October 6, 2025 • 48 mins
Back on the show today after a hiatus is Kirk Kordeleski, onetime CEO of Bethpage Federal Credit Union and now a partner in Parc Street Partners where he focuses on credit union executive retirement plans.
Kordeleski has been on the show many times but he always is welcomed back because he has deep insight into what it’s like to be a credit union CEO and also into how to compensate those CEOs appropriately. Here’s a link to the Kordeleski Archives.
What brings Kordeleski back to the show is that much is changing in the retirement planning for credit union CEOs and senior staff. Changing macro economic conditions have triggered significant changes in the retirement plans. Breathe easily. There remain good, stable plans. Kordeleski tells about them here.
Know that appropriate compensation for senior executives is a must at credit unions that want to succeed. And a good retirement plan is a critical part of that package.
‘
Kordeleski brings us up to date.
Listen up.
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Find out more about CU2.0 and the digital transformation of credit unions here. It's a journey every credit union needs to take. Pronto
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:03):
Back on the show today after my A Korolatsky one
time COVID.
Now partner and Fox StreetPartners or Focus design crazy
fans.
Those are the fans designed toget the channel in place.
Koroletsky, of course, has beenon the show many times, but he's
(00:24):
always welcome back.
An autopsy on the opposite ofCEOs appropriately.
Here's a link to the Korolatskyarchives in the show notes.
What brings Korolski back to theshow today is as much as
changing in the retirement fivefor crazy of the STO and senior
(00:45):
staff.
Changing macroeconomicconditions have triggered
significant changes in theretirement plants.
Korolesky tells about them inthe show.
Know that appropriatecompensation for senior staff to
start cutting in is a must forthose institutions that want to
(01:06):
succeed.
Koroletsky brings it up to dateto what's working now and what
will likely work in the future.
Listen up.
Okay, now you're gonna tell meabout what's new, what what's
changed in the world of SERPsince we last talked, perhaps
six months ago.
SPEAKER_01 (01:26):
So let's talk about.
So good to be back on the on theair with you.
Thank you for uh taking the timeto interview me today.
And and uh you asked a what is areally intriguing question, um
uh which is about wheresupplemental executive
retirement program SERPs aretoday in the credit union
industry.
(01:46):
And let's let's take a step backinto the the bigger picture.
Uh with when interest rates wentup, this was really the kind of
the last time we spoke in insome detail, interest rates had
gone up, and it really exposed anumber of challenges in the
industry.
For the like so many things,like so many types of
(02:08):
investments, like so much marginon the business for credit
unions, low interest rates hadcreated a long-term environment,
10, 12-year run since 2010, upuntil well into 2020 and 2021,
uh, that allowed for CERPsspecifically to be able to be
(02:31):
created at a low rate ofinterest on the books of a
credit union.
If you remember the model, andI'm sure you do, and I imagine
maybe some most of the listenersmay, but these are uh life
insurance policies that are umput in place to create a
retirement, a tax-freeretirement uh plan for the
(02:55):
executive, typically paying outover 20 years tax-free.
And it much like a mortgageloan, the the uh where the house
is um put up as collateral for aloan, and uh it's collateralized
back to the credit union and inthe as the first uh payee in uh
(03:16):
time of a sale or or default.
Um and then the equity or thevalue of the that home accrues
to uh the homeowner or themember.
In these cases, these are loansgiven by the credit union to
purchase a life insurancepolicy, and that life insurance
policy is a loan, becomes a loanon the books of the credit
(03:37):
union, and the life insurancepolicy is in the name of the
executive, and the executiveextracts that value, in this
case, instead of appreciatedhome value, cash value in the
insurance fund during theirretirement years.
Well, that all workedmarvelously for that 10 or 12
years in a low interest rateenvironment.
As interest rates moved up byfive and a quarter percent and
(04:02):
started to settle into a higherrate of interest for the loans
on the books of the creditunion, the loan that funded that
insurance policy, uh, thoseloans uh started to become
larger and larger because thethe rate not only was higher
that had to be paid back to thecredit union for their loan, to
(04:23):
the executive, but also themargin between the dividend rate
or the earnings rate on thatlife insurance policy and the
rate on the loan became smallerand smaller.
So, in order to create the samevalue for the executive, the
same retirement funding for the20 years, those products, those
(04:44):
loans became much larger, orthey carried tax consequences
with them.
So you have this environmentwhere interest rates go up and
it starts to stress the originalmodel of the plans.
Our last conversation was abouta product that we reintroduced
to the marketplace, Park Street.
(05:05):
For those of you that havelistened to us over the years,
OM was our firm for a number ofyears.
Park is our rebranded firm fromabout 18 months ago.
Park went back to the productthat had been in place in uh the
early 2000s, uh, which allows usto uh put in a an uh insurance
(05:26):
product and a loan on the booksthat does not create the loan at
the beginning of the policy, butallows it to accumulate uh
premium by premium as it's paid.
That has allowed us to not havethe tax consequences or the
inflation in the in the size ofthe loan.
So new products entered themarketplace.
(05:48):
The quick answer uh to this asinterest rates went up, new
products came into themarketplace.
In our case, it's called switchdollar, and there are a couple
other firms that have introducedthat product.
On the other hand, the indexuniversal life product, which is
the other primary product, ifyou might recall, two products
that fund the insurancepolicies, whole life or index
(06:11):
universal life, the IULs orIndex Universal Lives product uh
has been strained.
And it's now in a situationwhere a lot of those have had to
be uh refinanced uh because theyno longer are performing at the
illustrated rate that theexecutives had counted on.
(06:32):
Uh so you've had a lot ofpressure that's been created by
interest rates and created bythe design of the products that
are forcing most credit unionsto go back and evaluate whether
the plans are designed andillustrated as properly as they
should be, and if they're goingto deliver the retirement plans
(06:53):
that the executives hope to.
There's more to that, but I'vegone on long enough.
Let me ask, let me let you ask afew questions.
SPEAKER_00 (07:00):
Let's go back to why do SERPs exist.
It's not because credit unionswant to be nice to their chief
executives, although perhapsthat's part of it.
It's really to providecompensation that has some
resemblance to what that personcould make working for a bank.
And since a credit union doesn'thave shares, there can't be
(07:23):
share, I mean shares of stock,you can't award stock to the
person, et cetera, et cetera.
I mean, that's the simple,that's not simple, but that's
the basic problem that SERPs aredesigned to handle, right?
SPEAKER_01 (07:36):
It is a a design for a retention and reward or wealth
creation uh plan that takes thethe same tries to create the
same value as stock options werein the for-profit world.
And it took on and it has takenon a particular priority because
(07:57):
we used to be able to offerdefined benefit plans, which
only now 13% of the credit unionmarketplace provides, and
because salaries have gone up toan extent that 401ks and Social
Security no longer can, becauseof the caps on those plans, no
longer can make up a highpercentage of an executive's
(08:18):
retirement.
So you you don't have, you donot have the traditional tools,
the defined benefit plan, andyou're trying to compete in the
marketplace against uhexecutives that can work in
environments for fintechs or bigtechs or banks or or community
banks that have stock options.
And without these types oftools, you can't compete for
(08:41):
that talent.
SPEAKER_00 (08:42):
And very, very, very few companies still offer
defined benefit plans.
It's not just very few creditunions, there's very few
companies of any kind.
SPEAKER_01 (08:53):
That is the difference is that that used to
stand in place of uh some ofthese uh tools and benefits, but
once that got eliminated, thegap became much larger and SERPs
became even more important.
SPEAKER_00 (09:08):
Now, I had a I have a friend who used to he's now
retired, but he had a very largeprivately held hospitality
company.
He was the sole shareholder,sole owner, and he liked it that
way.
But to keep his employees, hecreated a kind of phantom stock.
(09:30):
Uh wasn't a real stock exactly,but in the world of that fantasy
world, it actually had value.
And what could go up, it couldgo down using normal metrics.
And the employees were quitehappy with that.
They thought they're they werepaid comparable to what they
would have gotten from fromlarger hotel companies that are
(09:52):
publicly held.
Could a credit union create avehicle like that?
SPEAKER_01 (09:58):
It's wonderful that you ask it, because we've worked
on this a couple times,particularly for QSOs.
Uh I worked on one extensively,uh modeled extensively last
year, and we're we'll probablydo a couple more this year.
The challenge with Phantomstock, and I don't know if your
your friend and and that firmran into it, it's the valuation
(10:20):
of that stock.
And because there's not a marketfor it, you're you're making
estimates in the marketplacebased on you know returns, the
income that the organizationcreated, or other valuations.
SPEAKER_00 (10:36):
Now, in his case, I think he had an advantage that
you don't have with the QSA.
I think he modeled it aftercompetitors that were public.
SPEAKER_01 (10:45):
Correct.
So that's that that is withCUSOs, it's particularly
challenging because they tend tobe so unique each time.
With credit unions, there havebeen some discussions of phantom
stock from time to time.
You may be able to compare thatto a for-profit community bank
of a similar size, but as youknow, credit unions tend to, and
(11:08):
their boards particularly careabout this, tend to be driven by
more member value, meaning lowerrates uh on loans and higher
rates on dividends and lowerfees and more convenience than
they are on profitability orROA.
