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Study Finds REIT Executive Compensation Tied to Future Performance

It’s a common practice for REIT executive compensation to be based on short-term performance For example, if a REIT performed well over the past year, the CEO would receive a bonus, either in cash or equity. Increasingly, however, executive compensation is being structured in a way that encourages executives to focus on long-term objectives, says Anthony Saitta, managing director and co-head of FTI Consulting’s real estate solutions industry group’s executive compensation team.

The global business advisory firm recently conducted a study of REIT executive compensation, based on company filings and proprietary firm research for more than 125 REITS. The study found that total compensation for all REIT executives has steadily increased from its 2008 lows just as REIT stocks have also steadily rebounded. From 2010 to 2011, compensation increased by an average of 7 percent.

“The most interesting takeaway from this study is not so much that compensation increased, but the manner in which it increased,” Saitta notes. “Over the past several years, more and more companies have begun to award performance-based compensation that is ‘earned’ only if the company continues to perform and meet certain hurdles and benchmarks.”

For example, in this scenario, a CEO would be awarded 1,000 shares today. Although those shares would have a monetary value, the CEO would not “own” them unless he met future performance hurdles, perhaps four to five years from now. At that time, he would own those shares and would have the ability to sell them. And those shares would likely have a higher value if the CEO did his job, Saitta notes. If the CEO doesn’t meet those performance hurdles, however, he loses those shares.

Saitta says compensation committees and investors are fans of this “future performance” approach because they believe it encourages executives to focus not just on the job today, but to make decisions that will benefit the company in the long-term. “Structuring compensation to include prospective performance creates alignment with investors,” he says. “I absolutely believe that linking pay to future performance generates better behavior from management teams.”

In addition to basing compensation on performance, there’s been a movement to evaluate performance on a relative and absolute basis, Saitta notes. “Companies are trying to create a healthy mix of absolute and relative benchmarks, which help put performance in context of the market.”

As part of the study, FTI Consulting also found that the percentage of REITs with annual cash bonus plans based solely on subjective criteria (as opposed to formulaic/objective criteria) decreased significantly from 2008 (46 percent) to 2011 (37 percent).

Key findings of the FTI study:

  • Actual total compensation adjustments varied significantly by REIT sector, with the healthcare and multifamily sectors experiencing the largest year-over-year increases and the specialty finance sector experiencing slight year-over-year decreases at the C-suite level.
  • In 2011, base salaries for REIT executives increased over 2010 levels by 3 percent at the median, with average increases of 7 percent.
  • While equity compensation increased by approximately 4 percent at the median, the MSCI US REIT Index gained approximately 9 percent, the latter of which was a 20 percent decline over 2010 levels.
  • Compensation committees and boards determined that executives should not be fully rewarded for the overall increases in REIT share prices, but with the utilization of performance shares and stock options, executives have the opportunity to earn more significant value for sustained long-term performance.
  • REITs continue to redesign their long-term incentive programs to include a multi-pronged approach featuring two or three compensation vehicles, such as time-based restricted stock, performance shares and/or stock options.
  • Board compensation in 2011 increased from 2010 levels by 4 percent at the median, with an average increase of 10 percent.
  • The allocation between cash and equity awards for REIT boards was 45/55 respectively in 2011 versus 50/50 in 2010.
  • Over 92 percent of shareholders voted in favor of the executive compensation proposals at REITs in the second say-on-pay proxy season.
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