REITS: Muted Pay Increases and CEO Turnover
Annual REIT CEO pay increases have been muted over the past several years, which can in part be attributable to the increased prevalence of companies expanding their reliance on performance-based equity to reinforce their pay-for-performance philosophy. In 2010, only 40% of REITs granted performance-based equity awards, which are earned (or vested) dependent on company performance (often measured using total shareholder return, or “TSR”) versus pre-determined goals. For 2016, the number of REITs utilizing performance-based equity awards has more than doubled; upwards of 80% of REITs now award this equity vehicle.
The rate of annual pay increases for CEOs at the largest 50 REITs (by total cap) has trended toward a steady decline: dropping from median increases of 14% increases in 2010 to 3% in 2016.
Back in 2010, positive TSR performance was primarily rewarded through the increase in the grant date value (i.e., accounting value) of equity awards. This fact was a prime reason why the magnitude of annual increases was larger in that time frame. Today, performance-based equity vests in accordance with the success (or lack thereof) of a REIT’s stock price and growth in dividends. Accordingly, many REIT compensation committees no longer need to significantly increase the grant size of equity awards to reward management for shareholder value creation due to the fact that the structure of performance-based awards accomplish this in a more formulaic way.