WASHINGTON, DC—REIT executive compensation increased by a slightly greater margin in 2016 than the year prior, according to FTI Consulting's 2017 REIT Executive Compensation Trends study of pay practices at the 150 largest real estate trusts. However, while the average increase was greater—5%, compared to 3% in 2015—the range was narrower: 2% to 7% in '16, compared with 1% to 9% in '15.

If the range of pay increases has diminished, then the emphasis on linking those increases to performance continues to grow. FTI reports that 84% of REITs in the study now use performance-based equity, not including stock options, up from 82% the year prior and 34% in 2010. This past year, approximately 50% of equity awarded to REIT CEOs was allocated to performance shares based on grant date fair value.

“The continued trend of employing performance-based shares has made realizable compensation analyses increasingly important,” says Jarret Sues, a managing director in FTI's real estate & infrastructure industry group. “Due to the leverage often built into performance-based plans, the ultimate value realized may be significantly more (or less), depending on performance.”

The study finds that many REIT compensation committees and management teams have expressed a desire to simplify their compensation structures by streamlining performance-based equity programs into one long-term incentive plan and incorporating appropriate payout leverage for a range of performance. Further, many of the compensation committees have reduced the number of metrics in their annual incentive plans to no more than three to five key measures, while increasing the emphasis on annual incentive plan goal setting.

“Companies have been taking a deeper dive into performance goals to understand how meaningful and achievable they are, as the scrutiny on annual incentive plans by proxy advisory firms and investors has shifted from plan design (i.e., formulaic versus discretionary) to the appropriateness of the goals themselves,” says Sues. “In addition, compensation committees and management are more focused on evaluating performance metrics beyond total shareholder return for equity awards and determining if certain operational metrics that drive long-term value creation are more appropriate.”

The study showed that compensation trends by position varied less than previous years, based on 527 incumbents. Average compensation changes by position were as follows: chairman (-0.6%), CEO (+6.1%), COO (+5.7%), CFO (+6%), CIO (+2%), general counsel (+7.4%) and other executives (+2.7%). The median annual bonus target for CEOs was $1.05 million, the equivalent of 132% of base salary.

A new study of REIT executive pay conducted for S&P Global Market Intelligence by CEL Compensation Advisors provides a macro view of the drivers behind determining pay rates. “Unlike many prior years, REIT TSR performance in 2016 rose, but the broader market proved stronger,” according to the CEL study. “Swings in REIT vs. broad market performance reinforce that the better rationale for top executive compensation levels vs. company performance must be compiled and represented over multiple years to offer valid arguments regarding the relationship between company performance and CEO compensation.”

FTI's Larry Portal, co-leader of the executive compensation practice and a senior managing director within the real estate & infrastructure industry group, notes that TSR has been “the long-term performance metric of choice for REITs and proxy advisory firms for over five years. The executive compensation landscape continues to change, and managing the expectations of investors, directors, executives and other interested parties while creating an effective compensation program requires a delicate balance.

“It will be interesting as we move toward the end of '17 and beginning of 2018 to see if REITs will adjust course and make more of an effort to link performance to internally calculated operational measures,” Portal adds.

Instant Insights /

REITs Turn Toward Pay-for-Performance

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