2024 Guide to REIT Executive Compensation
Contents Introduction 1 Key Components of Executive Compensation for REITs 3 Base salary 3 Incentive Compensation 3 Cash 3 Equity 3 Perquisites 5 Compensation Trends in the REIT Industry 6 Pay Mix 6 Formulaic Bonuses 7 Long-Term Incentive Design 8 Performance Metrics for REITs 10 Goal Setting for Performance Metrics 12 Severance Policies 13 Executive Compensation Design Process 14 Overview 14 Role of Various Parties 14 Board of Directors 14 Compensation Committee 15 Independent Compensation Consultants 18 Outside Law Firm 19 Company Management 20 Stock Exchange and SEC Independence Rules 21 Rule 10C-1 of the Exchange Act 21 NYSE 22 Nasdaq 22 Key Terms of Equity Plans and Award Agreements 23 Overview 23 Equity Plans 23 Award Agreements 24 Types of Awards 24 Restricted Stock 24 Restricted Stock Units 24 Options and Stock Appreciation Rights 24 LTIP Units 25 Prevalence of Award Type in the REIT Industry 25 I | 2024 Guide to REIT Executive Compensation
Advantages and Disadvantages of Commonly Used Equity Awards in the REIT Industry 26 Vesting, Acceleration and CiC 27 Section 162(m) 28 Section 409A 30 Section 83(b) Elections 32 Problematic Equity Plan Provisions 34 Evergreen Plans 34 Excessive Share Reservations 34 Liberal Share Recycling 34 Single-Trigger CiC Provisions 34 Governance Matters and Proxy Advisory Firms 35 Proxy Advisory Firms 35 Pay-For-Performance Alignment 35 Transparency 35 Board Compensation 36 Incentive Compensation Clawback Rules 36 Hedging and Pledging Policies 37 Equity Ownership Guidelines 37 SEC Filings 38 Form S-8 38 Item 5.02(e) of Form 8-K 39 Proxy Statements 41 Determination of Named Executive Officers 41 Disclosure Requirements 41 Pay-Versus-Performance 47 Stockholder Approval of Equity Plans and Approval of Material Amendments to Equity Plans 54 Pay Ratio Disclosure 56 Stockholder Advisory Votes on Executive Compensation 57 Section 16 63 General 63 Disclosure Requirements 63 Section 16(b) and Rule 16b-3 64 Contributors 65 2024 Guide to REIT Executive Compensation | II
Introduction Executive compensation matters for public real estate investment trusts (“REITs”) require a delicate balance of designing an effective program that incentivizes and properly rewards key employees while being mindful of external pressures. Non-binding Say-onPay proposals required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”) have resulted in an increase in the influence of investors (particularly institutional investors) and proxy advisory firms, whose everchanging preferences and priorities at times may diverge from what is necessary or advisable from the board’s and/or management’s perspective to achieve the company’s strategic objectives. Given the context in which REIT executive compensation is scrutinized, it is important for boards of directors, compensation committee members and senior management teams of REITs to understand their respective roles in establishing, implementing and disclosing compensation policies and to keep apprised of trends and developments relating to REIT executive compensation. Executive compensation that is viewed by external stakeholders as excessive or inconsistent with recent financial performance—or that fails to address non-financial initiatives—can have significant ramifications for public REITs and their management teams, and often leads to negative voting results for Say-on-Pay proposals and the election of directors tasked with the oversight of compensation matters. In fact, sustained investor dissatisfaction relating to executive compensation can encourage activist stockholders—a prospect that has taken on new significance in light of the U.S. Securities and Exchange Commission (the “SEC”)’s universal proxy rules, which make it easier for activists to engage in proxy contests1 —and could result in litigation. Furthermore, as a result of the SEC’s adoption of expansive new executive payversus-performance disclosure rules in August 2022, public REITs likely are subject to even greater scrutiny to the extent that the new disclosures highlight misalignment between executive compensation and the REIT’s financial performance. One size certainly does not fit all when it comes to executive compensation. Compensation programs should be tailored to each REIT’s particular circumstances, competitive positioning and strategic objectives, which may have changed in recent years as a result of economic, demographic and other factors that have caused declines in the value of certain asset classes and corresponding declines in share prices, and the increased likelihood of acquisition overtures while share prices are depressed. In addition, due to expectations of a decreasing interest rate environment, the likelihood of increased M&A activity within the REIT space is expected to significantly increase compared to the past several years. As a result, many REITs have taken steps to adjust their compensation policies to address these new challenges and market shifts, including, among others, implementing new or enhanced severance programs to retain key personnel within and beyond the C-suite. 1 See https://www.mofo.com/resources/insights/211214-us-sec-adopts-universal-proxy-card-rules 1 | 2024 Guide to REIT Executive Compensation
Because matters relating to executive compensation can be challenging under even the best circumstances, REITs and their boards of directors must be thoughtful when designing and implementing executive compensation programs that create appropriate incentives for executives to achieve both short- and long-term financial and other objectives. When done correctly, a REIT’s executive compensation program can be a critical tool in recruiting, motivating and retaining executive talent and achieving corporate objectives, while at the same time encouraging behavior that generates long-term value for stockholders. In this 2024 Guide to REIT Executive Compensation (this “Guide”), we attempt to demystify REIT executive compensation by addressing a variety of topics, including, among others: ■ the various components of REIT executive compensation; ■ key compensation trends in the REIT industry; ■ the respective roles of the board of directors, the compensation committee, management and outside advisors; ■ governance matters relating to executive compensation, including best practices and provisions viewed as problematic by investors and proxy advisory firms; ■ increasing expectations for accountability and transparency relating to executive compensation; and ■ SEC reporting and other obligations relating to executive compensation, including the SEC’s rules relating to pay-versus-performance disclosures. We note that the topic of executive compensation is too complex and too nuanced to address comprehensively in this Guide. Rather, this Guide is intended to introduce and clarify executive compensation principles so that boards of directors, compensation committee members and senior management teams understand key concepts. This Guide also does not constitute securities law, accounting, tax or other advice, and readers are encouraged to seek appropriate counsel from their advisors before making executive compensation decisions. 2024 Guide to REIT Executive Compensation | 2
