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Credit union opponents often point at the levels of credit union executive compensation as a reason that credit unions should lose their tax exemption. This assertion has several problems.
First and foremost, the credit union tax exemption is not based on the level of executive compensation. Nowhere in any congressional record of why credit unions are exempt from taxes is the level of executive compensation listed as a reason for the exemption.
The credit union tax exemption is based on the not-for profit structure of the credit union. Credit unions earn income to cover the cost of operations and fund prudent reserves, but this is by statute and good business practices. The profits inure to the benefit of no person until they are distributed as dividends on accounts, at which time they are taxed.
Nowhere in there is executive compensation a factor in the credit union tax exemption.
But, for just a moment, let’s consider the compensation of credit union executives. There’s no question that they can be compensated handsomely for their efforts. Banks seem to think that such executives should be expected to work practically for nothing, since they work for not-for-profit organizations. Is this reasonable?
The fact is that compensation for today’s credit union CEOs must be sufficient to attract the talent necessary to manage financial institutions that in many cases offer their members a complete menu of financial services and act as stewards for their members’ savings.
It’s important when running a large financial institution, with savings of tens of thousands or more than a million people involved, that qualified personnel be hired. The expertise required to run a credit union is like that required to run a bank. Therefore, credit unions and banks draw from the same talent pool for executives.
No doubt the pool of talent available to credit unions would shrink dramatically if the pay disparity between a bank and a credit union was dramatically different. But if the pay remains less but “in the ballpark”, the pool will expand greatly. This is the way that credit union boards of directors must approach the challenge.
More on boards, shortly, but as a rule credit union executives are compensated less than bank executives of comparable financial institutions.
One compensation firm[1] indicates that at comparably sized banks and credit unions, executives’ total compensation are higher at banks:
As that study shows, while base pay of credit union executives maybe similar to (but still lower than) bank executives, bank executives are often also compensated with stock grants or stock options, which may increase their compensation to 42% higher than credit union executives.[2]
Certainly, one could expect to earn less at a not-for-profit financial institution, but that expectation has limits. Boards of directors, who are responsible for the overall health and safety of the credit union, have generally determined that it’s a wise use of member funds to pay for expertise they feel confident can run the credit union well. They don’t pay as much as banks, but keep it “in the ballpark”.
Speaking of the board, this is the group that’s fundamentally responsible for the success of the financial institution. The board is elected from the membership. These board members are not paid for their service to the credit union. They volunteer their time to run the credit union.
This is not the case at banks. One survey puts bank director compensation from $24,794 to $120,795 per year.[3]
On the whole, considering the responsibilities of the credit union executive team in comparison to the bank, along with the compensation of the board of directors, it seems reasonable for the unpaid board of directors to see fit to pay the appropriate amount for the expertise to help them run the credit union.
[1] https://www.pearlmeyer.com/blog/comparing-c-suite-compensation-banks-versus-credit-unions
[2] https://www.cuinsight.com/cuna-sets-record-straight-on-credit-union-vs-bank-exec-compensation/
[3] https://www.pearlmeyer.com/knowledge-share/article/evaluating-bank-board-of-directors-compensation
