documentation to support its reasonable estimate of the effects of the restatement and provide the documentation to the securities exchange on which its securities are listed. Notably, the clawback rules provide boards of directors very limited latitude in pursuing recovery of erroneously awarded incentive compensation, providing only narrow exceptions to the extent that recovery is impracticable. For purposes of the clawback rule, the SEC defined “incentive-based compensation” to mean any compensation that is granted, earned or vested based wholly or in part upon the attainment of any “financial reporting measure.” The expansive approach adopted by the SEC will, therefore, capture both equity-based awards as well as base salaries and cash bonuses to the extent that increases in base salaries and the award of cash bonuses are based in whole or in part on a financial reporting measure. Under the SEC’s rule, “financial reporting measures” means measures that are determined and presented in accordance with the accounting principles used in preparing the issuer’s financial statements, and any measures derived wholly or in part from such measures. Moreover, “financial reporting measures” includes non-GAAP financial measures as well as other measures, metrics and ratios that are not non-GAAP measures, such as same-store measures. In addition, “financial reporting measures” includes stock price and TSR. The clawback rules do not, however, apply to executive compensation that is awarded or vests based solely on continued employment or non-financial reporting measures. Hedging and Pledging Policies Anti-hedging and anti-pledging policies are governance provisions that prohibit executives from hedging or pledging shares of the company’s stock. Anti-hedging policies prohibit executives from entering into short sales or derivative transactions to hedge their exposure to fluctuations in the company’s stock price. Anti-pledging policies prohibit executives from using shares as collateral for a loan or holding company shares in a margin account. Some companies also use partial anti-pledging or antihedging policies that allow executives to pledge or hedge shares with the approval of a board committee. REITs that adopt anti-hedging and anti-pledging policies often extend these policies to directors and non-executive employees. Following the finalization of the hedging disclosure requirements under the Dodd-Frank Act, public companies must disclose any hedging practices or policies in their annual proxy or information statements. Many public companies, including public REITs, already disclose their hedging policies in their proxies, with only three of REITs allowing insiders to engage in hedging transactions with board approval. Governance Policy Prevalence Equity Ownership Guidelines Equity ownership guidelines are adopted by companies to promote ownership of company shares to further align executives’ interests with those of stockholders. Ownership guidelines require executives to maintain a certain level of ownership of the company’s shares at any point in time, usually expressed as a multiple of the executive’s base salary. To reduce the burden of achieving the prescribed ownership levels, companies often provide a grace period (typically five years) during which the executive can accumulate ownership. In addition, companies can also require that executives retain a certain percentage of any equity granted as compensation until the ownership requirements are met. Equity ownership guidelines also frequently apply to a company’s non-employee directors. Companies often allow for unvested time-based restricted shares, common OP Units and/or LTIP units to count toward satisfying ownership guidelines. Equity ownership guidelines are prevalent among REITs, with approximately 89% of REITs having ownership guidelines in place, and almost half of those REITs requiring executives to retain equity awarded to them until the ownership requirements have been met. 0 20 40 60 80 100 Anti-Hedging Policy 93% 58% 26% 4% Anti-Pledging Policy Partial Anti-Pledging Policy Partial Anti-Hedging Policy 37 | 2024 Guide to REIT Executive Compensation
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