ROSELAND, NJ—When it comes to REIT management's annual incentive plans, shareholder and proxy advisory firms have become more interested in the how than the what. That is to say, they've moved away from asking questions about the AIP's design and toward inquiries about the methods used to determine performance goals.

FTI Consulting's latest annual study on executive compensation at the 125 top publicly traded REITs, prepared by senior director Jarret Sues, finds investors and advisory firms focusing on questions such as these: “How often has the annual incentive plan paid out above target?” “What is the process for setting performance goals?” “What is the performance range?” “Does the plan allow for payouts above target for performance below the median of the peer group?”

Sues tells GlobeSt.com that since 2012, there has been a noticeable shift toward formulaic measures in setting AIPs. “You don't want to set goals that are a slam-dunk,” he says. “No compensation committee or shareholder wants goals that are basically a slam-dunk year in and year out. So there's much more focus on setting meaningful performance goals.”

Defining “meaningful” entails a number of components, he says. “You have to look at what your company is budgeting. The world changes year in and year out, so you have to be cognizant of that. You have to be cognizant of what your peers are doing; relative to the industry, are your goals harder or easier? You have to understand analysts' expectations—is the Street expecting you to return such and such? You have to be aware of those things; are you setting goals that match those expectations? Do you think the expectations are just outrageous or are you going to blow them away?”

Once the goals are set, there's then the question of the performance ranges around those goals. “We've run into this issue with a number of our clients: if I'm setting an earnings goal, and it's $1 per share, am I basically going to say 'you can earn maximum dollars on this plan if you return $1.50 per share?' You might respond, “$1.50? That's basically impossible. Why am I setting that performance range so high where basically I can never actually achieve it?' It just becomes meaningless to an executive team.”

For the earnings goal, the high and low sides might be set at a closer margin on either side of the target: say, 97 cents per share on the low side, and $1.03 per share at the upper range. “Now it matters from goal to goal, because every goal is different; the math is different,” says Sues. “But we're seeing a much, much more measured approach as to what meaningful goals are—at the threshold level, obviously at the target level and then at maximum level.” Setting the maximum at the highest level that could be achieved “will motivate the management team to knock the ball out of the park,” he adds.

The shift toward formulaic measures, and the shift of the conversation from investors and advisory firms toward goals rather than on design, has occurred in an environment of more frequent dialogue “among all of the stakeholders,” says Sues. “With the pay-for-performance environment that we're in, we're getting more of, 'Don't just give me the slam-dunk goals; give me something meaningful.' We're hearing that from shareholders and we're hearing that from board members as well.”

FTI's report predicts that the use of total shareholder return as a metric in AIPs will either hold steady or decrease. “As an executive and as part of the management team, you want to be driving value for your shareholders,” Sues explains. “But TSR itself is too volatile over a one-year period. There's a theoretical lag between your operational performance and how that affects total shareholder return. Just because you're doing something in real time that's really good for the company, you may not see it reflected in TSR for a three-year period, or longer.”

Instant Insights /

REITs Eye Goal-Setting in Exec Incentives

Related Stories

Recommended For You