WASHINGTON, DC—Let it not be said that REIT executive officers live paycheck to paycheck. That's partly because for 99% of the largest real estate trusts, long-term incentives represent the most sizable components of their executives' compensation, according to FTI Consulting.

Fifty-one percent of named executive officers' compensation came through LTIs; the figure rises to more than 58% in the case of CEO pay. "Accordingly, LTI awards generally receive substantial scrutiny from investors and proxy advisors and also require the most time and consideration from the compensation committee and management," according to the FTI report prepared by senior managing director Larry Portal and senior director Katie Gaynor.

The majority of REITs use a combination of two or more equity compensation vehicles, with 87% of the top 125 companies granting time-vested restricted stock/LTIP units. Performance shares—i.e. shares or units of stock that may be earned based on the achievement of specified performance hurdles over a pre-determined time period—are becoming more prevalent, with 69% of REITs granting such awards last year, up from 54% in 2013.

When awarding both performance shares and outperformance plans, more than three-quarters of the top REITs utilize a cumulative performance period, as opposed to an annual one. A three-year performance period is the most common benchmark; FTI observes that the use of cumulative performance periods has increased over the past few years for performance shares, due to a preference on the part of proxy advisory firms.

About 80% of REITs now use relative performance measures for both performance shares and outperformance plans. Such relative measures may include broad-based REIT indices such as the NAREIT All Equity Index, sector-based indices, executive compensation peer groups or other/custom indices and peer groups. The most common performance measure for performance shares is total shareholder return, with funds from operations running a distant second.

That being said, FTI notes that REITs have begun incorporating measures beyond TSR into their performance-based equity compensation, with a view toward balancing market fluctuations of stock price performance and measures "that may ultimately influence long-term shareholder value creation but are not subject to the same macro-economic influences of stock prices. More companies will continue to incorporate such measures but TSR will continue to be the predominant performance measures due to its favorable accounting treatment."

The consulting firm also sees "a notable increase" in the use of performance-based equity awards, although the rate of increase will level off from the dramatic rise experienced over the past couple of years. "Instead, it is anticipated that the balance between the allocation of annual equity to performance shares as compared to time-based stock awards will shift more favorable towards the performance-based element," according to Portal and Gaynor.

The report also predicts more companies taking a formulaic approach when determining the value of LTI awards on grant date, similar to the methodology employed for formulaic cash bonuses but generally using different performance metrics. Such an approach will allow REITs to more effectively align their annual compensation values, as disclosed in the summary compensation tables of their proxy statements, with the correlation of pay and performance as calculated under the evaluation model used by ISS, "potentially alleviating unnecessary say-on-pay concerns."

Finally, FTI sees many REITs increasing their focus on actual pay instead of on the accounting or grant date value approach. "As more REITs disclose such information in their CD&A disclosure, companies will be able to prepare better comparative analyses to understand the take-home pay of their executives as compared to the market and will be able to more effectively explain to shareholders any one-off discrepancies between summary compensation table values and the company's performance in a given year," the report states.

Instant Insights /

REITs Take Long View in Exec Compensation

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