Board Oversight Best Practices in

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Board Oversight Best Practices in CEO
Evaluation, Compensation and Succession
Planning Presented by HRValue Group, LLC
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Presenter
Michael Dougal, SPHR Director, HR
Consulting HRValue Group, LLC
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HRValue Group

• Human resource consulting company
• Owned by a consortium of State Credit Union
  Leagues and CUNA Mutual Group
• Dedicated exclusively to providing HR support to
  the credit union industry

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HRVGs Products And Services

• Executive Search
• Staff Recruiting
• Virtual HR
• Compensation System Design
• Benefits Analysis
• Human Resource Policy Development

• Employee Handbook Development
• Performance Management Programs
• Organizational Structure Analysis
• HR Assessments/Audits
• Employee Opinion Surveys
• Training Programs

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Presentation Objectives

• List the characteristics of successful CEO
  assessment processes
• Review Board and CEO responsibilities for
  performance management
• Discuss the main components of executive
  compensation
• Review the importance of a compensation
  philosophy
• Review the business reasons for creating a
  succession plan
• Identify the components of a good succession plan
  
• Understand the steps required to do a succession
  plan

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Organizational Value

• For credit unions, there are three critical
  components that make up Organizational Value
• Strong financial bottom line
• Superior service to the members
• Motivated, satisfied workforce

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Organizational Value

• The decisions that Directors make can affect
• Strong financial bottom line
• Superior service to the members
• Motivated, satisfied workforce
• And CEO performance evaluation, compensation and
  succession planning is certainly no exception!

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• Your decisions regarding evaluation, compensation
  and succession planning should align with your
  organizations culture.

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What is Your Culture?

• Four Common Cultures
• Clan Culture
• Adhocracy Culture
• Hierarchy Culture
• Market Culture

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Clan Culture

• Characteristics
• Focuses on internal issues, but values discretion
• Manage environment through teamwork
• Relationships and teamwork, rather than
  hierarchy, are predominant
• Family business feel
• Example Southwest Airlines

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Adhocracy Culture

• Characteristics
• Focuses on external environment
• Values flexibility and discretion
• Key values are freedom, creativity and
  risk-taking
• Entrepreneurial environment
• Example Apple Computer

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Hierarchy Culture

• Characteristics
• Focuses more on internal than external issues
• Values stability and control over flexibility
• Formal structures, policies and procedures
• Efficient, reliable operations
• Management style conformity
• Example McDonalds

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Market Culture

• Characteristics
• Focuses on external issues, but values stability
  and control
• Strong sense of mission/customers
• Productivity, consistency and results
• Best practices and benchmarking very important
• Example General Electric

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Performance Evaluation
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Why Be Concerned About Evaluating Your CEO?

• Health of the credit union
• Pay adjustments
• Bonus/Incentive payments
• Protect the credit union/Litigation
• Your CEO wants to know how he/she is doing!

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Common Pitfalls

• Failure to set (negotiate) clear, measurable
  goals with the CEO
• Micro managing by the board (focusing too much on
  the hows and not the whats)
• Allowing subjectivity to cloud objective results
• Avoiding tough issues until the annual review
• Assuming goals are static
• Failure to check in with the CEO on a regular
  basis
• Not gaining board agreement on the goals

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Quote

• Evaluations with noconnection to strategic
  goals have little value
• -- John Carver

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Characteristics of a Successful Process

• Based on shared, agreed upon goals
• Goals are clear and aligned with the strategy
• Objective evaluation
• Flexible goals
• Ongoing feedback mechanisms
• Goal achievement is tied to some type of
  incentive or reward

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Board Responsibilities

• Determine and prioritize the CEOs goals
  according to the strategic plan
• Executive or Personnel Committee drafts the
  initial performance plan/tool
• Review draft with CEO and get feedback adjust
• Then get entire Board approval on the final plan
  so you speak with a single voice
• Communicate the final plan to the CEO

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Board Responsibilities

• On-going communication with the CEO
• Communicate directly with the CEO when
  performance is not meeting expectations
• Conduct timely and thoughtful performance
  evaluations at least once a year
• Recognize and reward performance