Key Components of Executive Compensation for REITs Base Salary Base salary provides a predictable stream of fixed-cash compensation designed to recognize an executive’s role, scope of responsibility and experience. Base salaries for executives are generally not adjusted regularly according to performance, but performance may be taken into account for future adjustments. Incentive Compensation Cash Cash incentive compensation provides variable compensation that is designed to reward executives, generally for annual performance relating to key operational and financial measures. It is more common for short-term or annual incentive compensation for REIT executives to be settled in cash, but some companies may provide for awards to be settled in equity (either at the REIT’s or the executive’s election). Cash incentive compensation may be determined based on a formula, but, at most companies, at least some portion of cash incentive compensation takes into account subjective performance assessments, such as individual performance and the achievement of non-financial objectives. Equity Equity incentive compensation provides variable compensation that is designed to promote retention, drive long-term value creation and align the interests of management with those of stockholders by subjecting executives to the same market fluctuations as stockholders. Due to the retentive properties of long-term compensation, it is generally awarded as equity. These awards are most commonly granted as “full-value” equity awards, which can be in the form of restricted stock, restricted stock units (“RSUs”) or units of limited partnership interest designated as LTIP units. Typically, the vesting terms associated with full-value equity awards may include the following (with most REITs using a combination of award types): ■ Time-vesting shares or units vest on a future date contingent upon remaining an employee through a specified date; and/or ■ Performance-vesting shares or units are earned on a future date contingent upon the satisfaction of pre determined performance goals PRACTICE POINT: When settling incentive compensation in equity, special attention must be paid to deferral election rules under Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “Code”), if the arrangement will result in the deferral of income recognition. For more information, see “Section 409A.” 3 | 2024 Guide to REIT Executive Compensation
Only a limited number of REITs use stock options or stock appreciation rights (“SARs”), with the utilization of these awards steadily decreasing due to a number of factors, including (i) the fact that dividends or dividend equivalents generally are not paid on these awards (and dividends represent a meaningful component of REIT value creation) and (ii) Institutional Shareholder Service (“ISS”) generally does not consider these type of equity awards to be performance-based unless vesting depends on the attainment of specified performance goals or they are granted significantly out-of-the-money. PRACTICE POINT: Accounting treatment for equity awards varies depending on the award type and performance factors. In general, time-based awards receive fixed equity accounting treatment and are valued at fair market value on the date of grant (with no subsequent adjustments except for forfeitures). Depending on the type of metrics that are used for performance-based equity, these awards may have fixed equity accounting treatment if the award is subject to a market based vesting condition (such as total stockholder return) or variable equity accounting treatment if the award is subject to company financial or operational performance conditions (fair value is set on the date of grant, and the number of shares expected to be earned is subject to quarterly adjustment). The accounting treatment should be considered when REITs evaluate any plan design changes. As an added factor, some awards (including time-based awards) are subject to additional accounting discounts for certain features, such as illiquidity discounts for post-vest holding periods or book-up risk. See “Key Terms of Equity Plans and Award Agreements” below. 0 40 20 60 80 100 Time-Vested Shares Type of Equity Award Backward-Looking Performance Shares Forward-Looking Performance Shares Stock Options/SARs 92% 7% 7% 6% 89% 2023 2022 88% 88% 6% 2024 Guide to REIT Executive Compensation | 4
Perquisites Executive perquisites, or “perks,” are fringe benefits awarded to executives that are neither broad-based nor directly related to the performance of the executive’s duties. These can include executive benefit plans, aircraft or automobile allowances, club memberships, personal benefits and relocation benefits. Generally speaking, an item is considered a perquisite for disclosure purposes if: ■ the benefit is not directly and integrally related to the performance of the executive’s duties (i.e., the executive needs the benefit to perform his, her or their job); and ■ it confers a direct or indirect benefit that is personal to the executive, unless the benefit is generally available on a non-discriminatory basis to all employees. The SEC takes a very narrow view of whether a benefit is directly and integrally related to job performance, and a valid business purpose or convenience to the company does not affect the characterization of a benefit as a perquisite. For instance, on July 2, 2018, the SEC issued a cease-and-desist order finding that Dow Chemical Company’s disclosure of executive perquisites in its annual proxy statements understated the value of perquisites and omitted disclosure of perquisites received by its CEO because the company applied an incorrect “business purpose” test for determining perquisites. In light of enhanced scrutiny of perquisite disclosures, REITs should ensure that employees responsible for executive compensation disclosures understand the SEC’s disclosure standards for perquisites—a task that is made difficult by the fact that much of the SEC’s guidance relating to perquisite disclosures is nuanced and challenging to apply in practice. PRACTICE POINT: Under ISS guidelines, excessive or extraordinary perquisites are a problematic practice likely to result in an adverse voting recommendation. This includes excessive amounts of perquisite compensation, perquisites for former or retired executives, and extraordinary relocation benefits. 5 | 2024 Guide to REIT Executive Compensation
