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
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