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CEO Responsibilities

• Review the goals, ask questions, and provide
  feedback on viability of meeting goals in
  planning stage
• Review performance plan on an ongoing basis to
  ensure you and staff are meeting goals and credit
  union objectives
• Communicate periodically with the Board about
  progress

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CEO Responsibilities

• Provide Board with internal reports for
  monitoring progress
• Communicate external factors or trends that may
  impact the plan
• Identify barriers that may be hindering progress

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Three Components of the Process

• Planning (Goal Setting)
• Monitoring(Ongoing Feedback)
• Assessing Performance (The Annual Appraisal)

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Planning

• What is expected must precede monitoring
• Is the vision and mission articulated in writing?
• Are goals established and prioritized?
• Have measures of success been articulated in
  writing?
• Are policies in place to control and direct
  activities?
• John Carver, Reinventing Your Board

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Monitoring

• Three vehicles for monitoring
• Internal Reports from the CEO
• External Reports from 3rd Parties
• Direct Board Observation/Interaction

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Monitoring

• Evaluate and Adjust
• Track key performance areas
• Keep abreast of changing trends, the economy,
  products/services, delivery, etc.
• Adjust goals to meet changing needs of members

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Monitoring

• Periodic Reviews
• Guidelines
• Keep it informal but focused
• Stay focused on the whats not the hows
• Board should identify actions they can take to
  support goal achievement

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Assessing Performance
Definition The process of guiding CEO
contributions toward credit union objectives
through a series of year-long activities.

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Assessing Performance

• The best appraisals
• Do not focus on numbers only
• Cover all important areas of performance
• Are based on specific performance objectives
  focused on results
• Are based on year-round data gathering
• Are truly participative and positive
• Respect the nature of the meeting
• Build in flextime

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Assessing Performance

• Delivering the review who should be involved?
• Whole Board
• Executive Committee
• Compensation Committee
• Board Chair

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Benefits of a CEO Assessment Process

• Creates a partnership environment with CEO
• Creates a clear articulation of the results the
  board expects
• Encourages better communication between board and
  CEO
• Aligns the CEO priorities with the strategic plan
  
• Establishes quantitative/qualitative basis for
  pay increases and bonuses

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Quote

• In the long run, no one really careswhether the
  Board evaluated the CEO well enough. What
  matters in the long run is,did the credit union
  achieve what itshould for its members without
  being unethical and imprudent.
• -- John Carver

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Compensation
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CEO Turnover

• It is estimated that in the next 10 years, 50-60
  of credit union CEOs will retire.
• And how many will leave due to dissatisfaction or
  non-performance?
• What will you do to attract a new CEO or keep
  your current CEO?

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Having the right total compensation package could
make the difference between attracting and
retaining The best of the best vs The
best of the unemployed
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The pay package for executives differs from that
of other employees in several ways

• Criteria used to gauge appropriate levels of base
  compensation
• Frequent use of short-term and long-term
  incentives
• Non-cash entitlements or perks
• Employment contracts
• Deferred compensation

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Elements of Executive Compensation Programs

• Base Salary
• Short-term Incentives or Bonuses
• Long-term Incentives
• Employee Benefits
• Perks
• Recognition
• Executive Benefits

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Determining Base Compensation

• Board must develop a philosophy
• Elements to consider
• 1. Asset size
• 2. FTE size
• 3. Loan Portfolio size
• 4. Membership size
• 5. Services
• Determine weight of each factor
• Compare to peers?
• Include comparison to bank?

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Incentives / Bonuses

• Bonus - additional cash compensation provided at
  the discretion of the organization
• Incentives - additional cash compensation based
  on the achievement of pre-determined goals

Two types of incentives Short-term - One year
or less Long-term - More than one year
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Factors for DeterminingBonus/Incentive Awards

• Earnings 54.2
• Board Evaluation 53.4
• Loan Growth 32.6
• CAMEL Rating 21.5
• Member Satisfaction 20.9

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Common Benefits and Perks

• Standard Employee Benefits
• Auto Use
• Mobile phones
• Paid education benefits
• Supplemental Life Insurance
• Paid/unpaid sabbatical

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Common Benefits and Perks

• Spouse travel expense
• Employment Contract
• Full Health Care Premium Paid
• Executive Long Term Disability
• Health Club or Country Club Membership

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Feedback and Recognition

• It is just as important for the Board of
  Directors to provide the CEO with feedback and
  recognition as it is for a manager/supervisor of
  the credit union to do the same for their
  employees.

