Despiterumblings ofshareholder discontent over executive compensation at some prominent REITs,average pay increases for CEOs in the space were relatively muted in 2015.
Accordingto an FTI Consulting study of the 125 largest REITs by year-end 2015 enterprisevalue — including mortgage REITs — median total compensation for executiveofficers whose pay is disclosed in companies' proxy statements rose by just 3%for the year. By contrast, pay for the same executives has averaged an 8%yearly increase since 2010, the firm said.
ForCEOs in the group, total compensation rose by 0.8% year over year in 2015, FTIfound. Meanwhile, 42% of named executives received a pay decrease. The drop-offin 2015 largely reflects REITs' muted returns for the year, FTI said: the MSCIUS REIT Index returnedjust 2.52% in 2015, compared to 30.38% in 2014.
Companyboards are keenly aware that institutional investors, and proxy advisory firms suchas Institutional Shareholder Services and Glass Lewis, monitor executivecompensation trends in relation to stock performance, Katie Gaynor, a managingdirector at FTI, said in an interview.
"Peopleare very sensitive to that relationship, so in years when your stock priceisn't doing well, it's really hard to get buy-in from boards of directors tohave meaningful increases, because they know that it can drastically increaseyour probability of having a negative ISS report," Gaynor said, addingthat such a report can put a company in danger of losing a nonbinding say-on-payvote.
REITsreceiving less than 50% shareholder support for their executive pay plans in2015 votes included General GrowthProperties Inc., Senior Housing Properties Trust, andHatteras FinancialCorp., a mortgage REIT. At SL Green Realty Corp., the company's pay packagenarrowly gained shareholder approval in a nonbinding vote after ISS recommendeda vote against it.
Intotal, among FTI's sample group, ISS recommended votes against executive pay at12 self-managed REITs, and only two of the companies — General Growth andConsolidated-Tomoka — went on to lose their votes.
Bycontrast, externally managed REITs, including Senior Housing Properties andHatteras, have faced greater scrutiny on executive pay from both ISS andinvestors, Gaynor said. The adviser recommended votes against executive pay atroughly two-thirds of externally managed REITs that held say-on-pay votes inFTI's sample group.
Whileexternally managed REITs have largely escaped ISS scrutiny in the past by notdisclosing many details of their top executives' pay, she said, ISS has taken aharder line more recently, pushing for disclosures indicating, among otherthings, how much of the REITs' management fees go toward executive pay.
Investors,too, appeared to view pay at externally managed REITs more harshly. While theaverage support level for say-on-pay packages at internally managed companiesin FTI's sample group was 93%, pay packages at externally managed companies inthe same group received only about 70% support, Gaynor said.
Accordingto SNL Financial data, total CEO compensation at equity REITs with marketcapitalizations over $2 billion fell in 2015, driven lower by smaller cashcompensation and stock awards. For equity REITs with market caps less than $2billion, total compensation rose slightly year over year, though cashcompensation was down.
Gaynorsaid the 2015 REIT pay packages reflect several trends among REITs and publiccorporations in general, including a general shift in recent years towardequity awards and away from cash. REITs typically award fewer stock optionsthan companies in other industries, in part because stock options typically donot pay dividends, and companies aim to reward executives for total returns,not just share-price appreciation, she said.
Finally,Gaynor said, companies are relying more on performance-based awards, comparedto a decade earlier when time-based awards were more common.
SNL Financial is an offeringof S&P Global Market Intelligence.