Pay-For-Performance Alignment: A Re-Consideration

Pay-For-Performance Alignment: A Re-Consideration

Real Estate Finance Journal

July 12, 2013

In today's world, the rules governing the evaluation of executive compensation and performance alignment in the real estate industry are fairly simple and straightforward. Regardless of whether you are looking at the guidelines published by industry leaders Institutional Shareholder Services (“ISS”) or GlassLewis & Co. (“GlassLewis”), the basic framework consists of evaluating the degree of alignment between a company's compensation levels and its performance on both an absolute and relative basis, with performance almost entirely denned as a company's total shareholder return (“TSR”), including both dividends paid and share price change, over a one- and three-year period.

By and large the evaluation of this alignment is based on how well the company's compensation levels respond to changes in the Company's TSR performance over these time frames. For example, ISS uses three quantitative tests to identify the degree of alignment between pay and performance, as follows:

  • Relative Degree of Alignment—Is a relative performance test that compares the percentile rank of a company's Chief Executive Officer's pay and the company's TSR performance over one- and three-year periods utilizing an ISS selected comparison group, with a 60% weighting for the three-year period and a 40% weighting for the one-year period. To the extent that the company's relative TSR performance outranks its pay, there is strong alignment of pay and performance. Conversely, to the extent that the company's relative compensation outranks its relative TSR performance there is a potential misalignment of pay and performance. In order to measure this potential misalignment, ISS has established metrics of -30% that indicates a medium level of concern and -50% that indicates a high level of concern.
  • Multiple of Median—Is a relative test that expresses the company's CEO pay as a multiple of the median of the ISS selected comparison group. This test is designed to ensure that a company does not overpay its CEO on an absolute basis regardless of how well it has performed relative to its peers. In order to determine whether or not a company is potentially over paying its CEO, ISS has established metrics as a multiple of the comparison group median pay of 2.33x that indicates a medium level of concern and 3.33x that indicates a high level of concern.

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