REITs Executive Compensation Guide

Goal Setting for Performance Metrics Appropriate goal-setting is a key factor in supporting pay for performance; accordingly, performance metric goals should be reviewed regularly to ensure continued alignment of strategic and operational objectives, which may include ESG-oriented objectives. This is particularly true for cash bonus program goals, which are assessed on an annual basis. Cash bonus goals should be set at levels that are challenging, yet attainable, with metrics based on a REIT’s strategic plan. Goals for cash bonus programs are generally based on the REIT’s outlook for the year, using guidance or budgeted amounts, although increasingly companies are incorporating ESG goals and associated metrics (and, in particular, measurable metrics) into their annual cash bonus programs. With respect to above target goals, amounts should be set meaningfully higher than budgeted amounts for maximum payouts to ensure that executives are not being unduly rewarded for merely ordinary performance.

The combination of both internal perspective and external factors in setting appropriate goals represents the most balanced approach. As scrutiny surrounding goal-setting increases, it is becoming more common for REITs to disclose their goal-setting methodology (e.g., the financial metrics based on reported guidance or internal budget) in the annual proxy statement. This is especially true for REITs that have lowered their performance goals relative to the performance goals established for the prior year. