FTI Consulting Study Finds REIT Compensation Increases 9 Percent as More Shareholders Vote in Support of Say-on-Pay Proposals

Monday, October 19, 2015 - 18:28

FTI Consulting, Inc., the global business advisory firm dedicated to helping organizations protect and enhance their enterprise value, has announced the findings from the firm's 2015 REIT Executive Compensation study, which focused on the pay practices at the largest 125 REITs.

Conducted by the Real Estate and Infrastructure practice of FTI Consulting, the study found that total compensation levels for REIT executives increased by almost 9 percent in 2014, which was above the 2013 increase range of 3 percent to 8 percent and reflected that industry returns were up meaningfully year-over-year. The study also found that board compensation increased by only 2 percent in 2014 compared to 2013 levels, with less than half of REITs providing 2014 board adjustments. Nonetheless, over the past three years, board compensation is up by 23 percent, indicating that companies generally increase board compensation periodically by large amounts.

According to the firm's 2015 REIT Executive Compensation study, the utilization of performance-based equity soared in 2014, with 85 percent of REITs granting such awards last year (a 15 percent jump from 2013) and makes performance-based equity almost as heavily utilized as time-based stock awards for the first time. The use of performance-based equity reflects the preference of investors and ISS and could have helped to drive the positive say-on-pay voting results in the REIT industry, which saw four fewer failed REITs and an overall rise in support to 92.4 percent.

"Over 85 percent of REITs grant performance-based equity, which in large part is driven by the fact that both ISS and investors have a stated preference for such awards and generally want them to comprise at least 50 percent of stock-based compensation," said Larry Portal, senior managing director in the Real Estate & Infrastructure practice at FTI Consulting and head of the Executive Compensation team. "Ever since the majority of REITs have begun allocating a substantial portion of compensation to performance-based equity, we have not seen the large year-over-year adjustments in the stock award values as years past, which is evident by the fact that industry TSR was up 30 percent but the stock values only increased by 9 percent. Instead, compensation plans are now designed so that the value actually realized or earned will reflect the TSR performance of the company. Many times the value ultimately earned under these plans is significantly more than the grant date value reported due to the accounting valuation and leverage often built-into the plans."

"2014 was a phenomenal year for REITs, with the MSCI US REIT Index up 30 percent; this translated into solid increases in compensation for most REIT executives and very positive say-on-pay voting results. Given that investor returns is a key consideration for REIT compensation committees, 2015 may yield much more tempered adjustments with REIT returns being relatively flat year to date," said Portal.