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
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