Compensation Trends In The REIT Industry Pay Mix Over the past several years, the pay mix between base salary, cash incentive compensation, equity incentive compensation and perquisites in the REIT space has remained relatively stable, with fixed compensation representing approximately 25% of total target compensation (slightly lower for the CEO) and variable compensation representing the largest component of total target compensation. Perquisites represent a relatively small portion of the total pay mix—generally less than 5% of total compensation for most REITs. Perqs LTI Cash Bonus Salary Target Compensation by Component 17% 21% 60% 3% CEO 25% 24% 48% 3% NEOs 2024 Guide to REIT Executive Compensation | 6
PRACTICE POINT: For REITs that lower the bonus plan performance targets, it is particularly important to disclose the goal-setting rationale and the reason for the adjustment, as there has been an increased focus on goal setting from proxy advisor firms, particularly for REITs with declining profitability. ISS guidelines state that if such adjustments materially increase incentive payouts, companies should provide clear disclosure in the proxy explaining the nature of the adjustment, it’s impact (dollar or percentage) on payouts, and the board’s rationale. While not often followed, ISS also recommends, as a best practice, disclosure in the proxy of line-item reconciliation to GAAP results, when possible, and goes on to note that the absence of these disclosures would be viewed negatively, as would adjustments that appear to insulate executives from performance failures—particularly for companies that exhibit quantitative pay for performance misalignment. It is worth noting that the rigor of performance goals (for both cash and equity incentives) was a contributing factor for a significant number of the self managed REITs that received a negative Say-on-Pay vote recommendation in 2024. See “Stockholder Advisory Votes on Executive Compensation—Say-on-Pay.” Formulaic Bonuses Formulaic bonuses continue to be the most commonly utilized plan design for REITs, with approximately 90% of REITs utilizing a formulaic cash bonus program. However, the use of entirely formulaic bonuses has been steadily decreasing since 2016, as REIT boards look to balance quantitative metrics with operational and strategic priorities that may not be quantifiable, including certain metrics focused on environmental, social, and governance (“ESG”) matters. Bonus Plan Structure Entirely Discretionary Entirely Formulaic Formulaic with a Subjective Component 0 20 40 60 80 2022 2023 9% 9% 73% 11% 11% 76% 7 | 2024 Guide to REIT Executive Compensation
Long-Term Incentive Design Following the adoption of Say-on-Pay, the use of performance-based equity in long-term incentive (“LTI”) programs soared. Total shareholder return (“TSR”) and relative TSR (i.e., total shareholder returns relative to the total shareholder return of the REIT’s peer group) have overwhelmingly been favored as the primary performance metric for REIT LTI programs, which has led to additional scrutiny on programs using this metric. For instance, ISS continues to criticize programs based on relative TSR when payouts target only median performance (i.e., awards pay out at “target” levels for TSR at the 50th percentile relative to the peer comparator group) and are not capped during periods of negative absolute TSR. Despite this scrutiny, most REITs continue to use relative TSR as the primary performance metric for LTI programs, but, in response to ISS and stockholder criticism, many REITs are adopting performance share modifiers that serve as a secondary performance metric. Modifiers can limit, multiply, reduce or set minimum payout levels after the primary or initial payout calculation. The most commonly used modifier is absolute TSR, and over 50% of modifiers limit payouts if absolute TSR does not meet a certain threshold, typically 0%. Consider the following example: a REIT’s relative TSR performance was at the top of its peer group, but absolute TSR over the same period was −2%. In this scenario, performance shares based on relative TSR would be earned at the maximum payout level (e.g., 200% of the “target” shares earned), but, if the REIT had an absolute TSR modifier that capped payouts at the target payout level for negative absolute TSR performance, the actual payout would be 100% of the target level. Additionally, many REITs use more than one performance metric (e.g., relative TSR and absolute TSR) as part of their LTI programs. LTI Performance Metric Prevalence 0 20 40 60 80 Relative TSR 21% Absolute TSR Occupancy/ Leasing FFO Leverage NOI Discretionary 70% 19% 6% 6% 6% 2% 2024 Guide to REIT Executive Compensation | 8
