executive team focused on longer-term, strategic goals, and aligning? the credit union?s success with their own. Short-term goals should be rewarded through short-term bonus programs, while longer-term objectives can be supported through a strategically developed long-term incentive plan, in which executives are rewarded for moving the credit union successfully into the future. An integrated compensation philosophy is the road map to get you there.

Bridget McNamara-Fenesy works with Executive Compensation Solutions to support credit union boards in the development of strategic compensation and benefit programs that align the interests of credit union members with their executive team. Bridget has worked in the area of executive compensation design for over 25 years. She holds a BA degree from the University of Notre Dame, a JD degree from the University of Denver and the Certified Employee Benefit Specialist designation from the Wharton School of Business.?

Management Strategy 2012, Planning

Source: http://www.creditunionbusiness.com/2012/02/27/strategic-planning-for-2012-executive-compensation-and-benefit-trends/

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