Archive for Management & Operations

Aligning CU Executive Incentives With CU Goals and Member Needs

By David Frankil, President, Burns-Fazzi, Brock and Associates

Dr. Jack Clark from Clark Research Associates presented the results of the 2014 NAFCU-BFB Executive Compensation and Benefits Survey at this summer’s NAFCU Annual Conference.  There were many tidbits in the presentation, but one topic caught my eye – the wide variety of incentives that Boards have used to create bonus plans for top executives.

The topic of how incentives affect behavior is far from new – go back to freshman-year economics and Adam Smith –

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

Adam Smith, An Inquiry into the Nature & Causes of the Wealth of Nations, Vol 1, March 9, 1776

Just as water finds its own level, economic activity naturally seeks its highest and most efficient use.  That’s not to say that the greater good is subverted to individual self-interest, rather that well-designed compensation models effectively align individual incentives with desired outcomes that benefit the credit union, its members and top executives.

On that we can probably all agree – but what are the metrics and desired outcomes that will create optimal goal alignment?  To use a baseball analogy, home runs are great – but rewarding players just based on home runs would result in tons of shortstops and second basemen batting .075 as they swung from the heels every time up at the plate.  You’d have a hard time finding anyone who wanted to pitch too.

First off, what sorts of credit unions offer bonus plans tied to incentives?  On average, only half (49%) offer bonus plans tied to incentives, with the tipping point being around $150M in assets.  The survey clearly showed that mid-size and larger credit unions are more likely to offer them, with roughly 80% of the credit unions between $150M and $750M, and 90% over $750M, doing so.

Hard to know what is cause and what is effect here – have the larger credit unions figured out how effective bonus incentives can be in driving growth, or are they using these bonus models because they can better afford them?

Second, what is the metric most often used as the incentive?  Given how similar most of our financial services business models are, you’d naturally expect to see a high degree of commonality in the incentives used.  And you’d be wrong – see the chart below.

While “Loan Growth” topped nearly everyone’s list at 70%, after that you see a cluster of metrics such as Return on Assets (ROA), Net Worth, Membership Growth, and Net Income Growth – and then a broad range of others from Delinquency to Employee Satisfaction and Asset Growth, with Compliance coming in dead last.  We can only assume that is not an indicator that compliance is unimportant, just that it is expected to be done right regardless of incentives.

The other conclusion we draw from this chart is that many credit unions are apparently using more than one measure of success for incentives tied to bonus.

Now that we know there are a variety of measures, the next question is whether there are any patterns that emerge based on credit union size.

Once you get past Loan Growth as a common metric, larger credit unions tend to be more focused on ROA, Membership Growth, Member Satisfaction and Products/Services per Member – and smaller and mid-size credit unions tend to be focused on Net Worth, Net Income Growth, Delinquency Measures and Strategic Initiatives.

There may be some crossover here – I’d be surprised if “Strategic Initiatives” didn’t include some of the other specifics cited, for example.  But Net Worth, Net Income Growth, and Delinquency Measures must also be important to larger credit unions too.

Not sure there is any one explanation, but taken together it looks like the larger credit unions tend to be focused on “making the pie bigger” – in particular, the focus on membership growth and products/services per member.  Think of this in the context of indirect lending – just growing an indirect lending program can certainly help with net worth and net income growth, and you’d have to be concerned about delinquency rates too.

But transforming a single indirect lending transaction into a broader relationship with multiple solutions that positions your credit union as the primary financial institution can yield benefits across many of the metrics cited.  And the long-term relationship will continue to yield in the future long after the indirect loan had been paid off, assuming that individual remains a satisfied member.

The survey contains many more interesting insights into credit union compensation and executive benefits.  If you’re interested in learning more, a recording of Dr. Clark’s recent webinar is available online, along with his presentation slides. You can find the recording, and the schedule of upcoming free webinars, at www.nafcu.org/BFBwebinars.

For a copy of the NAFCU-BFB Executive Compensation and Benefits Survey, contact Liz Santos at lsantos@BFBbenefit.com.

 

Developing the Next Leaders Within Your Credit Union

By Peter Myers, MSC, PCC, Vice President, DDJ Myers

If I told you that you could handpick a group of leaders who would be perfectly invested in your credit union, would you jump at the chance? Now what if I told you these potential leaders may be individuals who you already interact with every day? Of course, I’m talking about looking within your own organization and identifying emerging leaders from your staff, and then providing them the training to transform into leaders and thinkers who exceed expectations for both you and your members.

Who Is an Emerging Leader in Your Credit Union?

To identify emerging leaders within your ranks, I encourage you to cast a wide net and look beyond obvious candidates such as vice presidents and other upper management. Perhaps there’s a team leader, a department manager, or a teller supervisor who has shown leadership potential by delivering excellent member service or proactively helping on team projects. By paying close attention and identifying those employees who put your credit union values into action, you may be surprised at how many of your staff have the potential to exceed expectations and grow into leadership roles. Read more

Debt: The Inheritance No One Wants

Originally posted on CUInsight.

