REIT Executive Compensation and Corporate Governance Insights
Current Challenges Impacting Compensation Design
The discussion and focus surrounding “strategy” and how that impacts REIT executive compensation programs has meaningfully increased. Best practice is to ensure that REIT compensation programs are directly aligned with the company’s annual business and long-term strategic plans, which often requires deviating from the norm and possibly investor expectations.
Setting Cash Bonus Goals
The alignment of short- and long-term strategy with incentive plans should always be a driving force around compensation decisions. Being mindful of what needs to be accomplished in the short-term, even if it represents a decline from prior year’s performance, allows employees to focus on current strategy and what needs to be achieved now to be successful in the long-term. Short-term incentives should be based on performance targets that are considered achievable, but require strong effort, which calls for a delicate balance of planning and forecasting. Many REITs experience challenges setting bonus hurdles in periods of declining profitability, specifically when it may be appropriate to set a performance target that is lower than the prior year. Very few companies increase profitability every year for the life of the organization (“success is not a straight line”) and accordingly, most REITs encounter this issue at some point. A few key considerations that should be analyzed include:
- “Maximum” payouts may need to include more significant stretch goals than prior plans since it is harder to justify above target payouts in periods of declining profitability and should require extraordinary effort.
- ISS guidelines state that in these situations “clear disclosed rationale for lowered financial performance targets” is necessary.
- If the decline is a direct result of mismanagement, paying significant value to executives to “fix their mistakes” may be harder to justify.