Reconsidering Pay-For-Performance Alignment

Real Estate & Infrastructure | Institutional Investor (Reprint)

May 20, 2013

Guidelines published by proxy advisories Institutional Shareholder Services and Glass Lewis that govern executive compensation and performance alignment in the real estate industry are straightforward.  They don’t, however, necessarily align with the realities of a real estate business. One big issue is the time frame over which company performance (on both an absolute and relative basis) is measured— generally a one- and three- year period.

A real estate company's ability to execute on its strategic plan—and implement corrections depending on market conditions—directly affects its long-term ability to generate shareholder value.

In the real estate industry, the time it takes to create shareholder value (defined in the public REIT industry as total shareholder return, or TSR, which includes share price appreciation and dividends) happens over a longer time horizon. The current compensation model also skirts another important factor: that real estate executives should be compensated for how well they execute on the things that are within their control and not solely on the performance of the market (on any basis), which they cannot control.

A New Performance Evaluation Model
Rather than balance the interests of shareholders, prevailing market conditions, controllable line items and evaluation time periods, I propose a new framework that evaluates the company’s fundamental operating performance and market performance on an absolute and relative basis. This places less emphasis on annual shareholder returns, because the executives' day-to-day activities do not directly impact them.


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