The free market is hard at work in the executive suites of publicly traded real estate companies. According to a recent survey, long-term incentives account for more than 40 percent of total compensation for senior executives at these firms.

The executive compensation survey, conducted for the National Association of Real Estate Investment Trusts (NAREIT) by Deloitte & Touche, indicated that REITs and publicly traded real estate companies are now using such long-term incentive programs much more frequently than two years ago.

And as any good management consultant will tell you, incentive compensation plans are key to driving corporate performance and hanging onto top-quality hired guns.

"With REITs and publicly traded real estate companies looking for ways to retain experienced management and drive the performance they need to succeed in today’s marketplace, long-term incentive plans are a way to link total compensation to long-term performance," said Michael Grupe, NAREIT vice president and director of research.

To conduct the survey, Deloitte & Touche and NAREIT send out questionnaires, which were completed by 62 REITs and real estate companies in the United States and Canada. The average total market capitalization of the responding companies was $1.8 billion.

"REITs and publicly traded real estate companies must compete effectively with other public companies to both attract and retain experienced professionals," said Martin Somelofske, national practice leader of performance management and compensation consulting at Deloitte & Touche. "Companies must also look carefully at their compensation programs to be certain they are in alignment with business strategies, as well as shareholder interests."

The survey pointed out several other positive trends in executive compensation. Some of these findings, however, are marred when the thought "shouldn’t everybody have these?" crosses your mind. For example, approximately 90 percent of responding companies said they have some type of formal salary administration program in place for senior executives or intend to implement one within the next two years. This begs the question, who in the heck are the other 10 percent?

Almost 80 percent of respondents said they have, or plan to provide, a performance management process. While these processes are difficult to put into place and time-consuming to construct, are there really 2 out of 10 companies that don’t see them as necessary?

Three-quarters of the companies said they offer, or plan to offer, short-term incentives, bonuses or recognition programs. The other 25 percent are sure to see mass exodus next year when Santa doesn’t show up with a Christmas check.

And 85 percent said that funds from operations (FFO) per share was a "critical performance measure" for CEOs and senior management. Don’t you want to know who the remaining 15 percent are, so that you can sell those stocks pretty darn fast?

Also, I’m sure you have noticed that the companies were allowed to get away with "plan to provide" and "plan to add" so they could save face. No self-respecting manager would want to admit that they had not gotten around to creating a formal salary administration program for top executives.

For the participating companies that can truthfully say they have these measures in place, many kudos. I wish I knew who you were - I would access my Ameritrade account immediately. After all, a well-incented CEO and his fairly compensated senior staff are a great deal more likely to take care of and grow my investment.

For the companies that were not ashamed to admit that a lack of short-term bonuses will lead to an abundance of short-term employees, prepare to meet your maker. Real estate is a people business. People who are not valued will go somewhere they are treated with respect and - God and the market willing - cash.

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Published: February 2, 2000

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