The hidden cost of loyalty: How internal promotions impact credit union executive compensation.

Break the cycle of below-market pay while preserving your credit union's promotion culture

Credit unions so widely embrace internal promotion that it has moved beyond being a common staffing practice and has become a cultural norm. That’s a good thing in many ways. For example, promoting from within can foster organizational continuity, reinforce credit unions’ mission-driven ethos, and encourage employee loyalty and engagement. However, internal promotion also carries hidden costs, particularly when it comes to executive compensation.

This article explores the strategic balance credit unions can find between the benefits of a promotion culture and the often-overlooked consequences of internal hiring, including inadvertently suppressing executive compensation, and how this suppression poses significant strategic challenges. Additionally, we will highlight practical steps that credit unions can take to mitigate these challenges and ensure competitive alignment of both internal promotions and external hiring moving forward.

The tradition of internal promotions in credit unions

As we’ve said, internal hiring practices are deeply entrenched in the credit union philosophy. Credit unions pride themselves on fostering employee growth, nurturing internal talent, and providing clear paths toward senior leadership roles. Many executives in the industry began their careers in entry-level positions, working their way upward through years—or even decades—of dedicated service.

This home-grown leadership development strategy offers several clear advantages. It helps sustain the credit union’s core values and mission, maintains organizational knowledge, and ensures consistency in management practices. However, despite these clear benefits, reliance on internal hiring creates an inherent risk for compensation practices: salaries tend to lag significantly behind broader market rates. As we’ll see later in the article, having discrepancies between the salaries of staffers promoted from within and the typically higher salaries demanded and received by outsiders when the credit union needs to recruit externally can create problems with equity, retention, and the credit union’s culture.

Why compensation lags when hiring internally

The phenomenon of lagging compensation arises primarily because internal candidates who accept promotions often have less negotiating leverage than external candidates. Familiarity, loyalty, and a desire for advancement within the organization often overshadow compensation expectations. Employees promoted internally may feel compelled to accept lower salaries to remain part of an institution they've grown attached to, trusting future opportunities or incremental raises to balance out over time.

As a result, internal promotions rarely trigger thorough market compensation assessments. Rather, pay increases often reflect incremental steps from prior roles, reinforcing a pattern where executive compensation significantly trails broader industry benchmarks. Over the years, the cumulative impact of incremental pay adjustments versus market-aligned compensation can create a substantial gap.

Moreover, internal compensation adjustments are frequently guided by organizational precedent rather than external competitiveness. Boards/compensation committees, CEOs, and HR executives accustomed to giving modest annual increases at the credit union may struggle to justify or conceptualize significant adjustments needed to close gaps with broader industry standards.

The emerging crisis: Aging executives and a slimming talent pool

Today, the credit union industry faces a rapidly approaching demographic crisis. Numerous long-tenured executives are nearing retirement, resulting in an unprecedented wave of executive vacancies. Internal succession plans, though often preferred, are becoming less viable due to an increasingly thin pipeline of adequately prepared internal candidates.

While credit unions historically relied heavily on internal promotions, the reality of the current executive talent landscape is forcing many institutions to turn to external markets for leadership roles. This shift, however, is revealing previously hidden compensation discrepancies in stark relief, triggering a variety of strategic and operational challenges.

The consequences of external hiring amidst internally suppressed compensation

When credit unions hire externally, they often discover that market rates for executive talent far surpass internal compensation scales. External candidates typically demand—and receive—salaries significantly higher than those currently earned by incumbent executives. This salary disparity generates immediate challenges:

• Internal equity issues: Significant compensation disparities can erode trust and morale among existing executives. Long-term, dedicated leaders may feel undervalued or overlooked, potentially creating internal tensions and damaging team cohesion.
• Retention risks: Seasoned executives witnessing substantial gaps between their compensation and that of newly hired peers are more likely to explore external opportunities themselves. Attrition growth can exacerbate leadership gaps and disrupt organizational continuity.
• Cultural disruption: The sudden arrival of external hires at substantially higher pay levels can send unintended messages about organizational priorities. The perception of diminished appreciation for loyalty and internal development can challenge the credit union’s cultural integrity.