PRACTICE POINT: If a modifier is used, the proxy statement should provide a clear disclosure of the modifier, achieved performance level, impact on payouts and the limitations that a modifier metric has on payouts (i.e., “may increase or decrease the total bonus payout by up to 15%”). Use of modifier metrics that allow for a significant increase in a payout or that contribute to an overemphasis on committee discretion, or failure to disclose the amount by which a payout can be increased by the modifier, may be viewed negatively by proxy advisory firms and could increase the likelihood of an adverse vote recommendation. ” Not all REITs have remained complacent in their LTI design, with more REITs conducting extensive reviews of their performance share plans as nonTSR metrics have gained traction. In particular, many REITs have been reviewing existing plans to ensure that the relationship between pay and performance is properly correlated. Scrutiny of LTI program design from investors and proxy advisory firms likely will become more pronounced as a result of the SEC’s pay-versus-performance disclosure rules (see “Pay-Versus-Performance”), which expressly require disclosure of the relationship between executive compensation and financial performance, including TSR. Accordingly, we have seen—and we expect to continue to see—more innovation in LTI design in the past several years, including time-based equity awards with added performance conditions to provide an upside for the achievement of operational, strategic and/or financial goals. LTI Modifier Prevalence 0 20 40 60 80 Absolute TSR Relative TSR Absolute & Relative TSR Other Operational Metrics 71.70% 15.09% 7.55% 5.66% 9 | 2024 Guide to REIT Executive Compensation
Performance Metrics for REITs Incentive compensation is often based on an assessment of both qualitative and quantitative performance. Performance metrics relating to the quantitative assessment of performance vary based on the performance horizon, with short-term incentive compensation generally favoring operational metrics and LTI compensation generally favoring metrics relating to total stockholder return. Qualitative and/or subjective metrics typically are added to incorporate strategic initiatives or individual performance objectives into the incentive compensation program, particularly in the context of incentive programs that utilize ESG metrics (e.g., metrics tied to company culture, employee wellness, and diversity and inclusion). A majority of REITs utilize between three and five metrics in the cash bonus program in order to balance the simplicity of using too few metrics (which may motivate excessive risk-taking) and focusing management on key business objectives, although 13% of REITs use seven or more metrics. The most common performance metrics for REITs include same-property NOI, leverage FFO based metrics2 (including Core FFO and Adjusted FFO) and profitability metrics (e.g., EBITDA and EBITDAre). REITs should assess cash bonus metrics each year to ensure that those metrics continue to align with the company’s short-term objectives and strategic plan. 2 FFO, or Funds from Operations, is a non-GAAP financial measure of a REIT’s performance. For more information about FFO, see our publication entitled “Frequently Asked Questions about Non-GAAP Measures for REITs.” Number of Cash Bonus Metrics 0 5 10 15 20 25 5% 13% 11% 22% 22% 13% 13% 1 2 3 4 5 6 7+ Number of Metrics 2024 Guide to REIT Executive Compensation | 10
As noted above, for performance-based equity compensation, the most common performance metric is relative TSR. REITs generally utilize an asset class-based peer group to assess their relative performance. FFO, NOI and ESG metrics continue to be the most prevalent non-TSR metrics, as REITs try to balance maximizing both stockholder value and operational success, which may not always be captured in the REIT’s stock price. Most Prevalent Cash Bonus Metrics Core/Normalized FFO ESG (Individual) Same-Property NOI Leverage AFFO Cost Controls ESG (Corporate) Revenue EBITDA/Net Income FFO Occupancy Acquisitions Leasing 33% 32% 31% 20% 25% 20% 19% 19% 19% 18% 16% 14% 35% 0% 5% 10% 15% 20% 25% 30% 35% 40% 11 | 2024 Guide to REIT Executive Compensation
PRACTICE POINT: While predicting future performance, particularly over multi-year performance periods, can be difficult, and unexpected events can necessitate revisiting pre established metrics, adjusting metrics, particularly when it results in material increases in payouts, is likely to be heavily scrutinized. Under ISS guidelines, bonus or incentive plan payouts can be evidence of a problematic pay practice if they are not tied to performance, made despite failure to achieve pre-established performance criteria or are based on performance metrics that are changed, canceled or replaced during the performance period without adequate explanation of the action and the link to performance. Goal Setting for Performance Metrics Appropriate goal-setting is a key factor in supporting pay for performance; accordingly, performance metric goals should be reviewed regularly to ensure continued alignment of strategic and operational objectives, which may include ESG-oriented objectives. This is particularly true for cash bonus program goals, which are assessed on an annual basis. Cash bonus goals should be set at levels that are challenging, yet attainable, with metrics based on a REIT’s strategic plan. Goals for cash bonus programs are generally based on the REIT’s outlook for the year, using guidance or budgeted amounts, although increasingly companies are incorporating ESG goals and associated metrics (and, in particular, measurable metrics) into their annual cash bonus programs. With respect to abovetarget goals, amounts should be set meaningfully higher than budgeted amounts for maximum payouts to ensure that executives are not being unduly rewarded for merely ordinary performance. The combination of both internal perspective and external factors in setting appropriate goals represents the most balanced approach. As scrutiny surrounding goal setting increases, it is becoming more common for REITs to disclose their goal-setting methodology (e.g., the financial metrics based on reported guidance or internal budget) in the annual proxy statement. This is especially true for REITs that have lowered their performance goals relative to the performance goals established for the prior year. Lowering performance goals for the cash bonus program may be appropriate given forecasted performance, but care must be taken to show stockholders and proxy advisory firms the rationale behind the goals. Goal setting for LTI programs can be more challenging because REITs and compensation committees must balance incentivizing long-term performance while setting goals that will properly reward executives for that performance. If goals are set at levels that are excessively challenging, executives may not be properly incentivized, but if goals are set too low, executives may be rewarded for merely average performance. 2024 Guide to REIT Executive Compensation | 12
