Corporate Performance REIT Compensation | FTI Consulting

Corporate Performance, Shareholder Value Affect REIT Compensation Plans

Corporate Finance | Real Estate & Infrastructure | Realestatefinanceinvestment.com (Reprint)

February 20, 2017

chart showing upward trend

Although compensation trends among REIT executives have fluctuated over the past few years, patterns are emerging around those trends that affect executive pay—patterns that look like they are here to stay. These were revealed in FTI Consulting’s 2016 REIT Executive Compensation study; it focused on the pay practices at the nation's largest 125 REITs, with issues of executive pay, total shareholder value, and transparency regarding bonuses among the factors affecting the compensation. The results reveal some industry bellwethers to be mindful of as 2017 approaches.

1. Continued correlation of NEO pay increases to REIT returns.

As annual REIT returns go, so goes annual pay for named executive officers (NEOs). The average annual NEO pay had increased by eight percent since 2010, but only three percent in 2015 over the previous year. This corresponds directly with REIT stock gains of three percent in 2015 (compared to five to 13 percent from 2010-2014). The modest pay increase and modest total returns are both at the lowest level since the financial crisis. Based on this, we expect to see a modest increase reported for 2016 since REIT stocks are relatively flat year-to-date.

This correlation reflects the more recent trend to pay executives more or less based on short-term performance, even though the historic focus of shareholder return has been over longer periods of time.

2. Pay for performance models show particular focus on performance-based equity compensation.

Performance-based equity—most commonly awarded in time-vested restricted stock shares—has continued to increase. Approximately 82 percent of REITs granted performance shares for 2015, a slight increase over the prior year (79 percent in 2014). A three-year horizon is the most prevalent vesting and performance period.

For REIT CEOs, approximately 48 percent of equity was allocated to performance shares in 2015. This equity allocation reflects continued board sensitivity to total shareholder return (TSR) and pay-for-performance compensation philosophies. This illustrates a clear trend of the REITs’ aim of striking a balance between executive retention and motivating management to increase shareholder value (shares earned contingent upon TSR performance).

Conversely, awarding stock options has been and will continue to be a declining trend. This is in spite of the fact that prices for stock options have settled, related accounting costs have dropped slightly and they also have a 10-year horizon.

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