Do Credit Unions have Distinct Objectives? Evidence from Executive Compensation Structures

35 Pages Posted: 20 Jun 2019 Last revised: 19 Nov 2020

See all articles by Jordan van Rijn

Jordan van Rijn

University of Wisconsin - Madison - Agricultural and Applied Economics; Credit Union National Association (CUNA); Center for Financial Security

Shuwei Zeng

Federal Home Loan Mortgage Corporation (FHLMC); University of Wisconsin - Madison - Agricultural and Applied Economics

Brent Hueth

University of Wisconsin - Madison - Department of Agricultural & Applied Economics

Date Written: November 18, 2020

Abstract

Credit 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 two-and-a-half times 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.

Keywords: Executive compensation, Banks, Credit unions, Prosocial behavior, Cooperatives, Principal-agent

JEL Classification: G2, G3, H2

Suggested Citation

van Rijn, Jordan and Zeng, Shuwei and Hueth, Brent, Do Credit Unions have Distinct Objectives? Evidence from Executive Compensation Structures (November 18, 2020). Available at SSRN: https://ssrn.com/abstract=3403048 or http://dx.doi.org/10.2139/ssrn.3403048

Jordan Van Rijn (Contact Author)

University of Wisconsin - Madison - Agricultural and Applied Economics ( email )

427 Lorch St.
Madison, WI 53706
United States

HOME PAGE: http://https://aae.wisc.edu/staff/vanrijn/

Credit Union National Association (CUNA) ( email )

5710 Mineral Point Rd
Madison, WI 53705
United States
6082153896 (Phone)

HOME PAGE: http://https://www.cuna.org/CUNA-Research-and-Policy-Analysis-Team/Jordan-van-Rijn/?EventID=23622406

Center for Financial Security ( email )

Madison, WI
United States

HOME PAGE: http://https://cfs.wisc.edu/2018/09/26/jordan-van-rijn/

Shuwei Zeng

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

University of Wisconsin - Madison - Agricultural and Applied Economics ( email )

United States

Brent Hueth

University of Wisconsin - Madison - Department of Agricultural & Applied Economics ( email )

427 Lorch St.
Madison, WI 53706-1503
United States

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