Real-world implications and an example

Consider a mid-sized credit union that, after decades of promoting internally, needed to replace its retiring CEO. After unsuccessful internal recruitment efforts, the board turned to the external market. The eventual outside hire commanded a compensation package significantly above internal precedents—approximately 30% higher than the outgoing CEO.

The impact was immediate. Several senior executives expressed dissatisfaction with perceived inequities, leading to internal friction. Within a year, two highly experienced senior leaders left for competing financial institutions, each receiving compensation packages far exceeding their previous salaries. This attrition weakened organizational stability, caused disruptions in member services, and ultimately increased operational costs.

Stories like these illustrate why proactive compensation planning and market benchmarking are crucial for credit unions, especially as executive leadership demographics rapidly shift.

Strategic recommendations: Conducting comprehensive compensation analyses

To effectively navigate such complex compensation challenges, credit unions must proactively adopt a structured approach to compensation planning and alignment. Specifically, credit unions should routinely conduct comprehensive compensation analyses—not only for roles being actively recruited externally but across the entire executive leadership team. This broader approach ensures that internal pay structures reflect market conditions and prevents significant disruption when external hiring becomes necessary.

Here’s how credit unions can practically implement these compensation analyses:

1. Regular market benchmarking

Regular, systematic market benchmarking against industry-specific and broader financial services market data is essential. Reliable data sources, such as industry surveys, Form 990 filings, and compensation consulting insights, should form the basis of these benchmarks.

2. Total compensation reviews

Compensation reviews should encompass base salary, short-term incentives, long-term incentives (where applicable), and executive benefit plans. A holistic perspective ensures credit unions accurately identify the full scope of compensation discrepancies and opportunities for improvement.

3. Transparent communication

Credit unions should engage their executive teams transparently when performing compensation analyses. Clearly communicating how compensation decisions are made, why certain benchmarks are relevant, and the overall strategic direction reinforces organizational trust and reduces internal dissatisfaction.

4. Structured compensation philosophy

Developing and maintaining a clearly defined executive compensation philosophy can provide clarity and direction. This philosophy should outline the organization's market positioning (e.g., median, 75th percentile), commitment to internal equity, and the factors influencing compensation decisions.

While compensation is critically important, retention involves broader considerations. Credit unions should foster cultures emphasizing professional growth, meaningful recognition, work-life balance, and purposeful mission alignment. Non-financial incentives such as flexible work arrangements, robust professional development opportunities, and recognition programs can significantly enhance employee loyalty and reduce turnover risks.

The financial and strategic benefits of competitive compensation

Though increasing compensation levels can initially appear daunting, the strategic benefits far outweigh short-term costs. Competitive compensation allows credit unions to attract and retain the best talent, ensuring continued operational excellence, service quality, and innovative thinking.

Long-term, strategically-aligned compensation planning reduces the risk of disruptive turnover, mitigates succession planning gaps, and strengthens overall organizational stability. Additionally, a competitive compensation strategy positions credit unions as attractive employers, enhancing their reputation and brand within both local communities and broader financial markets.

Looking ahead: Shaping the future of executive compensation in credit unions

The credit union industry is at a pivotal moment regarding executive compensation. As an aging executive population retires, internal talent pools shrink, and external hiring becomes increasingly necessary, credit unions must thoughtfully recalibrate their compensation practices. Maintaining competitive alignment with market rates while preserving internal equity requires strategic foresight, disciplined execution, and continuous communication.

Ultimately, credit unions that proactively recognize the hidden costs of internal hiring, rigorously benchmark compensation, and thoughtfully align pay structures with broader market standards will thrive. They will successfully navigate industry shifts, preserve organizational culture, and sustain their critical mission—serving their members and communities effectively.

In short, internal hiring in credit unions is a double-edged sword, offering valuable cultural advantages that can come with hidden costs. Through proactive, informed compensation strategies and thoughtful leadership development programs, credit unions can successfully balance internal promotions with competitive market compensation.

By addressing the nuanced implications of internal hiring and market compensation, credit unions can strengthen their long-term strategic positions, sustain organizational health, and remain employers of choice in the evolving financial services landscape.