SPEAKER_00 (11:25):
So most community banks, smaller ones, are owned
by 10 guys down at the countryclub.
Yeah, there's no there's nomarketplace for that stock.
SPEAKER_01 (11:38):
So it's it's much harder to find the apples and
apples uh that you need to dothe evaluation.
So that that has been the reasonprimarily it hasn't occurred.
SPEAKER_00 (11:48):
Right.
No, when you talk, I I think I Iknow he picked out a couple
competitors that were basicallythe same business he was in that
were public.
So he had clear models he coulduse.
Yep.
And the the employees wouldunderstand those models because
they were always competing withthese guys.
SPEAKER_01 (12:07):
I mean that's very different, right?
And most of the credit union uhexecutives, particularly those
below five billion dollars inassets, really only know the
credit union world, right?
Certain there there is asprinkling of people from the
banking side, but even in thosecases, they're they're not
particularly familiar with or asclose to as as they were when
(12:29):
they were working on that side,what uh the valuation might be
of the firm.
SPEAKER_00 (12:35):
Yeah, yeah.
So SERPs still are and the otherthe other Park Street product
are still the way to go rightnow.
SPEAKER_01 (12:45):
Yeah.
So when when you look at theoptions in the marketplace, they
they are the switch dollarproduct that we're offering,
which again is a where we set upa credit union life insurance
policy uh in the executive'sname.
It switches, literally the name,switches over to a traditional
(13:05):
plan after it's matured enoughto have cash value in it and
interest rates uh that havebalanced in the marketplace.
And what'll happen is, just toput it really simply, is that
one of two things will happen uhover time in the rates that are
(13:27):
associated with these products.
Either the dividend will go upor rates will go down.
And why can we be so sure ofthat?
Because if rates stay up in themarketplace, then the dividend
must go up.
The dividend is based on MassMutual and New York Life's
dividend, it's based on their$750 billion investment
(13:48):
portfolio that is heavilyregulated and it is in the in
mostly in the same type of bondsuh that credit unions are
allowed to purchase, uh, U.S.
government, municipals, etc.
And so if rates stay higher,then the dividend rate will go
up and the margin will come backinto the business model uh for
(14:11):
these products, the differencebetween the dividend rate and
the loan rate on the creditunions books, and allow us to
switch it over to a traditionalsplit dollar loan sometime
between year seven and year 10.
Uh so that we can prove thatmath.
We show it, we can show you thatit always works.
Um, so that that that newproduct has worked very well for
(14:33):
us.
It also allows for the premiumsto be paid um annually rather
than all paid up front, uh,which was a real value when
liquidity was a problem in theindustry.
Liquidity has uh is no longer asmuch of a challenge.
Um, so that part of the productis still valuable, but not as as
(14:53):
valuable uh or as necessary asit was two years ago.
SPEAKER_00 (14:58):
Now, as have the problems suffered by competitive
products tarnished your productsin the minds of credit union
executives and board members?
SPEAKER_01 (15:09):
Yeah, so it's uh probably the the thing, the the
issue that we struggle with uhthe most, um, because that there
have been there are realchallenges in the index
universal life, the IUL product.
Um you may remember the detailedconversations we had on this,
(15:32):
and if not, uh there are somepodcasts that Robert did that
will that lay this outcarefully.
Um but IULs uh are tied in thoseindexes are tied to normally the
SP uh returns.
The problem has been that thosethey had they have floors and
(15:55):
caps.
Floors zero, that's wonderful.
The market goes down below zero,you you are not penalized below
not having any return that year.
It's not negative.
On the upside, though, uh thosecaps were originally set at 15%.
They have been changed by theinsurance providers because of
(16:17):
the profitability of theproduct.
They've made mistakes in theircalculation of the profitability
of their products.
They lowered those caps to 8 and9%.
So now, in the very good yearsof a market, you can only earn 8
or 9%, not 15%.
Or if you're in the stock marketyourself, you know, if you have
(16:38):
a year that's that has a 20%return, you're going to get that
20% return.
And that's going to offset thenext year if it is if you have
the zero or negative return.
So now instead of a wide rangeof value that's created by the
index universal life, zero to15% or 0 to 13%, you have a very
(16:58):
limited return of 0 to 8%.
Well, the average of the 0 to 8%ends up being right around 6%,
which is lower than the dividendon the whole life policies.
So, in essence, you take acompletely risk-free
environment, dividends on awhole life policy, and now you
(17:19):
compare that to an indexuniversal life, which has a lot
of volatility and risk, and uhthe whole life product stands up
very well.
As a matter of fact, in every inevery credit union and in every
plan, our whole life producttoday illustrates the same or
higher retirement value than weoriginally designed.
(17:43):
So every one of our plans isworking to the extent it was
designed or better than thedesign for the executive and for
the credit union.
And it's just simply whole lifeproducts are really well
designed for this product.
SPEAKER_00 (17:57):
IUL is my point was you if a friend of yours had an
IUL product and now needs it andis not quite there for him.
Is that friend as a seniorexecutive of the credit union,
does he distinguish between thatproduct and your product?
In other words, are all productstainted in his mind?
(18:19):
Yeah, it's too it's too risky,man.
Yeah, my friend was counting onthis and now he's on food stamps
and blah, blah, blah.
SPEAKER_01 (18:28):
Yeah, I I don't think that all plans are
tainted.
I think that that executives andboards are taking a great deal
more time to understand whatthey're getting into.
Because if you know this this issomething that once it's set up,
(18:48):
is extraordinarily important andsubstantial to the executive's
family.
They're counting on this.
He, the she, or they are allcounting on uh living off of
this benefit.
And so if it is miscalculated ormisperforming, um, it's severely
(19:09):
disruptive.
So they're spending timeunderstanding the options.
Uh when it isn't working, creditunions are stepping in and
putting in additional plans tofix the problem.
So it has not tainted theindustry at this point.
And part of that is where youstarted, Robert.
There's only one option.
Uh, if you don't offerinsurance-based SERPs, then
(19:31):
you're going to offer acash-based SERP of 457F, and
that's a terribly expensiveproduct for the credit union.
SPEAKER_00 (19:38):
It also has more tax consequences for the executive,
right?
SPEAKER_01 (19:43):
But that's why it's so much more expensive because
they're going to get taxed on 50cents on the dollar.
SPEAKER_00 (19:48):
Yeah, in a totally different world.
Of the let's say credit union isa billion and above, what
percentage would you guess havein place a retirement plan
similar to the one you'retalking about?
Or you know, a SERP or somethingcomparable?
SPEAKER_01 (20:07):
So I I actually have most of that data.
There, and it breaks into threebuckets.
Uh first of all, just thegeneral concept, SERPs, and
that's 457 F and split dollarplans.
Uh, 94% of the market have oneor the other.
94%.
SPEAKER_00 (20:27):
And the market is defined as what?
SPEAKER_01 (20:29):
Million dollars or above.
SPEAKER_00 (20:31):
Okay.
SPEAKER_01 (20:32):
Um, about 80% of the credit unions above 50 billion
uh 500 million, and then it goesdown to about 30 percent between
um 100 million and 500 million.
Now, second bucket or seconddata point, that is that uh
they're split about 50-50between 457Fs and split dollars.
(20:55):
Third and critical data point isabout 70 percent, though, about
70 percent of new plans aresplit dollar plans because
they're so beneficial to theorganization because they get
paid the credit union gets paidback principal and interest, and
so valuable to the executivebecause it's uh tax-free income
(21:17):
during the retirement years.
SPEAKER_00 (21:20):
In the case of a merger, what happens to one of
these plans?
SPEAKER_01 (21:25):
Great question.
Uh and it's a material questionnow that you see such large
mergers occurring.
SPEAKER_00 (21:32):
Uh yeah, you look at first tech DCU and you say
anything is mergeable.
Maybe the only one that isn't,maybe state employees and and
navy.
And everybody else is employed.
SPEAKER_01 (21:44):
So when you look at at a merger, the credit union
that's being acquired, okay, thecredit union that's being
acquired, their executive servesbecome a hundred percent vested
on the merger date.
(22:07):
So the idea behind it, theconcept, the strategy is that an
executive that's gettingacquired would not stand in the
way of the merger for their ownself-interest.
SPEAKER_00 (22:20):
Ah, that's excellent.
Yes.
So they And I I know in smallercredit unions, and this is
pretty well documented in infilings with NCUA, a lot of
times it's concerns aboutpensions and whatnot that could
prompt executives to fightliterally against a merger.
SPEAKER_01 (22:43):
Correct.
SPEAKER_00 (22:44):
And and by the way, and I'm kind of understandably
too.
SPEAKER_01 (22:47):
I mean, that's perfect sense on a human basis.
If you're the if if you're in a$10 billion credit union and
you're acquiring a$5 billioncredit, so major stuff, right?
But the acquired credit in the$5billion, you know, that CFO,
that chief operating officer,that chief whatever, um, if they
(23:11):
don't have a SERP in place, ifthey're not gonna get a benefit
from this transaction, afinancial benefit, are likely
going to work against themerger.
Because they're not gonna be theCFO of the bigger company.
Whoever's the CFO there is goingto be it.
SPEAKER_00 (23:30):
Right.
