Do credit unions have distinct objectives? Evidence from executive compensation structures

Abstract

AbstractCredit unions compete directly with commercial banks in markets for consumer financial services yet receive an exemption from federal corporate income tax. Commercial banks claim that credit unions are no different than banks and that the credit union tax exemption represents an unfair competitive advantage. Credit unions counter that while they offer similar products and services, they differ from commercial banks in terms of structure and mission, given their not‐for‐profit, cooperative status. In this paper, we test for substantive differences in the objective functions of commercial banks and nonprofit credit unions by comparing CEO compensation structures. Drawing on the relevant principal–agent literature, we provide several arguments to support the hypotheses that credit union boards of directors establish lower‐powered incentive contracts with their CEOs relative to similarly sized commercial banks, and offer lower total compensation. We find that credit union CEOs receive approximately 250% less performance‐based compensation relative to CEOs of similarly sized community banks. Bank CEOs also earn approximately 15% to 20% more total compensation on average. The results are generally robust to controlling for CEO‐ and board‐level characteristics, local economic conditions, and institution‐level indicators of size, growth, complexity, liquidity and risk. The findings suggest important differences in incentive structures and objectives between banks and credit unions.