Guest post written by Kristi Nelson, Second VP and Actuary, Securian Financial Group

Second VP and Actuary
Second VP and ActuarSecurian Financial Group

Have you thought about what would happen to your debt when you die?

When Securian Financial Group posed that question to 1,004 Americans of all ages in an online survey last September, nearly one third (31 percent) said they had not thought about it.

Lopsided personal finances

Among the respondents in Securian’s recent survey who hold debt as primary borrowers or cosigners, significant percentages could leave behind large financial obligations if they died. Twenty percent owe $100,000 or more. Forty-four percent owe $25,000 or more. Read more

Credit Unions Need to Know KBYO

Originally posted on CUInsight.com.

Guest post written by John Levonick, Chief Legal & Compliance Officer, Accenture Mortgage Cadence

Accenture Mortgage Cadence is the NAFCU Services Preferred Partner for Mortgage Processing and Fulfillment Services.

Join compliance specialists, John Levonick and Suzanne Garwood, as they discuss The 7th Rule: Unintended Consequences of the New, “Simplified” Mortgage Disclosures” on Wednesday, July 9, 2014 at 2:00 pm–3:30 pm ET.

Know Before You Owe (KBYO), the new mortgage disclosure regulation, does not take effect until August 2015.  So why talk about it now? This change in mortgage disclosures is sweeping, and, in many respects, bigger than the Qualified Mortgage (QM) and Ability to Repay (ATR) Rules.  Its complexity and broad range poses significant challenges for mortgage originators.

First things first:  Know Before You Owe, a product of the Dodd-Frank legislation, introduces two new disclosures: the Loan Estimate and the Closing Disclosure.   The Loan Estimate is designed to provide disclosures that help borrowers understand the key features, costs, and risks of the mortgage loan for which they are applying.  It must be issued within three days of loan application.  So far so good; this is the same requirement that is in place today for the Truth-in-Lending (TIL) and Good Faith Estimates (GFE).  The big change, however, is that the Loan Estimate replaces the TIL and GFE forms that every lender (and every borrower that has taken out at least one mortgage) knows well.

The Closing Disclosure is designed to provide information that helps borrowers understand all of the costs of the transaction. It must be received by the borrower three business days prior to the closing date.  The HUD-1 and TIL that is due at closing is replaced by the Closing Disclosure. These forms, too, are familiar to every lender and seasoned borrower.

The implications of KBYO are broad and touch every corner of the mortgage origination process.  So, in setting priorities in the areas of people, process and technology, where should lenders focus first?  The short answer is technology.  While QM and ATR were technologically challenging — with some platforms managing them better than others – KBYO is even more so because of the way it handles the costs borrowers typically encounter when taking out a mortgage loan.  Dealing with KBYO is a major undertaking.

People, both internal and external, should be the second focus for KBYO implementation.   Mortgage teams must re-learn and translate all they know from the Truth-in-Lending, Good Faith Estimate and HUD-1 forms.  Every mortgage lender knows them well and can explain them thoroughly.  As of August 1, 2015 these forms become a part of mortgage history.  Training staff well is a critical first step, because the next step is educating borrowers.  First-time borrowers, of course, are unaffected.  Since they have never seen a TIL, GFE or HUD-1, they will not be surprised by the new disclosures. Repeat borrowers are another story altogether, especially those who have financed or refinanced a home more than once.  The Loan Estimate and the Closing Disclosure will be completely foreign to them, so it will be essential to have a well-trained and well-prepared lending staff to put them at ease.

Know Before You Owe affects mortgage origination in a number of ways, so process should be the third area of concentration.  It is important to have the right technology (and trained people) in place before tackling processes.  Technology drives the flow of most mortgage operations and the right technology is essential to refining the processes needed to address the new regulations.

While 16 months may seem like a long time from now, objects on the horizon are closer than they appear.  Now is the time to get to know Know Before You Owe, and to start making sure that your mortgage technology is ready when – or better yet, before – this complex and sweeping regulation takes effect.

The Top 5 Myths about Executive Benefits

Guest post written by Christine Burns-Fazzi, Principal, Burns-Fazzi, Brock.

Burns-Fazzi, Brock (BFB) is the NAFCU Services Preferred Partner for Executive Compensation and Benefit Consulting.

There is a lot of mystery swirling around executive benefits. A well-designed  plan does more than pay for performance and longevity, or provide the ability to offer supplemental retirement benefits to key executives. While executive benefit plans are designed to recruit, reward, and retain senior executives, they are also arranged to have a positive impact on the credit union’s earnings. Of course, all of this must be accomplished with a constant eye on federal and state regulations.

While we all can agree on what an executive benefit plan is, it is equally as important to note what an executive benefit plan is not. Here are the top five common myths about executive benefit plans: Read more