And that that I've I've doneresearch on mergers, and
executives often are some of thebiggest leaders against the exec
against the merger, primarilyfor the reasons we're just now
discussing.
SPEAKER_01 (23:45):
Well, that's been my experience, uh Robert.
And in and when I was doing theconsulting practice for five
years, uh, we were involved in ain a couple three mergers and uh
um and helping negotiate thedeals.
And in each one of those, uh twoof the two of the three did not
uh finish it, it did notcomplete.
(24:06):
Uh we were not the uh consultingfirm on the advice, the advisory
side.
We were the operationalconsultants.
We're doing the tech platformsand the uh uh product mergers.
Um but in two of those three, itwas the executive team of the
(24:28):
acquired credit union that keptwhispering in the ears of the
board members and got them to uhturn down the mergers on what
were frankly kind of sillyreasons and had nothing to do
with the financial performanceor the decisioning, the
strategic decision or the membervalue decisions, but we're based
(24:52):
on I'm gonna lose jobs and powerhere.
SPEAKER_00 (24:58):
Right.
And you know, if you're 60 yearsold and you're a CFO at a
billion dollar credit union,probably there aren't a lot of
job opportunities out there atthat same salary for you.
And that's just reality, whetheryou like it or not.
So unless that person has abeautiful golden parachute
(25:21):
that's intact, it stands toreason they'd be opposed to the
merger.
SPEAKER_01 (25:27):
That's it.
You've got it, and uh, so it'sso SERPs matter in that uh
framework because it allowsthose executives to see the
value that they're gonna get.
So they, you know, let's saythat they're vested at 30% or
50%, they become 100% vested atthat point, and uh that value
(25:49):
accrues to them um at uh theirretirement age.
You do see uh some additionalSERPs put in place at times uh
at uh at mergers so that people,as part of a means of of keeping
people within the company whowhose talent the organization
(26:12):
wants to retain.
Um, and as you can imagine, yougo way up in asset size,
compensation follows assets, sothere is reason to put in new
SERPs at a larger institutionbecause the val their their
compensation is going to go up,their annual salary and base and
incentive, and so will theirproportion that would go to a
(26:35):
SERP um over time.
SPEAKER_00 (26:39):
Now, if my memory's right, you you had talked some
time ago to me about nascentplans, nothing nothing really
hardcore, where you were lookingat what can be done for this
retirement issue in smallercredit units, let's say a
(27:02):
hundred million and under.
Where my sense of the researchas I remember it, is the vast
majority of those CEOs, theirretirement plan is social
security, and maybe a 401k,maybe.
And that's it.
No SERP, nothing, nothing ofthat kind.
Is my memory distorted?
Do I not, or were you working onsomething like that?
SPEAKER_01 (27:24):
You're spot on, and I um I'm working, I I continue
to work with uh the folks at theunderground.
I you may be familiar with withuh uh uh that organization.
SPEAKER_00 (27:38):
Uh Mitchell Stankovich.
SPEAKER_01 (27:40):
Yep, yep.
Um with them a little bit on thedesign.
They have already done someresearch and put in some design
options, but I I've been able toconfigure a model that will work
for a credit union of$70 millionor more in assets.
Wow.
Goes down below$70 million, thenit's gonna be uh dependent on
(28:05):
salary.
So if the salary is, let's say,$100,000 a year for that CEO,
then if they have a$401K and aSocial Security, they're gonna
be able to get to theirretirement goals.
It's when you get above$200,000that the caps come in for 401ks
and Social Security, and that'swhere you need a SERP, and
(28:26):
that's where we're where we'rewe're putting it in.
And that comes in around$70million,$80 million in assets.
SPEAKER_00 (28:32):
Well, the most you can get out of Social Security,
right?
Is uh$55,000 a year, somethinglike that.
SPEAKER_01 (28:40):
Like that.
Yep.
SPEAKER_00 (28:42):
And yeah, so much you get much over a hundred
thousand, and there's a bigstretch, a big gap between that
and what social security isgoing to give you.
SPEAKER_01 (28:53):
Right.
It's you know, then it dependson whether you have a 401k,
right?
And if they had a fair match ornot.
So there are there are um leverswithin that analysis that that
you have to take a look at.
The biggest issue is that as youget to the smaller credit
unions, they are less uhconnected to these tools, and so
(29:17):
the education and and bringingthe board members along is a
difficult process.
SPEAKER_00 (29:24):
And also, and you notice, Kirk, some of those
small credit unions, the boardmembers are acting in many cases
as unpaid employees of thecredit union.
SPEAKER_01 (29:35):
That's right.
They're they're doing it.
SPEAKER_00 (29:36):
And they're doing it out of joy and mission and
passion, and they're really goodpeople, but they they can't put
the it's hard for them to say,oh, the president's getting a
hundred thousand dollars and yetI'm working 60 60 hours a week
here for nothing.
Yes, is that fair?
I I see both sides of thatstory, actually.
(29:58):
I've I've talked to those uh Ofpersons, wow, I have nothing but
admiration for them.
I wouldn't do it myself, but Ihave nothing but admiration.
So you're saying there's hopefor the retirement plans of at
credit.
SPEAKER_01 (30:12):
I believe that there is hope for uh the retention of
the right leaders.
I think the hard there are twohard parts to delivering those
plans to the marketplace.
And it and I want to emphasizethat there are a lot of people
trying to figure this outbecause it is uh uh it is a real
problem of keeping talent.
(30:34):
So let me give you a couplestories, uh quick ones.
There is a uh credit union thatI work with in uh Colorado, the
CEO there is really talented andcredit union in New York, uh
really talented, very, verydifferent institutions, but
approximately the same size atassets.
(30:54):
Call it 150 million, a littlebit more, a little bit less.
If they don't do something toretain the talent for those
executives, those folks aregoing to be recruited to the 500
million, the 750 million, andultimately the billion-dollar
(31:15):
institutions and be compensatedat a level that will make their
families help their families bemuch more stable.
So retaining the talent at thosesmaller institutions that is
particularly strategic andfinancially literate and
member-driven andcommunity-oriented is very
(31:38):
tough.
And if you you have to usetools, one of which is a SERP,
to be able to retain thoseleaders in place and create a
succession plan for the nextlevel of leaders.
If you don't, they really haveno choice but to leave, right?
If you if it if you get caughtup in this situation that you
(32:02):
hear from boards from time totime about, well, you know,
that's more money than I've evermade, or those are not plans
that I have availability to, orthat are not what the members
normally have availability to,well, that's all well and good
and clearly true, but you're notrunning an institution where you
(32:25):
have all the regulations and allthe product picks and all the
technology and theresponsibility for the hue for
the people that are involvedthat these executives have.
Um, and if you want the goodones, you've got to find a way
to mix the compensation modelup, including the retirement
piece, in order to retain them.
SPEAKER_00 (32:43):
I I remember as you talk about retention, etc.
NCYA was kicking around theidea.
I don't know if they implementedit because things are a little
hairy there.
Uh where credit unions, boards,and senior executives have to
fill out a document thatoutlines succession plans.
(33:03):
And I remember talking to theconsultant who was telling me
about this.
I said, Well, if I were on theboard, I know exactly what I'd
write.
And he'd say, What?
And I'd say, go merge thissucker out of existence if my
CEO quits.
And he laughed and said, Well,if a lot of people probably are
thinking exactly the same thing,don't know if they'd write that
on the forum for the NTUA,though.
(33:23):
And it's and that's what I woulddo in the case of these two two
good CEOs that you're talkingabout if I'm on the board.
It's uh now that said, I mightwant to do some things to try to
retain them instead.
That's right.
SPEAKER_01 (33:36):
So, you know, let's let's explore that, Robert.
I'd love to get your input on itas well.
So I here's where I've I'veevolved during our
conversations, and now with myfive years in this role as a
partner at Park Street Partners,I I've come to the to this point
where I'm I've always beenpassionate about this, but I've
(33:59):
uh I'm really driven by thisnow.
That that creating compensationmodels, and particularly
retirement models, entirecompensation models, that are
fair to the executives who aretalented.
And, and this is the importantpart, I think, and hopefully the
(34:20):
difference in what I do versuswhat other people do that are in
similar positions is mine, andtying that to three drivers
strategy of the organization,financial capabilities of the
organization, and current state,and succession planning, the
next leaders to be able thatthey need to be able to afford.
(34:41):
And so I do a lot of analysis ontheir capital growth, on their
current return on assets.
I work hard with the executiveteam on the politics of getting
the boards up to date andcomfortable.
I don't ever close a deal wherethe the board doesn't fully
understand what they've boughtinto.
(35:02):
Um, so I'm my belief is that myplace in the market, having sat
in the CEO seat and been aroundthe industry now for almost 50
years, is to help executives getfairly compensated for what I
think is the toughest job inretail banking, and do that in a
way that is mutually beneficialto the organization, and then
(35:26):
finding a way to communicatethat so that it doesn't cause
friction with the board.
That's where I spend most of mytime these days.
SPEAKER_00 (35:40):
We're really in a world of a business world that
believes in the great man orwoman.
Example, Elon Musk's trilliondollar uh pay package at Tesla.
I won't comment on how sane Ithink that is, but I think what
it underlines is the great mantheory at work.
