September 2012
FTI Consulting recently released its annual report on compensation trends within U.S.-based REITs and other real estate-related entities. Below, we’re summarized information you might find interesting.
Increases in compensation averaged 5 to 10% at the median in 2011 over 2010. This change is lower than the 10-15% increase reported in 2010 over 2009.
On average, cash compensation grew 8%, while equity-based compensation grew 4%. Total compensation for the CEO, COO and CFO positions surpassed 2007 levels which were historically the highest to that point in time.
U.S. REITs continue to redesign compensation plans in light of changing corporate governance standards, such as "Say on Pay". The participating REITs reported that 78% of executives have some form of severance arrangement in place.
The following chart outlines the changes in median compensation level for U.S. REITs in 2011 over 2010 for the top few positions:
|
POSITION |
MEDIAN INCREASE IN BASE SALARY |
MEDIAN INCREASE IN CASH BONUS |
MEDIAN INCREASE IN EQUITY-BASED/LONG TERM INCENTIVES |
TOTAL INCREASE AT THE MEDIAN |
|
CEO |
2% |
5% |
7% |
9% |
|
COO |
2% |
5% |
8% |
8% |
|
CFO |
3% |
10% |
2% |
8% |
|
CIO |
3% |
12% |
14% |
9% |
|
General Counsel |
3% |
1% |
1% |
4% |
|
Other |
3% |
14% |
3% |
11% |
Base salaries increased an average of 7%, or 3% at the median. 84% of participating REITs cited an increase in base salary versus 64% in 2010. FTI estimates that base salaries will increase 3% at the median across all levels in 2012.
Cash bonuses were up 8% at the median, and ranged from -6% to +37% at the 25th and 75th percentiles respectively. Funds from Operations (FFO) per share was up 9% at the median.
Cash bonuses are increasingly based on a combination of subjective and objective measures (49% in 2011 up from 26% in 2008). REITs' sole use of formulaic calculations has come down significantly from 28% in 2008 to 14% of participating organizations in 2011.
Long Term compensation was up 4% at the median, and ranged from -11% to +36%. At the same time, the MSCI US REIT index increased by 9% during 2011. It was suggested that this discrepancy might be due to compensation committees determining that executives should not be fully rewarded for stock performance, but rather should be rewarded for sustained long term performance. As such, these executives would not be penalized for declines in annual values as we saw in the last few years.
The following table outlines the vehicles used in formulating Long Term Equity Plans:
|
VEHICLE |
USAGE |
|
Stock Options |
26% of REITs use them; of which 85% use options in conjunction with another equity vehicle. |
|
Time-Based Restricted Stock or LTIP units |
80% of REITs employ them; 36% use them exclusively; 44% use them in conjunction with another equity vehicle. |
|
Performance Awards |
47% of REITs use performance-based shares. Approximately 3% of REITs use them exclusively while 44% utilize them in conjunction with other vehicles. |
The combination of the components of total compensation has stayed relatively stable in 2011, and is outlined in the chart below:
|
POSITION |
LONG-TERM |
CASH BONUS |
BASE SALARY |
|
CEO |
52% (up from 50% in 2010) |
25% (down from 27% in 2010) |
21% (up from 20% in 2010) |
|
COO |
47% (up from 45%) |
25% (down from 28%) |
25% (up from 24%) |
|
CFO |
45% (up from 44%) |
25% (no change) |
27% (up from 25%) |
|
Other |
39% (up from 38%) |
28% (up from 27%) |
30% (down from 32%) |
As one would expect, those REITs operating in stronger sectors realized more significant increases in executive compensation. In the U.S., outperforming sectors include Multi-Family and Industrial. The table below outlines the summary data for the following U.S. sectors:
Diversified
Office
Retail
Industrial
Lodging
Multi-Family
Healthcare
|
POSITION |
CHANGE IN BASE SALARY |
CHANGE IN CASH BONUS |
CHANEGE IN LONG TERM PLAN |
CHANGE - TOTAL |
|
CEO |
+3% |
+13% |
0 |
+7% |
|
|
0 |
+4% |
0 |
0 |
|
|
+1% |
+1% |
+1% |
+8% |
|
|
0 |
0 |
+30% |
+12% |
|
|
+3% |
-5% |
+2% |
+5% |
|
|
+1% |
+19% |
+28% |
+20% |
|
|
+3% |
0 |
+26% |
+21% |
|
|
|
|
|
|
|
COO |
+3% |
+18% |
+4% |
+11% |
|
|
0 |
+13% |
+2% |
+8% |
|
|
+3% |
+10% |
+15% |
+6% |
|
|
n/a |
n/a |
n/a |
n/a |
|
|
+10% |
-7% |
+16% |
+14% |
|
|
+2% |
+30% |
+29% |
+25% |
|
|
+3% |
+7% |
+7% |
+7% |
|
|
|
|
|
|
|
CFO |
+3% |
+18% |
+4% |
+11% |
|
|
+1% |
+13% |
0 |
+7% |
|
|
+3% |
+12% |
+2% |
+5% |
|
|
+4% |
+11% |
+23% |
+16% |
|
|
+4% |
+1% |
+6% |
+12% |
|
|
+5% |
+24% |
+27% |
+20% |
|
|
+5% |
+6% |
+23% |
+16% |
|
|
|
|
|
|
|
Other |
+3% |
+4% |
0 |
+11% |
|
|
+2% |
+6% |
0 |
+2% |
|
|
+3% |
+8% |
+9% |
+10% |
|
|
+3% |
+33% |
+23% |
+18% |
|
|
+3% |
-10% |
+5% |
+3% |
|
|
+2% |
+21% |
+17% |
+17% |
|
|
+6% |
+11% |
+3% |
+11% |
While the information presented above is U.S.-centric, we hope that you found some of the general trends informative.