PRACTICE POINT: While executive employment agreements often specify a base salary and a target annual incentive opportunity expressed as a percentage of base salary, prospective hires will also sometimes ask for the employment agreement to guarantee future long-term incentive award opportunities. While there is a logical basis for such requests, they are not common and are generally not considered a best practice. Such guarantees can be viewed negatively by proxy advisory firms. ISS, for example, notes that guaranteeing any executive pay elements (outside of salary and standard benefits) is not considered a best practice, and they include in their list of potentially problematic pay practices multi-year guaranteed awards that are not at risk due to rigorous performance conditions. With this in mind, companies should be cautious about acceding to requests to guarantee future long-term incentive award opportunities, particularly if the awards will not be subject to rigorous performance conditions. Severance Policies Given the expected recent uptick in M&A activity and depressed values in certain asset classes that have made certain REITs vulnerable to activist pressure and unsolicited acquisition overtures, many REITs have been reviewing their severance polices to ensure that severance provisions are in line with the market and that key employees are properly compensated in the event of a change in control (“CiC”). Severance payments are typically a multiple base salary or base salary plus annual cash bonus. Severance payments in connection with a CiC are generally slightly higher than those outside of a CiC (e.g., from 2x without a CiC to 3x in connection with a CiC); this serves to protect executives in the case of a change in ownership or control. This step-up in payment often impacts other components of severance, including benefits continuation, which is becoming more prevalent for REIT executives in both CiC and nonCiC scenarios. Many companies are moving away from employment agreements and are instead favoring simplified severance and CiC agreements. Additionally, many companies are establishing these severance plans as more broad-based policies that cover key personnel and/or other employees in addition to senior executives. Regardless of where severance provisions are housed, there are certain provisions that are considered poor governance, which can lead to negative voting recommendations from proxy advisory firms and are highly scrutinized by most institutional investors. These include: ■ Cash severance payments in excess of three times the executive’s then-current base salary plus cash bonus (target, average or most recent cash bonus; cannot include equity). ■ Single-trigger (i.e., benefits are triggered upon the occurrence of a CiC, with no other factors necessary) and modified single-trigger provision allowing the executive the right to walk away and voluntarily terminate during a specified period following a CiC for any reason and receive CiC benefits (see “Single-Trigger CiC Provisions” below). ■ REITs should not have single-trigger cash severance payments under any circumstance, but it is common to see single-trigger treatment for the acceleration of equity awards, which is not considered best practice but is common market practice. ■ If equity awards vest automatically upon a CiC (i.e., the board of directors or compensation committee lacks discretion to determine the treatment of unvested equity awards upon a CiC), ISS believes that a disconnect in pay for performance may result and that executives may be incentivized to pursue transactions that are not in the interests of stockholders. ■ The inclusion of gross-ups for 280G parachute payment excise taxes in employment or severance agreements, which ISS heavily disfavors. Generally, if these problematic provisions are part of grandfathered agreements, it is not considered an overriding factor that would result in an adverse voting recommendation by proxy advisory firms. However, REITs should keep these provisions in mind when renewing any agreements or executing new agreements. Even in cases where material terms are not amended in a renewed employment or severance agreement, proxy advisory firms will no longer consider these terms to be grandfathered and, as a result, will generally recommend against the current Say-on-Pay proposal. 13 | 2024 Guide to REIT Executive Compensation
Executive Compensation Design Process Overview Designing an executive compensation program is a dynamic and iterative process that requires a team of experts with a wide array of functional expertise, particularly given that a properly designed executive compensation program requires a balance of financial, human resources, legal, strategic, sustainability and governance considerations. Accordingly, it is important to understand the role of the board of directors, management and outside advisors, along with SEC and stock exchange requirements, to ensure that the process both meets legal standards and represents an effective process that supports the implementation of a well-designed program. Role of Various Parties Board of Directors A public REIT’s board of directors is responsible for all director and officer compensation, including compensation plans, policies and programs. To develop and maintain a sustainable compensation structure, the board of directors delegates its authority to establish and administer compensation matters to an independent compensation committee. The board of directors, in consultation with the nominating and corporate governance committee, as applicable, is responsible for appointing and, if necessary or appropriate, removing compensation committee members, and is responsible for affirmatively determining the independence of compensation committee members. The additional independence requirements for compensation committee members is discussed below under “Stock Exchange and SEC Independence Rules.” The board of directors is also responsible for ensuring that the compensation committee is provided the funding and resources need to perform its responsibilities. As described below under “Compensation Committee,” the compensation committee typically has the exclusive authority under its charter to approve CEO compensation and the authority to approve and/or