(36:01):
And in their own small way, agreat leader at a hundred
million dollar credit union is agreat man or a great woman.
They're essential for thatinstitution.
It did offer one at abillion-dollar credit union.
And uh and great people shouldbe compensated greatly, simple
as that.
SPEAKER_01 (36:21):
Not necessarily at a trillion-dollar level, but you
know, that's important that wedrive home in this conversation
and through others that none ofthe credit union leadership that
we're talking about areextravagantly paid.
Yes, they are paid higher morethan maybe the teacher that's on
the board, or the state employeethat's on the board, or or the
(36:43):
manufacturing manager that's onthe board, but they are paid in
balance with theresponsibilities of the job, and
and we're getting them up to amarket position that's a
fairness in compensation, not anexorbitant amount.
And you know, there there arethere may be a couple CEOs at
(37:07):
the very, very high end that areapproaching a couple billion
dollars in annual compensation,but they're running
organizations that are$30,$50billion in assets and have
thousands of employees.
SPEAKER_00 (37:23):
It's a pretty I bet you, I bet you there are over a
hundred people at JP MorganChase who make more money than
the CEO of First Tech DCU whenit's combined.
Over a hundred.
I'm not even counting JamieDiamond.
Yeah, of course he he's makingmany, many, many multiples more.
(37:45):
Uh and I don't know what thatperson will make, but it's going
to be a hell of a lot less.
Uh, there's a hundred people atGoldman Sachs.
500 people at Goldman Sachsmaking more.
That's right.
Look, I mean, this is just theway the world works.
You can not like it, but this isreality.
SPEAKER_01 (38:04):
And if you want to be able, you know, you can't
have a conversation saying,geez, we have to have an
organization that can competefor the members' business and
provide the same quality ofservice and value to the members
as these banks, and then on theother hand, say, well, we can't
pay a third of what they pay.
That that's not logical, thatdoesn't work.
SPEAKER_00 (38:27):
And you know, life is expensive.
Uh you know, a friend of minecalled me up the other day, and
he's he's not complainingexactly, but he's kind of like
thunderstruck.
My son wants to go to Duke.
Do you know that Duke costsabout a hundred thousand dollars
a year?
And saying a hundred thousanddollars, and it's I think that's
(38:49):
about what it costs, actually.
So you know, it takes real moneyto play in this world sometimes.
SPEAKER_01 (38:55):
It does indeed.
SPEAKER_00 (38:57):
And you know, that that's uh that is a very
interesting conversation thathas nothing to do with what
we're talking about today, butuh it has everything to do with
the compensation and how creditunions have to accept that these
these aren't unrealistic ornasty or greedy demands.
(39:18):
Sometimes it's just a lifedemand.
That's it.
SPEAKER_01 (39:22):
Let's say they're going to state, right?
Uh let's say they're going to uhvery significant university
within your state, the you it'sstill very expensive for those
uh those men and women to go tocollege.
SPEAKER_00 (39:38):
And oh, in New York State where you live, there are
a lot of very nice smallcolleges, Hamilton, Hamilton, uh
Colgate, etc., they all probablycost 80 grand a year.
SPEAKER_01 (39:52):
They do.
And and I happen to have a songoing to school in in Virginia
right now, and and I can tellyou that it's expensive.
Um and the uh the important partof all these pieces is that what
those if we have an executive,the credit union has an
(40:12):
executive that has real talent,and that they're driving the
member value and the financialperformance and the regulatory
requirements, and they'rebuilding strategy and they're
building brand, and they'rethey're managing all the
technology consequences andchanges and the fintech uh
investments and and the productdifferentiation and the product
(40:34):
complexity and the balance sheetcomplexity and interest rate
marketplaces that are movingvery fast, then that takes
talent.
And that talent is compensatedat a market rate.
And most of the people, I wouldsay that almost all of the
executives of the industry arewilling to trade off something
(40:57):
in compensation, some amount ofcompensation, some percentage,
for being in an industry thatthey care about, that they
believe has better value, thatthey have more control of their
careers in than they do in thebanking world.
But it has to be somewhat incommensurate, has to be somewhat
fair, or they cannot make thatdecision.
(41:19):
You you can't have a 50%differentiation and say that all
of that is about beingcommunity-oriented and
collaborative and and uhbelieving in the industry.
Um at some point in thosepercentages of difference, an
executive is going to move on,and without that talent, you're
(41:39):
not gonna be able to provide theservice you want.
SPEAKER_00 (41:42):
You know, if I were selling for Park Street, I've
often used the same strategy indoing interviews like this.
Well, if I were selling for ParkStreet, I'd say to the board,
let's not talk about serviceright now.
First, I want you to talk aboutdo you want this institution to
(42:03):
exist 10 years from now?
And and if it's gonna exist 10years from now, do you realize
there's certain things that aregonna happen in the executive
staff?
Because I think a lot of timesthey're just kicking this can
down the road.
So I I would try to get them toconfront.
Do you want it to exist?
Do you want to merge it out?
And if you want it to exist,you're gonna need a certain
(42:24):
level of staff to exist.
SPEAKER_01 (42:27):
I I think your approach is exactly spot on.
SPEAKER_00 (42:29):
And and you could you can steal it, Kirk.
It's yours.
SPEAKER_01 (42:33):
There's an interesting, there's a couple
interesting uh transitions thatare going on in the industry.
Many of them, there are many,but two of them that come to
mind.
One is that certainly in thedemographics that you and I
talked about a lot about babyboomers retiring.
There's also a second piece tothat is that many board members
are 20 years older than the babyboomers.
(42:56):
And there is an extensive amountof new board members coming into
the industry and helping themunderstand how the industry
works, whether they're going tobe here for in the next 10
years, how they think about thatuh strategy and uh executive
retention, um and who to hirefor those roles is becoming a
(43:21):
very interesting conversation.
Because, as I'm sure you note,and and I'm sure the listeners
will note, there are major jobannouncements made every day for
large credit unions of thecountry.
At least once a week, you see anannouncement made.
And along with those, if you youget underneath the covers, if
you look at them, you're seeingthat the board members are
(43:42):
changing at the same time.
They're they're moving on as theCEO retires because they are of
an age and they are of a mindthat may be different from the
new organization.
SPEAKER_00 (43:56):
Well, I think that's healthy too.
Agreed.
Yeah, I credit unions, in mymind, most of them don't exist
in a hyper-competitive world.
That and the hyper-competitiveworld does exist in things like
banking, not necessarilycommunity banking, but uh money
center banks are highlycompetitive with each other.
(44:17):
And credit unions just say, ohgeez, you know, NCUA says our
camel score is this, so we'redoing okay.
Yeah, we're kind of mediocre,but so's everybody else.
That's not a way to think, Idon't think, anymore.
It's uh is that really goodenough?
I I doubt it.
SPEAKER_01 (44:36):
So without the launch uh NCU 2.0 about last
week, you know, one of thethings that I noted about the
organizations that werepresenting or the thought
leadership that was created wasyou know the modernization of
financial institutions, theartificial intelligence, the use
of artificial intelligenceextensively.
(44:59):
And uh, you know, we we havethis opportunity within the
industry, um, as we've had anumber of times in the past, to
be able to jump up thetechnology curve and compete uh
with the new tools that areavailable.
But what does that take?
That takes thoughtfulleadership, it takes a board
(45:20):
support behind it, it takes aninvestment in new skills, um, it
takes a requirement that thewillingness to change and to be
as aggressive as those regionalsand money center banks.
Um, but the tools are available.
Uh, if you look at some of thepieces that we see around the
(45:43):
industry uh that are AI tools tothat significantly speed up new
accounts or collections or loanapprovals, um, but you need the
right talent to be able to usethose tools and be willing to
understand the risk in them andbe able to convince the board
and the teams of the culture toaccept them.
(46:04):
In order to do that, you needreal you need the uh leaders
that understand it and are andare open to that level of
change.
SPEAKER_00 (46:12):
And you know, to me, this the secret weapon of credit
units is is the Q zel.
Where uh particularlyfintech-oriented Q zos, they can
get really, really veryperfectly good technology
happening, even in the smallercredit union.
However, uh to do that in almostevery case, I ask FinTech, so
(46:34):
what does a credit union need toimplement this your your tool?
If they're telling the truth,and almost always they say,
Well, there needs to be a seniorexecutive with enough bandwidth
to oversee this project.
And often there isn't.
And that's why the credit uniondoesn't adopt the technology, or
(46:56):
if it does, the implementationdoesn't go well.
It's not because there'sanything wrong with the
technology, the credit unionjust doesn't have the staff.
And staff costs money.
Before we go, think hard abouthow you can help support this
podcast so we can do moreinterviews with more thoughtful
(47:19):
leaders in the credit unionworld.
What we're trying to figure outhere in these podcasts is what's
next for credit unions.
What can they do to really,really, really make a difference
in the financial team?
Can't all be megabanks, can it?
It's my hope it won't all bemega banks.
There'll always be a place forcredit units.
That's what we're discussinghere.
(47:40):
To figure out how you can help,get in touch with me.
This is RJ McGarvey atgmail.com.
That's RJ McGarvey at gmail.com.
Get in touch with us.
Figure out a way that you canhelp.
We need your support.
We want your support.
We thank you for your support.
