Another takeaway from the report: REIT executive pay increased despite negative Total Shareholder Returns (TSR) in 2018, a signal that reportable pay was more correlated to annual earnings and operational performance and less on one-year TSR, Gaynor adds.

Highlighting this trend, the median cash bonus payout as a percent of target was 121% of target in 2018 versus 123% in 2017. Less than 6% of REITs used TSR as a cash bonus metric in 2018, compared to more than 20% of REITs in 2014, as REITs continue to link annual payouts to REIT fundamentals and not to short-term swings in stock prices.

At the same time, performance goals continues to be one of the main say-on-pay pressure points, with proxy advisory firm ISS citing this as an area of concern at 68% of self-managed REITs that received an ‘Against’ voting recommendation. Other key areas of concern from ISS include outsized equity awards, overly discretionary incentive plans and problematic severance-related provisions.

“A pay-for-performance misalignment under the ISS model continues to be the main precursor to negative voting recommendations,” Larry Portal, a senior managing director in the Executive Compensation & Corporate Governance practice, says. “Worth noting, 89% of self-managed REITs that received an ‘Against’ vote were cited for pay-for-performance misalignment, while two REITs with a ‘Low’ concern triggered negative recommendations based on severance provisions.”

Other findings from the report:

• The pay mix that comprises REIT executive compensation has remained consistent in recent years with LTIs (long-term incentives) comprising the largest portion, followed by cash bonuses.
• The use of 100% formulaic plans continues to decrease as REIT boards look to balance quantitative metrics with other operational and strategic priorities that may not be quantifiable, such as the execution of the strategic plan and the achievement of individual performance goals. In 2018, 60% (versus 58% in 2017) of annual cash incentive plans were formulaic with a subjective component, while only 17% (compared to 20% in 2017) of these plans were entirely formulaic.
• Based on CEOs’ annual cash incentive plans, most REITs used between three and five bonus metrics, as companies aimed to balance motivating excessive risk-taking by using too few metrics and focusing management on critical business objectives.
• The majority (77%) of REITs that granted performance equity used relative TSR as a metric. However, non-TSR metrics grew more prevalent in 2018, with approximately 43% of REITs using at least one financial/operational metric in their LTI program (up from 37% in 2017). Industrial, office and mortgage REITs were significant users of non-TSR metrics.
• In 2019, 19 self-managed REITs received “Against” say-on-pay voting recommendations, up from 15 in 2018, but only two REITs failed say-on-pay, down from three in 2018, in spite of increased pressure from ISS.
• The median CEO pay ratio for all REITs was 57:1 in 2018, as compared to 55:1 in 2017. However, REIT industry CEO pay ratio continued to vary greatly by sector last year, with 3:1 for the office sector and 477:1 for the retail sector.
• 39% of REITs increased board compensation in 2018, similar to the percentage increase from the previous year. However, the median increase was 10%, down from 13% in the previous year. The pay mix continued to be 39% cash and 61% equity, at the median. Equity was almost always delivered in full-value shares awarded under a fixed-dollar value formula, with immediate and one-year vesting periods being the most prevalent.

The upshot? FTI expects that ISS will begin to issue adverse voting recommendations for ‘excessive’ non-employee director pay beginning in the 2020 proxy season. It also expects board compensation disclosure to look more like a simplified version of executive compensation reporting in response to growing board compensation scrutiny, according to Gaynor.

“The pressure faced by REIT boards will continue to increase as institutional investors find their own voice and no longer only rely on the voting recommendations of proxy advisors,” Portal says.

He suggests that compensation committees review each element of compensation to ensure that the views of all stakeholders have been appropriately considered and that this process is effectively communicated to investors. “For the compensation program to be effective in the face of so many competing priorities, many REITs will need to implement more innovative compensation solutions to achieve desired results, Gaynor adds.