recommend to the full board of directors the compensation for the company’s other named executive officers (“NEOs”). See “Proxy Statements— Determination of Named Executive Officers” for more information on determining a company’s NEOs. Then, if applicable, upon recommendation from the compensation committee, the company’s full board of directors will then vote on whether to approve the recommendations. When voting to approve director and executive compensation, board members should keep the statutory duties owed to the company’s stockholders under applicable state law at the forefront of their decision-making. The board of directors must also ensure that their compensation is designed to attract, retain and incentivize talent best suited for their organization. Executive compensation matters are increasingly important to institutional investors and proxy advisory firms, and a company’s compensation practices can draw positive or negative feedback from the investor community. In light of the scrutiny placed on compensation matters, the board of directors and compensation committee should make all compensation decisions only after thoughtful deliberations and processes. Boards of directors and compensation committees should also consider engaging consultants and independent legal counsel to assist in the design and documentation of compensation policies in order to demonstrate the integrity of the decision making process. 2024 Guide to REIT Executive Compensation | 14
Compensation Committee The compensation committee plays a critical role in the design, administration and oversight of a public REIT’s executive compensation plans and arrangements. As a general matter, the compensation committee is responsible for: ■ developing and implementing the REIT’s compensation philosophy, including determining the various components of executive compensation and establishing appropriate incentives to align compensation with financial and other performance; ■ approving and administering any equity incentive plans (as well as the related award agreements) in which the REIT’s executive officers are eligible to participate (see “Key Terms of Equity Plans and Award Agreements” below); ■ approving, or recommending that the board of directors approve, grants of equity awards to officers; ■ determining whether, and the degree to which, the REIT’s executive officers have achieved the performance goals applicable to their respective incentive compensation arrangements; ■ if permissible under the terms of the applicable plans, exercising upward or downward discretion to adjust the amount of incentive compensation paid or granted to executive officers based on actual performance; ■ engaging, retaining and compensating any independent compensation consultants, legal counsel or other advisors to assist the compensation committee in satisfying its responsibilities; and ■ to the extent applicable, reviewing and discussing the REIT’s Compensation Discussion and Analysis (“CD&A”) disclosure in its annual proxy statement and producing the Compensation Committee Report required under SEC rules to be included in the REIT’s annual proxy statement. See “Compensation Discussion and Analysis” and “Compensation Committee Report” below. In designing a REIT’s executive compensation program, the compensation committee should consider a variety of factors, including, among others: ■ the REIT’s short- and long-term business needs and objectives; ■ the mix of compensation that will appropriately incentivize executive officers to achieve the REIT’s short- and long-term business needs and objectives (financial or otherwise); ■ the individual and company-wide performance measures that will appropriately encourage activities that are in the best interests of the REIT and its stockholders, and that align with the REIT’s business needs and objectives; ■ how the REIT’s compensation programs promote the creation of long-term value for stockholders; ■ the levels of compensation necessary to recruit and retain qualified executive officers, including the levels of compensation paid to executive officers at similarly situated REITs; ■ the tax, accounting and public reporting implications of executive compensationrelated decisions, including the proxy statement disclosures that may result from the compensation committee’s decisions; ■ how the REIT’s executive compensation programs, including the individual components of executive compensation, may create incentives for executive officers to take significant risks that are detrimental to the REIT, as well as measures that may be implemented to mitigate those risks3; and ■ how stockholders and other stakeholders will perceive the REIT’s executive compensation programs, including the relationship between executive compensation and the REIT’s financial performance and the presence (or absence) of factors linking ESG initiatives to executive compensation, and any potential adverse impact on future Say on Pay votes (see “Say-on-Pay Proposals”) and the election of directors. 3 Item 402(s) of Regulation S-K requires a company to discuss its compensation policies and practices as they relate to risk management practices and risk-taking incentives. See “Compensation Discussion and Analysis” below. 15 | 2024 Guide to REIT Executive Compensation
Although the list of factors enumerated is instructive for compensation committees, it is by no means an exclusive list of factors, and compensation committees should also consider other factors unique to their company’s particular circumstances. For instance, the compensation committee at a smaller REIT that is focused on growth and achieving scale may consider factors that will incentivize management to make accretive acquisitions, while the compensation committee at a mature REIT may consider factors that will incentivize management to focus on organic growth opportunities and portfolio management. In designing and administering the REIT’s executive compensation program, the compensation committee should consult with appropriate employees at the company to ensure that it has access to information necessary to make informed executive compensation-related decisions. Under the Maryland General Corporation Law (the “MGCL”), directors may rely on information, opinions, reports or financial statements prepared by an officer or employee of the company. Accordingly, the compensation committee should consider whether, and the extent to which, it should consult with, or seek information from, employees serving in the REIT’s legal, financial reporting, accounting, human resources and sustainability functions. 2024 Guide to REIT Executive Compensation | 16