Let's see you to DO Podcast.
Back on the show today after my A Korolatsky one
time COVID.
Now partner and Fox StreetPartners or Focus design crazy
fans.
Those are the fans designed toget the channel in place.
Koroletsky, of course, has beenon the show many times, but he's
(00:24):
always welcome back.
An autopsy on the opposite ofCEOs appropriately.
Here's a link to the Korolatskyarchives in the show notes.
What brings Korolski back to theshow today is as much as
changing in the retirement fivefor crazy of the STO and senior
(00:45):
staff.
Changing macroeconomicconditions have triggered
significant changes in theretirement plants.
Korolesky tells about them inthe show.
Know that appropriatecompensation for senior staff to
start cutting in is a must forthose institutions that want to
(01:06):
succeed.
Koroletsky brings it up to dateto what's working now and what
will likely work in the future.
Listen up.
Okay, now you're gonna tell meabout what's new, what what's
changed in the world of SERPsince we last talked, perhaps
six months ago.
SPEAKER_01 (01:26):
So let's talk about.
So good to be back on the on theair with you.
Thank you for uh taking the timeto interview me today.
And and uh you asked a what is areally intriguing question, um
uh which is about wheresupplemental executive
retirement program SERPs aretoday in the credit union
industry.
(01:46):
And let's let's take a step backinto the the bigger picture.
Uh with when interest rates wentup, this was really the kind of
the last time we spoke in insome detail, interest rates had
gone up, and it really exposed anumber of challenges in the
industry.
For the like so many things,like so many types of
(02:08):
investments, like so much marginon the business for credit
unions, low interest rates hadcreated a long-term environment,
10, 12-year run since 2010, upuntil well into 2020 and 2021,
uh, that allowed for CERPsspecifically to be able to be
(02:31):
created at a low rate ofinterest on the books of a
credit union.
If you remember the model, andI'm sure you do, and I imagine
maybe some most of the listenersmay, but these are uh life
insurance policies that are umput in place to create a
retirement, a tax-freeretirement uh plan for the
(02:55):
executive, typically paying outover 20 years tax-free.
And it much like a mortgageloan, the the uh where the house
is um put up as collateral for aloan, and uh it's collateralized
back to the credit union and inthe as the first uh payee in uh
(03:16):
time of a sale or or default.
Um and then the equity or thevalue of the that home accrues
to uh the homeowner or themember.
In these cases, these are loansgiven by the credit union to
purchase a life insurancepolicy, and that life insurance
policy is a loan, becomes a loanon the books of the credit
(03:37):
union, and the life insurancepolicy is in the name of the
executive, and the executiveextracts that value, in this
case, instead of appreciatedhome value, cash value in the
insurance fund during theirretirement years.
Well, that all workedmarvelously for that 10 or 12
years in a low interest rateenvironment.
As interest rates moved up byfive and a quarter percent and
(04:02):
started to settle into a higherrate of interest for the loans
on the books of the creditunion, the loan that funded that
insurance policy, uh, thoseloans uh started to become
larger and larger because thethe rate not only was higher
that had to be paid back to thecredit union for their loan, to
(04:23):
the executive, but also themargin between the dividend rate
or the earnings rate on thatlife insurance policy and the
rate on the loan became smallerand smaller.
So, in order to create the samevalue for the executive, the
same retirement funding for the20 years, those products, those
(04:44):
loans became much larger, orthey carried tax consequences
with them.
So you have this environmentwhere interest rates go up and
it starts to stress the originalmodel of the plans.
Our last conversation was abouta product that we reintroduced
to the marketplace, Park Street.
(05:05):
For those of you that havelistened to us over the years,
OM was our firm for a number ofyears.
Park is our rebranded firm fromabout 18 months ago.
Park went back to the productthat had been in place in uh the
early 2000s, uh, which allows usto uh put in a an uh insurance
(05:26):
product and a loan on the booksthat does not create the loan at
the beginning of the policy, butallows it to accumulate uh
premium by premium as it's paid.
That has allowed us to not havethe tax consequences or the
inflation in the in the size ofthe loan.
So new products entered themarketplace.
(05:48):
The quick answer uh to this asinterest rates went up, new
products came into themarketplace.
In our case, it's called switchdollar, and there are a couple
other firms that have introducedthat product.
On the other hand, the indexuniversal life product, which is
the other primary product, ifyou might recall, two products
that fund the insurancepolicies, whole life or index
(06:11):
universal life, the IULs orIndex Universal Lives product uh
has been strained.
And it's now in a situationwhere a lot of those have had to
be uh refinanced uh because theyno longer are performing at the
illustrated rate that theexecutives had counted on.
(06:32):
Uh so you've had a lot ofpressure that's been created by
interest rates and created bythe design of the products that
are forcing most credit unionsto go back and evaluate whether
the plans are designed andillustrated as properly as they
should be, and if they're goingto deliver the retirement plans
(06:53):
that the executives hope to.
There's more to that, but I'vegone on long enough.
Let me ask, let me let you ask afew questions.
SPEAKER_00 (07:00):
Let's go back to why do SERPs exist.
It's not because credit unionswant to be nice to their chief
executives, although perhapsthat's part of it.
It's really to providecompensation that has some
resemblance to what that personcould make working for a bank.
And since a credit union doesn'thave shares, there can't be
(07:23):
share, I mean shares of stock,you can't award stock to the
person, et cetera, et cetera.
I mean, that's the simple,that's not simple, but that's
the basic problem that SERPs aredesigned to handle, right?
SPEAKER_01 (07:36):
It is a a design for a retention and reward or wealth
creation uh plan that takes thethe same tries to create the
same value as stock options werein the for-profit world.
And it took on and it has takenon a particular priority because
(07:57):
we used to be able to offerdefined benefit plans, which
only now 13% of the credit unionmarketplace provides, and
because salaries have gone up toan extent that 401ks and Social
Security no longer can, becauseof the caps on those plans, no
longer can make up a highpercentage of an executive's
(08:18):
retirement.
So you you don't have, you donot have the traditional tools,
the defined benefit plan, andyou're trying to compete in the
marketplace against uhexecutives that can work in
environments for fintechs or bigtechs or banks or or community
banks that have stock options.
And without these types oftools, you can't compete for
(08:41):
that talent.
SPEAKER_00 (08:42):
And very, very, very few companies still offer
defined benefit plans.
It's not just very few creditunions, there's very few
companies of any kind.
SPEAKER_01 (08:53):
That is the difference is that that used to
stand in place of uh some ofthese uh tools and benefits, but
once that got eliminated, thegap became much larger and SERPs
became even more important.
SPEAKER_00 (09:08):
Now, I had a I have a friend who used to he's now
retired, but he had a very largeprivately held hospitality
company.
He was the sole shareholder,sole owner, and he liked it that
way.
But to keep his employees, hecreated a kind of phantom stock.
(09:30):
Uh wasn't a real stock exactly,but in the world of that fantasy
world, it actually had value.
And what could go up, it couldgo down using normal metrics.
And the employees were quitehappy with that.
They thought they're they werepaid comparable to what they
would have gotten from fromlarger hotel companies that are
(09:52):
publicly held.
Could a credit union create avehicle like that?
SPEAKER_01 (09:58):
It's wonderful that you ask it, because we've worked
on this a couple times,particularly for QSOs.
Uh I worked on one extensively,uh modeled extensively last
year, and we're we'll probablydo a couple more this year.
The challenge with Phantomstock, and I don't know if your
your friend and and that firmran into it, it's the valuation
(10:20):
of that stock.
And because there's not a marketfor it, you're you're making
estimates in the marketplacebased on you know returns, the
income that the organizationcreated, or other valuations.
SPEAKER_00 (10:36):
Now, in his case, I think he had an advantage that
you don't have with the QSA.
I think he modeled it aftercompetitors that were public.
SPEAKER_01 (10:45):
Correct.
So that's that that is withCUSOs, it's particularly
challenging because they tend tobe so unique each time.
With credit unions, there havebeen some discussions of phantom
stock from time to time.
You may be able to compare thatto a for-profit community bank
of a similar size, but as youknow, credit unions tend to, and
(11:08):
their boards particularly careabout this, tend to be driven by
more member value, meaning lowerrates uh on loans and higher
rates on dividends and lowerfees and more convenience than
they are on profitability orROA.
SPEAKER_00 (11:25):
So most community banks, smaller ones, are owned
by 10 guys down at the countryclub.
Yeah, there's no there's nomarketplace for that stock.
SPEAKER_01 (11:38):
So it's it's much harder to find the apples and
apples uh that you need to dothe evaluation.
So that that has been the reasonprimarily it hasn't occurred.
SPEAKER_00 (11:48):
Right.
No, when you talk, I I think I Iknow he picked out a couple
competitors that were basicallythe same business he was in that
were public.
So he had clear models he coulduse.
Yep.
And the the employees wouldunderstand those models because
they were always competing withthese guys.
SPEAKER_01 (12:07):
I mean that's very different, right?
And most of the credit union uhexecutives, particularly those
below five billion dollars inassets, really only know the
credit union world, right?
Certain there there is asprinkling of people from the
banking side, but even in thosecases, they're they're not
particularly familiar with or asclose to as as they were when
(12:29):
they were working on that side,what uh the valuation might be
of the firm.
