REITs Executive Compensation Guide

Long-Term Incentive Design Following the adoption of Say-on-Pay, the use of performance-based equity in long-term incentive (“ LTI ”) programs has soared. TSR and relative TSR (i.e., total shareholder returns relative to the total shareholder return of the REIT’s peer group) have overwhelmingly been favored as the primary performance metric for REIT LTI programs, which has led to additional scrutiny on programs using this metric. For instance, ISS continues to criticize programs based on relative TSR when payouts target only median performance (i.e., awards pay out at target for TSR at the 50th percentile relative to the peer comparator group) and are not capped during periods of negative absolute TSR.

Despite this scrutiny, most REITs continue to utilize relative TSR as the primary performance metric, but, in response to ISS and stockholder criticism, many REITs are adopting performance share modifiers that serve as a secondary performance metric. Modifiers can limit, multiply, reduce or set minimum payout levels after the primary or initial payout calculation. The most commonly used modifier is absolute TSR, and over 50% of modifiers limit payouts if absolute TSR does not meet a certain threshold, typically 0%. Consider the following example: a REIT’s relative TSR performance was at the top of its peer group, but absolute TSR over the same period was -2%. In this scenario, performance shares based on relative TSR would be earned at the maximum payout level (e.g., 200% of the target shares earned), but, if the REIT had an absolute TSR modifier that capped payouts at the target payout level for negative absolute TSR performance, the actual payout would be 100% of the target level. Additionally, many REITs use more than one performance metric as part of their LTI programs.

LTI Performance Metric Prevalence

100

84%

80

60

40

30%

23%

18%

20

3%

0

Discretionary

Relative TSR FFO Absolute TSR Other Operational Metrics

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