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Deferred Compensation Programs

• Credit union financed programs
• Executive financed programs

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Deferred Compensation Programs

• SERPs (Supplemental Exec Retirement Plan)
• 457(f)
• Split Dollar Life
• 457(b)
• Executive Bonus Plan

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How Should Boards Proceed?

• Identify the participants
• Identify the gaps
• Work with advisors
• Develop solutions
• Take board action
• Implement plans

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Succession Planning
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Where Do Credit Unions Prefer To Recruit CEO
Successors?

• 46 give preference to internal candidates
• 40 give equal preference to internal and
  external candidates
• 8 give preference to external candidates
• CUNA and Affiliates Salary Survey Report

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Where Are CEOs Actually Recruited?

• 33 are promoted internally
• 33 recruited from other CUs
• 34 other

CUNA and Affiliates Salary Survey Report
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Implications For Succession Planning

• If most Credit Unions prefer filling CEO
  positions from the inside, why are only 1/3 of
  the CEO positions actually filled by an internal
  candidate?

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Benefits of a Succession Plan

• Ensure continuous quality service
• Anticipate future position needs
• Identify and prepare internal successors for
  advancement opportunities

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Benefits of a Succession Plan

• Fills vacancies with internal candidates where
  appropriate
• Hires and grooms future leadership
• Identifies leadership gaps that could create a
  risk
• Utilizes professional development investments
  more effectively

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Elements Of A Succession Plan

• Goals and administrative guidelines
• Organizational (successor) chart
• Up-to-date job descriptions
• Professional development plans for each successor
• Communication plan
• Maintenance schedule

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Common Mistakes

• Not aligned with the strategic plan
• Incomplete and under-funded professional
  development
• Lack of appropriate rigor in the assessment of
  possible successors
• The process is not on-going
• Lack of Board involvement

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Succession Planning Steps

• Establish succession planning goals
• Align with strategic plan
• Identify and assess potential successors
• Create development plans
• Finalize succession plan document
• Update annually

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Establish Succession Planning Goals

• Emergency SP?
• Planned SP?
• Both?
• Positions targeted for succession?
• Professional development?

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Align with theStrategic Plan

• Review strategic plan
• Determine impact the strategic plan has on future
  structure and roles
• Update position descriptions to reflect strategic
  plan

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Identify And Assess Potential Successors

• Review organization to identify potential
  internal successors
• Assess skills and capabilities of each potential
  internal successor
• Create capabilities report on each potential
  successor
• Create successor organization chart (see next
  page)

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Sample Chart
Readiness codes 1 Immediate 2 Within 12-18
months 3 Within 24-36 months 4 Too early to
assess
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Create Development Plans

• Identify strengths and developmental needs
• Determine critical development needs
• Identify appropriate development options to suit
  development needs
• Set completion dates
• Include plans in performance management process
  

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Finalize Succession Plan Document

• Goals and administrative guidelines
• Successor depth chart with job descriptions
• Professional development plans
• Process for planned and unplanned vacancies
• Internal and external interim alternatives
• Potential funding requirements
• Communication plans

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Emergency Succession

• Management team pre-identified by the Board
  responsible for Credit Union operations until
  Board appoints interim President/CEO
• Management team addresses immediate needs,
  including internal communications, if they cant
  wait for an emergency Board meeting

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Emergency Succession

• Board meets within 24 hours of event to
• ensure stability
• set direction
• communicate the events
• Board meets within a week to agree on interim
  President/CEO
• Board puts into motion the recruitment process
• Board approves recruitment and funding

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Emergency Succession
Without a plan, the right people properly
prepared, the right outside resources available,
and the money to implement, succession will be
chaotic, hurting the Credit Union, the members,
and the employees.

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HRValue Group, LLC 15800 Haggerty Rd. Plymouth,
MI 48170 Phone [phone] www.hrvaluegroup.com