SPEAKER_00 (12:35):
Yeah, yeah.
So SERPs still are and the otherthe other Park Street product
are still the way to go rightnow.
SPEAKER_01 (12:45):
Yeah.
So when when you look at theoptions in the marketplace, they
they are the switch dollarproduct that we're offering,
which again is a where we set upa credit union life insurance
policy uh in the executive'sname.
It switches, literally the name,switches over to a traditional
(13:05):
plan after it's matured enoughto have cash value in it and
interest rates uh that havebalanced in the marketplace.
And what'll happen is, just toput it really simply, is that
one of two things will happen uhover time in the rates that are
(13:27):
associated with these products.
Either the dividend will go upor rates will go down.
And why can we be so sure ofthat?
Because if rates stay up in themarketplace, then the dividend
must go up.
The dividend is based on MassMutual and New York Life's
dividend, it's based on their$750 billion investment
(13:48):
portfolio that is heavilyregulated and it is in the in
mostly in the same type of bondsuh that credit unions are
allowed to purchase, uh, U.S.
government, municipals, etc.
And so if rates stay higher,then the dividend rate will go
up and the margin will come backinto the business model uh for
(14:11):
these products, the differencebetween the dividend rate and
the loan rate on the creditunions books, and allow us to
switch it over to a traditionalsplit dollar loan sometime
between year seven and year 10.
Uh so that we can prove thatmath.
We show it, we can show you thatit always works.
Um, so that that that newproduct has worked very well for
(14:33):
us.
It also allows for the premiumsto be paid um annually rather
than all paid up front, uh,which was a real value when
liquidity was a problem in theindustry.
Liquidity has uh is no longer asmuch of a challenge.
Um, so that part of the productis still valuable, but not as as
(14:53):
valuable uh or as necessary asit was two years ago.
SPEAKER_00 (14:58):
Now, as have the problems suffered by competitive
products tarnished your productsin the minds of credit union
executives and board members?
SPEAKER_01 (15:09):
Yeah, so it's uh probably the the thing, the the
issue that we struggle with uhthe most, um, because that there
have been there are realchallenges in the index
universal life, the IUL product.
Um you may remember the detailedconversations we had on this,
(15:32):
and if not, uh there are somepodcasts that Robert did that
will that lay this outcarefully.
Um but IULs uh are tied in thoseindexes are tied to normally the
SP uh returns.
The problem has been that thosethey had they have floors and
(15:55):
caps.
Floors zero, that's wonderful.
The market goes down below zero,you you are not penalized below
not having any return that year.
It's not negative.
On the upside, though, uh thosecaps were originally set at 15%.
They have been changed by theinsurance providers because of
(16:17):
the profitability of theproduct.
They've made mistakes in theircalculation of the profitability
of their products.
They lowered those caps to 8 and9%.
So now, in the very good yearsof a market, you can only earn 8
or 9%, not 15%.
Or if you're in the stock marketyourself, you know, if you have
(16:38):
a year that's that has a 20%return, you're going to get that
20% return.
And that's going to offset thenext year if it is if you have
the zero or negative return.
So now instead of a wide rangeof value that's created by the
index universal life, zero to15% or 0 to 13%, you have a very
(16:58):
limited return of 0 to 8%.
Well, the average of the 0 to 8%ends up being right around 6%,
which is lower than the dividendon the whole life policies.
So, in essence, you take acompletely risk-free
environment, dividends on awhole life policy, and now you
(17:19):
compare that to an indexuniversal life, which has a lot
of volatility and risk, and uhthe whole life product stands up
very well.
As a matter of fact, in every inevery credit union and in every
plan, our whole life producttoday illustrates the same or
higher retirement value than weoriginally designed.
(17:43):
So every one of our plans isworking to the extent it was
designed or better than thedesign for the executive and for
the credit union.
And it's just simply whole lifeproducts are really well
designed for this product.
SPEAKER_00 (17:57):
IUL is my point was you if a friend of yours had an
IUL product and now needs it andis not quite there for him.
Is that friend as a seniorexecutive of the credit union,
does he distinguish between thatproduct and your product?
In other words, are all productstainted in his mind?
(18:19):
Yeah, it's too it's too risky,man.
Yeah, my friend was counting onthis and now he's on food stamps
and blah, blah, blah.
SPEAKER_01 (18:28):
Yeah, I I don't think that all plans are
tainted.
I think that that executives andboards are taking a great deal
more time to understand whatthey're getting into.
Because if you know this this issomething that once it's set up,
(18:48):
is extraordinarily important andsubstantial to the executive's
family.
They're counting on this.
He, the she, or they are allcounting on uh living off of
this benefit.
And so if it is miscalculated ormisperforming, um, it's severely
(19:09):
disruptive.
So they're spending timeunderstanding the options.
Uh when it isn't working, creditunions are stepping in and
putting in additional plans tofix the problem.
So it has not tainted theindustry at this point.
And part of that is where youstarted, Robert.
There's only one option.
Uh, if you don't offerinsurance-based SERPs, then
(19:31):
you're going to offer acash-based SERP of 457F, and
that's a terribly expensiveproduct for the credit union.
SPEAKER_00 (19:38):
It also has more tax consequences for the executive,
right?
SPEAKER_01 (19:43):
But that's why it's so much more expensive because
they're going to get taxed on 50cents on the dollar.
SPEAKER_00 (19:48):
Yeah, in a totally different world.
Of the let's say credit union isa billion and above, what
percentage would you guess havein place a retirement plan
similar to the one you'retalking about?
Or you know, a SERP or somethingcomparable?
SPEAKER_01 (20:07):
So I I actually have most of that data.
There, and it breaks into threebuckets.
Uh first of all, just thegeneral concept, SERPs, and
that's 457 F and split dollarplans.
Uh, 94% of the market have oneor the other.
94%.
SPEAKER_00 (20:27):
And the market is defined as what?
SPEAKER_01 (20:29):
Million dollars or above.
SPEAKER_00 (20:31):
Okay.
SPEAKER_01 (20:32):
Um, about 80% of the credit unions above 50 billion
uh 500 million, and then it goesdown to about 30 percent between
um 100 million and 500 million.
Now, second bucket or seconddata point, that is that uh
they're split about 50-50between 457Fs and split dollars.
(20:55):
Third and critical data point isabout 70 percent, though, about
70 percent of new plans aresplit dollar plans because
they're so beneficial to theorganization because they get
paid the credit union gets paidback principal and interest, and
so valuable to the executivebecause it's uh tax-free income
(21:17):
during the retirement years.
SPEAKER_00 (21:20):
In the case of a merger, what happens to one of
these plans?
SPEAKER_01 (21:25):
Great question.
Uh and it's a material questionnow that you see such large
mergers occurring.
SPEAKER_00 (21:32):
Uh yeah, you look at first tech DCU and you say
anything is mergeable.
Maybe the only one that isn't,maybe state employees and and
navy.
And everybody else is employed.
SPEAKER_01 (21:44):
So when you look at at a merger, the credit union
that's being acquired, okay, thecredit union that's being
acquired, their executive servesbecome a hundred percent vested
on the merger date.
(22:07):
So the idea behind it, theconcept, the strategy is that an
executive that's gettingacquired would not stand in the
way of the merger for their ownself-interest.
SPEAKER_00 (22:20):
Ah, that's excellent.
Yes.
So they And I I know in smallercredit unions, and this is
pretty well documented in infilings with NCUA, a lot of
times it's concerns aboutpensions and whatnot that could
prompt executives to fightliterally against a merger.
SPEAKER_01 (22:43):
Correct.
SPEAKER_00 (22:44):
And and by the way, and I'm kind of understandably
too.
SPEAKER_01 (22:47):
I mean, that's perfect sense on a human basis.
If you're the if if you're in a$10 billion credit union and
you're acquiring a$5 billioncredit, so major stuff, right?
But the acquired credit in the$5billion, you know, that CFO,
that chief operating officer,that chief whatever, um, if they
(23:11):
don't have a SERP in place, ifthey're not gonna get a benefit
from this transaction, afinancial benefit, are likely
going to work against themerger.
Because they're not gonna be theCFO of the bigger company.
Whoever's the CFO there is goingto be it.
SPEAKER_00 (23:30):
Right.
And that that I've I've doneresearch on mergers, and
executives often are some of thebiggest leaders against the exec
against the merger, primarilyfor the reasons we're just now
discussing.
SPEAKER_01 (23:45):
Well, that's been my experience, uh Robert.
And in and when I was doing theconsulting practice for five
years, uh, we were involved in ain a couple three mergers and uh
um and helping negotiate thedeals.
And in each one of those, uh twoof the two of the three did not
uh finish it, it did notcomplete.
(24:06):
Uh we were not the uh consultingfirm on the advice, the advisory
side.
We were the operationalconsultants.
We're doing the tech platformsand the uh uh product mergers.
Um but in two of those three, itwas the executive team of the
(24:28):
acquired credit union that keptwhispering in the ears of the
board members and got them to uhturn down the mergers on what
were frankly kind of sillyreasons and had nothing to do
with the financial performanceor the decisioning, the
strategic decision or the membervalue decisions, but we're based
(24:52):
on I'm gonna lose jobs and powerhere.
