FTI Consulting Expects 2014 REIT Executive Compensation Increases to Exceed 2013 Levels
Conducted by the Real Estate and Infrastructure practice of
According to the firm's 2014 REIT Executive Compensation study, Chief Executive Officers ("CEOs") experienced slightly larger increases in 2013 than other senior executives. This represented a shift from the past couple of years when CEO adjustments were more tempered as a result of REIT Compensation Committees being more conservative during the first few years of Say-on-Pay ("SOP"). Specifically, total compensation for REIT CEOs increased seven percent from 2012 to 2013, while total compensation increased five percent for all senior executives.
"Given that most REIT Compensation Committees look to investor returns for directional guidance when making year-end compensation decisions, 2013 increases reflected the fact that the REIT market was relatively flat in 2013, with the MSCI US REIT Index up only one percent for the year, compared to an approximate increase of 18 percent," said
"If shareholder returns are an indication of compensation adjustments for senior executives, we anticipate that 2014 changes will be larger than in 2013 and closer to the eight to 10 percent range. The MSCI US REIT Index is up over 20 percent year-to-date, with REITs outperforming the general industry by a substantial amount, with both the
Other key findings of
- More than one-third of REIT executives had no base salary increase in 2013. Of those that did increase over 2012 levels, the average increase was five percent. Preliminary 2014 base salary increases are expected to be in the same range.
- Annual cash bonuses ranged from decreases of 10 percent to increases over 20 percent, with the median increases being six percent for all executives. Overall, however, 2013 increases were below 2012 increases, which were approximately 10 percent.
- The use of a purely discretionary/subjective cash bonus program declined from 42 percent in 2010 to just 22 percent in 2013.
- Approvals of REIT SOP proposals remained relatively consistent from 2013 (for 2012 compensation) (89.9 percent of shareholders) to 2014 (for 2013 compensation) (90.5 percent of shareholders).
- However, 2014 demonstrated the growing influence that a negative voting recommendation from ISS and, to a lesser extent,
Glass Lewis, has on actually failing a SOP proposal. For example, REITs that received an "against" voting recommendation from ISS had an average support level of 40 percent less than those companies that received a "for" voting recommendation.
- Most REITS utilized two or more equity compensation vehicles in their long-term incentive compensation plans; only one of the top 125 REITS granted no equity for 2013 performance.
- While total compensation for the REIT industry generally increased in 2013, there were significant differences in year-over-year compensation adjustments among the various industry sectors. For example, median total compensation for healthcare REIT Chief Financial Officer's ("CFOs") decreased by four percent from 2012 to 2013. Contrarily, retail REIT CFO's saw their total compensation grow by 10 percent on the median.
- For REITS that increased board compensation in 2013, the median increase was 16 percent, indicating that companies generally increase board compensation periodically by large amounts.
- As in 2012, REITS continued to allocate a higher percentage of board compensation toward equity awards, with approximately a 40/60 allocation between cash and equity.
"In 2013, we saw REITs continue to modify executive compensation programs to better align with the preference of proxy advisory firms, as well as investors. This resulted in a decrease in the utilization of discretionary incentive awards and an increase in formulaic bonuses and at-risk performance-based equity. The largest proxy advisory firms have yielded substantial influence and a sense of urgency among REITs to adjust compensation plans, within reason, to fit within their guidelines and models. That being said, more REITs have started to proactively engage with their largest shareholders so that a more customized compensation program can be adopted, while still being able to achieve a positive SOP voting outcome regardless of whether their compensation program fits within the one-size-fits-all proxy advisory model," Saitta said.
About the 2014 REIT Executive Compensation Study
They include externally-managed companies that do not directly pay cash compensation to their Named Executive Officers and excludes any IPOs or REIT conversions that were completed after