Governance Matters and Proxy Advisory Firms Proxy Advisory Firms Proxy advisory firms are organizations that specialize in providing proxy voting advice for stockholders, particularly institutional investors. They provide data, research and recommendations on proxy proposals submitted for vote at a company’s annual meeting to help institutional investors make voting decisions. Many institutional investors utilize this information and recommendations from proxy advisory firms to vote on matters subject to stockholder approval, although some larger institutional investors rely more heavily on internally formulated governance standards rather than focusing on the information and recommendations of the proxy advisory firms. Accordingly, the recommendations of proxy advisory firms can have a significant bearing on a company’s Say-on-Pay result and the election of directors, and their policies must be taken into consideration on compensation-related matters. The two largest proxy advisory firms are ISS and Glass Lewis, both of which annually publish their voting guidelines and prepare governance scorecards. Pay-for-Performance Alignment The primary assessment made by proxy advisory firms revolves around a company’s payforperformance alignment. In order to assess this alignment, proxy advisory firms benchmark executives’ pay and company performance against their peers across several performance metrics, which include both operational and market-based performance assessments. This payfor-performance assessment is scored by each proxy advisory firm and serves as the basis for their voting recommendations, outside of certain stand-alone problematic pay practices. The most common assessment includes executive pay relative to TSR, generally viewed over a threeyear period, with a particular focus on CEO compensation. See also “Pay-Versus-Performance.” Transparency The adoption of Say-on-Pay has served as a catalyst for the evolution of proxy statements from a mandatory SEC reporting document into an investor relations tool. Institutional investors and proxy advisory firms are continuously increasing their demands for transparency and disclosure preferences, resulting in many public companies spending a substantial amount of time and resources to create state-of-the-art proxy statements. Over the past several years, this has included an increased use in visuals and graphics in various sections of the proxy statement and enhanced disclosure surrounding the rationale behind compensation decisions. Key areas where REITs should consider enhancing disclosure include company performance factors, any individual performance factors considered for incentive awards and the rationale for any compensation changes. The pay-versusperformance disclosure rules adopted by the SEC in 2022 are intended to create greater transparency into the alignment (or lack thereof) between compensation and performance, which may be a catalyst for new and/or enhanced demands and expectations from investors and proxy advisory firms. 35 | 2024 Guide to REIT Executive Compensation
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