SPEAKER_00 (24:58):
Right.
And you know, if you're 60 yearsold and you're a CFO at a
billion dollar credit union,probably there aren't a lot of
job opportunities out there atthat same salary for you.
And that's just reality, whetheryou like it or not.
So unless that person has abeautiful golden parachute
(25:21):
that's intact, it stands toreason they'd be opposed to the
merger.
SPEAKER_01 (25:27):
That's it.
You've got it, and uh, so it'sso SERPs matter in that uh
framework because it allowsthose executives to see the
value that they're gonna get.
So they, you know, let's saythat they're vested at 30% or
50%, they become 100% vested atthat point, and uh that value
(25:49):
accrues to them um at uh theirretirement age.
You do see uh some additionalSERPs put in place at times uh
at uh at mergers so that people,as part of a means of of keeping
people within the company whowhose talent the organization
(26:12):
wants to retain.
Um, and as you can imagine, yougo way up in asset size,
compensation follows assets, sothere is reason to put in new
SERPs at a larger institutionbecause the val their their
compensation is going to go up,their annual salary and base and
incentive, and so will theirproportion that would go to a
(26:35):
SERP um over time.
SPEAKER_00 (26:39):
Now, if my memory's right, you you had talked some
time ago to me about nascentplans, nothing nothing really
hardcore, where you were lookingat what can be done for this
retirement issue in smallercredit units, let's say a
(27:02):
hundred million and under.
Where my sense of the researchas I remember it, is the vast
majority of those CEOs, theirretirement plan is social
security, and maybe a 401k,maybe.
And that's it.
No SERP, nothing, nothing ofthat kind.
Is my memory distorted?
Do I not, or were you working onsomething like that?
SPEAKER_01 (27:24):
You're spot on, and I um I'm working, I I continue
to work with uh the folks at theunderground.
I you may be familiar with withuh uh uh that organization.
SPEAKER_00 (27:38):
Uh Mitchell Stankovich.
SPEAKER_01 (27:40):
Yep, yep.
Um with them a little bit on thedesign.
They have already done someresearch and put in some design
options, but I I've been able toconfigure a model that will work
for a credit union of$70 millionor more in assets.
Wow.
Goes down below$70 million, thenit's gonna be uh dependent on
(28:05):
salary.
So if the salary is, let's say,$100,000 a year for that CEO,
then if they have a$401K and aSocial Security, they're gonna
be able to get to theirretirement goals.
It's when you get above$200,000that the caps come in for 401ks
and Social Security, and that'swhere you need a SERP, and
(28:26):
that's where we're where we'rewe're putting it in.
And that comes in around$70million,$80 million in assets.
SPEAKER_00 (28:32):
Well, the most you can get out of Social Security,
right?
Is uh$55,000 a year, somethinglike that.
SPEAKER_01 (28:40):
Like that.
Yep.
SPEAKER_00 (28:42):
And yeah, so much you get much over a hundred
thousand, and there's a bigstretch, a big gap between that
and what social security isgoing to give you.
SPEAKER_01 (28:53):
Right.
It's you know, then it dependson whether you have a 401k,
right?
And if they had a fair match ornot.
So there are there are um leverswithin that analysis that that
you have to take a look at.
The biggest issue is that as youget to the smaller credit
unions, they are less uhconnected to these tools, and so
(29:17):
the education and and bringingthe board members along is a
difficult process.
SPEAKER_00 (29:24):
And also, and you notice, Kirk, some of those
small credit unions, the boardmembers are acting in many cases
as unpaid employees of thecredit union.
SPEAKER_01 (29:35):
That's right.
They're they're doing it.
SPEAKER_00 (29:36):
And they're doing it out of joy and mission and
passion, and they're really goodpeople, but they they can't put
the it's hard for them to say,oh, the president's getting a
hundred thousand dollars and yetI'm working 60 60 hours a week
here for nothing.
Yes, is that fair?
I I see both sides of thatstory, actually.
(29:58):
I've I've talked to those uh Ofpersons, wow, I have nothing but
admiration for them.
I wouldn't do it myself, but Ihave nothing but admiration.
So you're saying there's hopefor the retirement plans of at
credit.
SPEAKER_01 (30:12):
I believe that there is hope for uh the retention of
the right leaders.
I think the hard there are twohard parts to delivering those
plans to the marketplace.
And it and I want to emphasizethat there are a lot of people
trying to figure this outbecause it is uh uh it is a real
problem of keeping talent.
(30:34):
So let me give you a couplestories, uh quick ones.
There is a uh credit union thatI work with in uh Colorado, the
CEO there is really talented andcredit union in New York, uh
really talented, very, verydifferent institutions, but
approximately the same size atassets.
(30:54):
Call it 150 million, a littlebit more, a little bit less.
If they don't do something toretain the talent for those
executives, those folks aregoing to be recruited to the 500
million, the 750 million, andultimately the billion-dollar
(31:15):
institutions and be compensatedat a level that will make their
families help their families bemuch more stable.
So retaining the talent at thosesmaller institutions that is
particularly strategic andfinancially literate and
member-driven andcommunity-oriented is very
(31:38):
tough.
And if you you have to usetools, one of which is a SERP,
to be able to retain thoseleaders in place and create a
succession plan for the nextlevel of leaders.
If you don't, they really haveno choice but to leave, right?
If you if it if you get caughtup in this situation that you
(32:02):
hear from boards from time totime about, well, you know,
that's more money than I've evermade, or those are not plans
that I have availability to, orthat are not what the members
normally have availability to,well, that's all well and good
and clearly true, but you're notrunning an institution where you
(32:25):
have all the regulations and allthe product picks and all the
technology and theresponsibility for the hue for
the people that are involvedthat these executives have.
Um, and if you want the goodones, you've got to find a way
to mix the compensation modelup, including the retirement
piece, in order to retain them.
SPEAKER_00 (32:43):
I I remember as you talk about retention, etc.
NCYA was kicking around theidea.
I don't know if they implementedit because things are a little
hairy there.
Uh where credit unions, boards,and senior executives have to
fill out a document thatoutlines succession plans.
(33:03):
And I remember talking to theconsultant who was telling me
about this.
I said, Well, if I were on theboard, I know exactly what I'd
write.
And he'd say, What?
And I'd say, go merge thissucker out of existence if my
CEO quits.
And he laughed and said, Well,if a lot of people probably are
thinking exactly the same thing,don't know if they'd write that
on the forum for the NTUA,though.
(33:23):
And it's and that's what I woulddo in the case of these two two
good CEOs that you're talkingabout if I'm on the board.
It's uh now that said, I mightwant to do some things to try to
retain them instead.
That's right.
SPEAKER_01 (33:36):
So, you know, let's let's explore that, Robert.
I'd love to get your input on itas well.
So I here's where I've I'veevolved during our
conversations, and now with myfive years in this role as a
partner at Park Street Partners,I I've come to the to this point
where I'm I've always beenpassionate about this, but I've
(33:59):
uh I'm really driven by thisnow.
That that creating compensationmodels, and particularly
retirement models, entirecompensation models, that are
fair to the executives who aretalented.
And, and this is the importantpart, I think, and hopefully the
(34:20):
difference in what I do versuswhat other people do that are in
similar positions is mine, andtying that to three drivers
strategy of the organization,financial capabilities of the
organization, and current state,and succession planning, the
next leaders to be able thatthey need to be able to afford.
(34:41):
And so I do a lot of analysis ontheir capital growth, on their
current return on assets.
I work hard with the executiveteam on the politics of getting
the boards up to date andcomfortable.
I don't ever close a deal wherethe the board doesn't fully
understand what they've boughtinto.
(35:02):
Um, so I'm my belief is that myplace in the market, having sat
in the CEO seat and been aroundthe industry now for almost 50
years, is to help executives getfairly compensated for what I
think is the toughest job inretail banking, and do that in a
way that is mutually beneficialto the organization, and then
(35:26):
finding a way to communicatethat so that it doesn't cause
friction with the board.
That's where I spend most of mytime these days.
SPEAKER_00 (35:40):
We're really in a world of a business world that
believes in the great man orwoman.
Example, Elon Musk's trilliondollar uh pay package at Tesla.
I won't comment on how sane Ithink that is, but I think what
it underlines is the great mantheory at work.
(36:01):
And in their own small way, agreat leader at a hundred
million dollar credit union is agreat man or a great woman.
They're essential for thatinstitution.
It did offer one at abillion-dollar credit union.
And uh and great people shouldbe compensated greatly, simple
as that.
SPEAKER_01 (36:21):
Not necessarily at a trillion-dollar level, but you
know, that's important that wedrive home in this conversation
and through others that none ofthe credit union leadership that
we're talking about areextravagantly paid.
Yes, they are paid higher morethan maybe the teacher that's on
the board, or the state employeethat's on the board, or or the
(36:43):
manufacturing manager that's onthe board, but they are paid in
balance with theresponsibilities of the job, and
and we're getting them up to amarket position that's a
fairness in compensation, not anexorbitant amount.
And you know, there there arethere may be a couple CEOs at
(37:07):
the very, very high end that areapproaching a couple billion
dollars in annual compensation,but they're running
organizations that are$30,$50billion in assets and have
thousands of employees.
