REIT Executive Compensation Up in 2010, Led by Office, Industrial Sectors

June 30, 2011
By Nicholas A. Ziegler, News Editor

Courtesy Flickr Creative Commons user morrissey

Closely mirroring trends in the economy at large, median compensation for C-level executives at the country’s largest REITs saw a gradual push upward during 2010. The average REIT executive saw a pay increase of 14 percent from 2009 levels, Anthony Saitta, managing director & co-head of the real estate solutions group’s executive compensation team at FTI Consulting, explained during a webinar the company hosted yesterday.

“During 2010, executive compensation continued to attract significant shareholder and media scrutiny, particularly in light of the new say-on-pay rules,” Saitta said. “Additionally, REIT boards and compensation committees had to balance perception concerns with other critical industry factors, such as personnel changes within executive management teams and a number of recent REIT initial public offerings, in determining the most appropriate executive compensation program to attract and retain talent.”

And that compensation program at most REITs often included non-cash items. While 36 percent of the trusts chose to keep base salaries flat, cash bonuses, for example, increased in 2010 by more than 21 percent from the previous year. Additionally, a full 30 percent use stock options as equity compensation. Saitta said the use of these non-cash awards helped incentivize a firm’s long-term health, ensuring that shareholders see the first benefits of increased performance.

Certain sectors also performed better than others, with both the office and industrial areas outperforming other REITs. These two industries have been leading some of the economic recovery, according to Saitta, and already saw pay increases in the 2009 term. The hospitality industry, however, is still working on making its comeback – both occupancy levels and average daily rates have not yet returned to their pre-2007 levels.

While the 2011 proxy season was the first term when shareholders had a non-binding advisory vote on compensation, the next year may spell changes. Those shareholders were, as a group, pleased with performance: Ninety percent voted in favor of a particular REIT’s compensation package, but four disclosure items built into the so-called Dodd-Frank Act will go into effect for the 2012 proxy season. Boards will now be required to disclose pay ratios (CEO pay versus median firm compensation), pay-for-performance policies (the relationship between non-cash compensation and company performance), clawback policies (a requirement to recoup compensation in the event of noncompliance) and hedging policies (disclosure on whether executives use hedging to guard against a decrease in equity compensation).

“Real estate is driven by population growth, job growth and consumer spending,” Saitta told Commercial Property Executive. “As those fundamentals have improved, the market has recognized that. Returns to shareholders have been solid, and that’s filtered down to the executives.”

But the future, he said, is far from certain.

“Boards are going to be looking at the future and will use all factors in their decision making,” he explained. “If the right decision is to pay executives a certain amount, the new disclosure rules won’t change that. The boards will have to do what’s right for the business.”