Stock Exchange Requirements for Compensation Committees As an initial matter, the New York Stock Exchange (“NYSE”) and the Nasdaq Stock Market (“Nasdaq”) both maintain listing rules mandating the minimum role and responsibilities of compensation committees. First and foremost, all members of a listed REIT’s compensation committee must be independent, subject to limited exceptions. In addition, the NYSE’s listed company manual and Nasdaq’s listing rules set forth various corporate governance standards, including standards specifically applicable to the compensation committee’s composition, responsibilities and authority. NYSE Compensation Committee Requirements The NYSE’s listed company manual4 requires that the board of directors of a company listed on the NYSE affirmatively determine that each member of the compensation committee is independent5 (see “Stock Exchange and SEC Independence Rules—NYSE” below) and that every NYSE-listed company maintain a written charter that addresses the following minimum responsibilities of the REIT’s compensation committee with respect to executive compensation: ■ reviewing and approving corporate goals and objectives for the REIT’s CEO and evaluating the CEO’s performance in light of those goals and objectives; ■ either as a committee or together with the other independent directors, determining and approving the CEO’s compensation;6 ■ making recommendations to the board of directors with respect to compensation of executive officers other than the CEO; ■ making recommendations with respect to incentive compensation and equity-based plans that are subject to approval by the board of directors; ■ preparing the Compensation Committee Report to the extent required to be included in the REIT’s annual proxy statement (see “Compensation Committee Report” below); and ■ appointing, compensating and overseeing the work of any independent compensation consultant, independent legal counsel or other advisors that the compensation committee deems necessary or appropriate. Nasdaq Compensation Committee Requirements Nasdaq’s listing standards7 require that the board of directors of a company listed on Nasdaq affirmatively determines that each member of the compensation committee is independent, subject to limited exceptions (see “Stock Exchange and SEC Independence Rules—Nasdaq” below), and that every Nasdaq-listed company maintain a written charter that addresses the following: ■ the scope of the compensation committee’s responsibilities and how it carries out those responsibilities, including structure, process and membership requirements; ■ that the compensation committee is responsible for determining, or recommending that the board of directors determines, the compensation of the CEO and all other executive officers of the company; ■ that the CEO may not be present during deliberations or voting with respect to his, her or their compensation; ■ that the compensation committee has the authority, in its sole discretion, to retain or obtain the advice of a compensation consultant, legal counsel or other adviser, and that the company must provide appropriate funding to compensate any compensation consultant, legal counsel or other adviser; ■ that the compensation committee must be directly responsible for the appointment, compensation and oversight of the work of consultants or advisers retained by the compensation committee; and ■ that prior to engaging consultants or advisers, the compensation committee must consider a variety of factors relating to the independence of the consultants or advisers. 4 See Sections 303.01, 303.02 and 303A.05 of the NYSE Listed Company Manual. 5 Subject to certain exceptions for “controlled companies.” 6 In determining the LTI component of CEO compensation, the NYSE suggests that compensation committees consider (1) the company’s performance and relative stockholder return, (2) the value of similar incentive awards to CEOs at comparable companies, and (3) the awards given to the CEO in past years. 7 See Rule 5605(d) and IM-5605-6 of the Nasdaq Listing Rules. 17 | 2024 Guide to REIT Executive Compensation
Independent Compensation Consultants Compensation committees or boards of directors often engage an independent compensation consultant to advise on compensation-related matters, including the following: ■ providing competitive benchmarking information for executive management and non employee director compensation; ■ providing guidance on equity incentive plan design, including plan document review and assistance with plan approval; ■ designing and implementing short-term and longterm incentive plans to ensure proper alignment of incentives; ■ assessing accounting and tax implications of short-term and long-term incentive plan design; ■ reviewing award agreements and forecasting and/or confirming payments relating to incentive compensation payable under the REIT’s executive compensation plans and policies; ■ providing guidance on the terms and best governance practice for employment agreements, severance agreements or similar arrangements between the REIT and its executive officers; ■ reviewing and drafting, or assisting in drafting, the REIT’s CD&A and tabular disclosures, including calculations for the purpose of payversus-performance and potential severance payment disclosures; and ■ providing guidance on institutional investor and proxy advisor policies. REITs may have an internal human resources department that is tasked with handling broad based compensation-related matters, but executive compensation matters often require outside expertise. Compensation consultants can bring a breadth and depth of knowledge on executive compensationrelated matters to assist compensation committees in efficiently and thoughtfully designing and assessing executive compensation programs. Although compensation committees are not required to engage a compensation consultant that is “independent,” they must take into consideration six independence factors when selecting a consultant (see “Stock Exchange and SEC Independence Rules—Nasdaq” and “Stock Exchange and SEC Independence Rules—NYSE” below). Companies are required to disclose if compensation consultants are engaged for purposes other than consulting on broad based compensation matters that are generally applicable to all salaried employees. Additionally, if fees for any additional services, such as benefits administration, exceeded $120,000, companies must disclose (i) aggregate fees paid for compensationrelated items or any additional services, (ii) whether the decision to engage a compensation consultant was made or recommended by management and (iii) whether the compensation committee or the board of directors approved the other services provided. 2024 Guide to REIT Executive Compensation | 18