SPEAKER_00 (37:23):
It's a pretty I bet you, I bet you there are over a
hundred people at JP MorganChase who make more money than
the CEO of First Tech DCU whenit's combined.
Over a hundred.
I'm not even counting JamieDiamond.
Yeah, of course he he's makingmany, many, many multiples more.
(37:45):
Uh and I don't know what thatperson will make, but it's going
to be a hell of a lot less.
Uh, there's a hundred people atGoldman Sachs.
500 people at Goldman Sachsmaking more.
That's right.
Look, I mean, this is just theway the world works.
You can not like it, but this isreality.
SPEAKER_01 (38:04):
And if you want to be able, you know, you can't
have a conversation saying,geez, we have to have an
organization that can competefor the members' business and
provide the same quality ofservice and value to the members
as these banks, and then on theother hand, say, well, we can't
pay a third of what they pay.
That that's not logical, thatdoesn't work.
SPEAKER_00 (38:27):
And you know, life is expensive.
Uh you know, a friend of minecalled me up the other day, and
he's he's not complainingexactly, but he's kind of like
thunderstruck.
My son wants to go to Duke.
Do you know that Duke costsabout a hundred thousand dollars
a year?
And saying a hundred thousanddollars, and it's I think that's
(38:49):
about what it costs, actually.
So you know, it takes real moneyto play in this world sometimes.
SPEAKER_01 (38:55):
It does indeed.
SPEAKER_00 (38:57):
And you know, that that's uh that is a very
interesting conversation thathas nothing to do with what
we're talking about today, butuh it has everything to do with
the compensation and how creditunions have to accept that these
these aren't unrealistic ornasty or greedy demands.
(39:18):
Sometimes it's just a lifedemand.
That's it.
SPEAKER_01 (39:22):
Let's say they're going to state, right?
Uh let's say they're going to uhvery significant university
within your state, the you it'sstill very expensive for those
uh those men and women to go tocollege.
SPEAKER_00 (39:38):
And oh, in New York State where you live, there are
a lot of very nice smallcolleges, Hamilton, Hamilton, uh
Colgate, etc., they all probablycost 80 grand a year.
SPEAKER_01 (39:52):
They do.
And and I happen to have a songoing to school in in Virginia
right now, and and I can tellyou that it's expensive.
Um and the uh the important partof all these pieces is that what
those if we have an executive,the credit union has an
(40:12):
executive that has real talent,and that they're driving the
member value and the financialperformance and the regulatory
requirements, and they'rebuilding strategy and they're
building brand, and they'rethey're managing all the
technology consequences andchanges and the fintech uh
investments and and the productdifferentiation and the product
(40:34):
complexity and the balance sheetcomplexity and interest rate
marketplaces that are movingvery fast, then that takes
talent.
And that talent is compensatedat a market rate.
And most of the people, I wouldsay that almost all of the
executives of the industry arewilling to trade off something
(40:57):
in compensation, some amount ofcompensation, some percentage,
for being in an industry thatthey care about, that they
believe has better value, thatthey have more control of their
careers in than they do in thebanking world.
But it has to be somewhat incommensurate, has to be somewhat
fair, or they cannot make thatdecision.
(41:19):
You you can't have a 50%differentiation and say that all
of that is about beingcommunity-oriented and
collaborative and and uhbelieving in the industry.
Um at some point in thosepercentages of difference, an
executive is going to move on,and without that talent, you're
(41:39):
not gonna be able to provide theservice you want.
SPEAKER_00 (41:42):
You know, if I were selling for Park Street, I've
often used the same strategy indoing interviews like this.
Well, if I were selling for ParkStreet, I'd say to the board,
let's not talk about serviceright now.
First, I want you to talk aboutdo you want this institution to
(42:03):
exist 10 years from now?
And and if it's gonna exist 10years from now, do you realize
there's certain things that aregonna happen in the executive
staff?
Because I think a lot of timesthey're just kicking this can
down the road.
So I I would try to get them toconfront.
Do you want it to exist?
Do you want to merge it out?
And if you want it to exist,you're gonna need a certain
(42:24):
level of staff to exist.
SPEAKER_01 (42:27):
I I think your approach is exactly spot on.
SPEAKER_00 (42:29):
And and you could you can steal it, Kirk.
It's yours.
SPEAKER_01 (42:33):
There's an interesting, there's a couple
interesting uh transitions thatare going on in the industry.
Many of them, there are many,but two of them that come to
mind.
One is that certainly in thedemographics that you and I
talked about a lot about babyboomers retiring.
There's also a second piece tothat is that many board members
are 20 years older than the babyboomers.
(42:56):
And there is an extensive amountof new board members coming into
the industry and helping themunderstand how the industry
works, whether they're going tobe here for in the next 10
years, how they think about thatuh strategy and uh executive
retention, um and who to hirefor those roles is becoming a
(43:21):
very interesting conversation.
Because, as I'm sure you note,and and I'm sure the listeners
will note, there are major jobannouncements made every day for
large credit unions of thecountry.
At least once a week, you see anannouncement made.
And along with those, if you youget underneath the covers, if
you look at them, you're seeingthat the board members are
(43:42):
changing at the same time.
They're they're moving on as theCEO retires because they are of
an age and they are of a mindthat may be different from the
new organization.
SPEAKER_00 (43:56):
Well, I think that's healthy too.
Agreed.
Yeah, I credit unions, in mymind, most of them don't exist
in a hyper-competitive world.
That and the hyper-competitiveworld does exist in things like
banking, not necessarilycommunity banking, but uh money
center banks are highlycompetitive with each other.
(44:17):
And credit unions just say, ohgeez, you know, NCUA says our
camel score is this, so we'redoing okay.
Yeah, we're kind of mediocre,but so's everybody else.
That's not a way to think, Idon't think, anymore.
It's uh is that really goodenough?
I I doubt it.
SPEAKER_01 (44:36):
So without the launch uh NCU 2.0 about last
week, you know, one of thethings that I noted about the
organizations that werepresenting or the thought
leadership that was created wasyou know the modernization of
financial institutions, theartificial intelligence, the use
of artificial intelligenceextensively.
(44:59):
And uh, you know, we we havethis opportunity within the
industry, um, as we've had anumber of times in the past, to
be able to jump up thetechnology curve and compete uh
with the new tools that areavailable.
But what does that take?
That takes thoughtfulleadership, it takes a board
(45:20):
support behind it, it takes aninvestment in new skills, um, it
takes a requirement that thewillingness to change and to be
as aggressive as those regionalsand money center banks.
Um, but the tools are available.
Uh, if you look at some of thepieces that we see around the
(45:43):
industry uh that are AI tools tothat significantly speed up new
accounts or collections or loanapprovals, um, but you need the
right talent to be able to usethose tools and be willing to
understand the risk in them andbe able to convince the board
and the teams of the culture toaccept them.
(46:04):
In order to do that, you needreal you need the uh leaders
that understand it and are andare open to that level of
change.
SPEAKER_00 (46:12):
And you know, to me, this the secret weapon of credit
units is is the Q zel.
Where uh particularlyfintech-oriented Q zos, they can
get really, really veryperfectly good technology
happening, even in the smallercredit union.
However, uh to do that in almostevery case, I ask FinTech, so
(46:34):
what does a credit union need toimplement this your your tool?
If they're telling the truth,and almost always they say,
Well, there needs to be a seniorexecutive with enough bandwidth
to oversee this project.
And often there isn't.
And that's why the credit uniondoesn't adopt the technology, or
(46:56):
if it does, the implementationdoesn't go well.
It's not because there'sanything wrong with the
technology, the credit unionjust doesn't have the staff.
And staff costs money.
Before we go, think hard abouthow you can help support this
podcast so we can do moreinterviews with more thoughtful
(47:19):
leaders in the credit unionworld.
What we're trying to figure outhere in these podcasts is what's
next for credit unions.
What can they do to really,really, really make a difference
in the financial team?
Can't all be megabanks, can it?
It's my hope it won't all bemega banks.
There'll always be a place forcredit units.
That's what we're discussinghere.
(47:40):
To figure out how you can help,get in touch with me.
This is RJ McGarvey atgmail.com.
That's RJ McGarvey at gmail.com.
Get in touch with us.
Figure out a way that you canhelp.
We need your support.
We want your support.
We thank you for your support.
Let's see you to DO Podcast.
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My Favorite Murder is a true crime comedy podcast hosted by Karen Kilgariff and Georgia Hardstark. Each week, Karen and Georgia share compelling true crimes and hometown stories from friends and listeners. Since MFM launched in January of 2016, Karen and Georgia have shared their lifelong interest in true crime and have covered stories of infamous serial killers like the Night Stalker, mysterious cold cases, captivating cults, incredible survivor stories and important events from history like the Tulsa race massacre of 1921. My Favorite Murder is part of the Exactly Right podcast network that provides a platform for bold, creative voices to bring to life provocative, entertaining and relatable stories for audiences everywhere. The Exactly Right roster of podcasts covers a variety of topics including historic true crime, comedic interviews and news, science, pop culture and more. Podcasts on the network include Buried Bones with Kate Winkler Dawson and Paul Holes, That's Messed Up: An SVU Podcast, This Podcast Will Kill You, Bananas and more.
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Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com