REIT Executive Pay Rises 5 Percent: FTI

Healthcare real estate CEOs earned the biggest hikes in 2016 while hospitality executives saw a slight decrease, FTI Consulting reports.

Larry Portal, FTI Consulting
Larry Portal, FTI Consulting

Last year was a better year financially for executives at the nation’s top 150 REITs with median compensation rising about 5 percent compared to 3 percent in 2015, according to a study conducted by the Real Estate & Infrastructure industry group of FTI Consulting that examined REIT pay practices and market trends.

The report, 2017 REIT Executive Compensation Trends, also found that there was a tighter range in pay change by executive position with 2016 seeing ranges of 2 percent to 7 percent compared to 1 percent to 9 percent in 2015. The study tracked compensation for 527 incumbents in seven executive categories and found: chairman, down 0.6 percent; CEO, up 6.1 percent; chief operating officer, up 5.7 percent; chief financial officer, up 6 percent; chief investment officer, up 2 percent; general counsel, up 7.4 percent and other executives, up 2.7 percent.

The median annual bonus target for CEOs was $1.05 million, which equaled 132 percent of base salary. For other executives, the median annual bonus target was: COO, $510,000, which equaled 100 percent of salary; CFO, $416,719, 100 percent of salary: CIO, $424,000, 100 percent of salary; general counsel, $322,500, 86 percent of salary; and other executives, $350,000, 94 percent of salary.

The 2016 total compensation varied significantly by sector, the report stated, with healthcare REITs receiving the largest increases, up 20 percent for the CEO, and hotel/resort REITs seeing pay decreases of 1 percent for CEOs. Total compensation for CEOs in other sectors were: specialized REITs, up 8.7 percent; residential REITs, up 9.2 percent; office REITs, up 5.5 percent; retail REITs, up 2 percent; mortgage REITs up 5.8 percent; diversified REITs, up 14.1 percent; and residential REITs, up 1.1 percent.

Performance metrics

Jarret Sues, FTI Consulting
Jarret Sues, FTI Consulting

The study also found many REITs are looking to simplify executive compensation structures by streamlining performance-based equity programs into one long-term incentive plan and using payout leverage for a range of performance.

“Compensation committees are increasingly balking at the idea of using too much discretion when it comes to annual incentive plans. Setting pre-determined financial measures, while sometimes difficult to forecast, provides a clear link to compensation amounts, to which shareholders have reacted positively. Companies are aiming to balance excessive risk taking by using too few metrics and focusing management on critical business objectives,” Larry Portal, co-leader of the Executive Compensation practice and a senior managing director in the Real Estate & Infrastructure industry group at FTI Consulting, said in a prepared statement.

Many compensation committees have reduced the number of metrics in annual incentive plans to three to five key measures and increased the emphasis on annual incentive plan goal setting, the report noted.

“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. 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,” Jarret Sues, a managing director in the Real Estate & Infrastructure industry group at FTI Consulting, said in a prepared statement.

The study found the most commonly utilized corporate performance metrics continue to be REIT earnings metrics. The top metrics used are: AFFO, 57 percent; same-store NOI, 31 percent; FFO, 24 percent; leverage ratios, 24 percent; EDITDA/net income, 17 percent; and revenue/revenue growth, 12 percent.

But the use of performance-based equity is still growing, with 84 percent of REITs granting this equity, up from 82 percent in 2015 and 34 percent in 2010. For REIT CEOs, approximately 50 percent of equity they were awarded was allocated to performance shares based on grant date fair value (GDFV).

“The continued trend of employing performance-based shares has made realizable compensation analyses increasingly important. Due to the leverage often built into performance-based plans, the ultimate value realized may be significantly more (or less), depending on performance,” Sues stated.

In another key finding, time-vested restricted equity with a three-year vesting was the most common equity vehicle, while stock options continued to decline. The report also noted that approximately 91 percent of REITs use stock ownership guidelines, with six times the base salary being the most common ownership required for CEOs and three times the base salary for all other executive positions.

“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,” Portal added. “It will be interesting as we move forward toward the end of 2017 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.”