Outside Law Firm REITs often engage outside legal counsel to address a variety of matters relating to executive compensation. For instance, it is common for outside legal counsel to handle the following compensation-related matters for REITs: ■ drafting the REIT’s equity incentive plans and policies, including deferred compensation plans, non-equity incentive compensation plans, clawback policies and similar plans or policies; ■ drafting the forms of award agreements relating to incentive compensation payable under the REIT’s executive compensation plans and policies; ■ drafting and/or negotiating employment agreements, severance agreements or similar arrangements between the REIT and its executive officers; ■ drafting, or assisting the REIT in drafting, the REIT’s executive compensation disclosures for its annual proxy statement, including the CD&A and tabular disclosures (see “Proxy Statements— Compensation Discussion and Analysis” and “Proxy Statements—Tabular Compensation Disclosure” below); ■ drafting, or assisting the REIT in drafting, any executive compensation-related proposals to be included in the REIT’s proxy statement, including proposals seeking the approval of new or amended equity plans (to the extent required under stock exchange listing rules) and proposals related to “Say-on-Pay,” “Say-onFrequency” and “Say-on-Golden Parachutes” (see “Stockholder Approval of Equity Plans” and “Stockholder Advisory Votes on Executive Compensation” below); ■ assessing the tax implications of the REIT’s compensation plans and policies, including the tax implications of different forms of equity awards and tax withholding obligations; ■ drafting the REIT’s registration statement on Form S-8 relating to the registration of offers and sales of securities under the REIT’s equity incentive plan and drafting the plan prospectus required under Form S-8 (see “Form S-8” below); and ■ drafting or reviewing drafts of board of director and compensation committee resolutions and minutes relating to compensationrelated matters. REITs that have an internal legal department or other employees with expertise in executive compensation matters, including securities law and tax law expertise, may address many of the foregoing matters themselves, rather than engaging outside legal counsel to handle those matters. However, even in those instances where internal legal counsel takes the lead on many compensation-related matters, it is still common for outside legal counsel to be consulted, particularly with respect to complicated tax matters, the nuances of the SEC’s disclosure rules relating to executive compensation and “best practices” in corporate governance relating to compensation matters. Each REIT’s circumstances are unique and will dictate whether, and the extent to which, outside legal counsel should be engaged to address matters relating to executive compensation. Outside legal counsel also may be engaged directly by the REIT’s compensation committee to the extent that the compensation committee determines that it is advisable to have its own counsel to address compensation-related matters. As discussed in the section entitled “Stock Exchange Requirements for Compensation Committees” above, both the NYSE and Nasdaq require listed companies to permit the compensation committee to engage its own counsel and to provide appropriate funding for the payment of reasonable compensation to independent legal counsel. A compensation committee may determine that it is advisable to engage its own legal counsel for a variety of reasons, including the desire to demonstrate the compensation committee’s independence from management and, by extension, the company’s existing outside legal counsel, who may have real or perceived conflicts of interest due to their desire to maintain good relationships with members of senior management. 19 | 2024 Guide to REIT Executive Compensation
Company Management While it is important that executive compensation, particularly with respect to the CEO, is analyzed and discussed independent of significant management influence, it would be ineffective and impracticable to entirely exclude management participation. Indeed, management has the best insights into the company’s strategy and factors impacting the organization, and accordingly, management’s input is imperative to designing an effective compensation program. While the roles of executives vary from company to company, it is critical that the process is fully transparent and that compensation for the CEO is always discussed in an executive session outside of the presence, and without the participation, of the CEO. The most common roles for management in the executive compensation process include: ■ management often provides input related to the company’s most comparable competitors as part of the peer group selection process; ■ the CEO should provide input into the performance of the other NEOs and often provides recommendations for any discretionary compensation components for this group of individuals; ■ the finance department (including the CFO) often provides budgeting and forecasting information to assist in the establishment of performance goals for the cash bonus and performance-based equity programs; ■ members of any ESG, sustainability or similar committee may provide input on non financial metrics that are designed to support the company’s ESG initiatives; and ■ individuals in the human resources and/or legal departments often facilitate the overall process and serve as the liaison between all parties. 2024 Guide to REIT Executive Compensation | 20
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