2017 Say-on-Pay Recap for the REIT Industry
The non-binding Say-on-Pay shareholder advisory vote has now completed its seventh year. Key takeaways from 2017 include the trend that self-managed REITs continue to receive Say-on-Pay support at a slightly higher rate than general industries, while externally-managed REITs or issuers (EMIs) continue to receive Say-on-Pay pressure following ISS adding “Insufficient Executive Compensation Disclosure by EMIs” to its list of problematic pay practices in 2016.
Say-on-Pay results in terms of average support and the percent of companies that failed was only slightly better for self-managed REITs than Russell 3000 companies. Yet in terms of ISS feedback, REITs received significantly fewer negative voting recommendations with only 5.8% of self-managed REITs receiving an Against voting recommendation as compared to 12.3% of companies in the Russell 3000. While it is hard to ascertain the precise reason for such strong REIT Say-on-Pay support from ISS, it is likely attributable to a number of factors that are beneficial under the ISS pay-for-performance evaluation, including:
- Strong TSR performance at REITs for the three-year period ending in 2016, which directly affects the relative Pay-TSR relationship used for ISS’ pay-for-performance model;
- REITs heavily utilize formulaic cash bonus plans that promote pay-for-performance alignment and transparency; and
- REITs grant TSR-based performance-based equity plans at a higher rate than other industries, which provides direct alignment between CEO pay and shareholder returns.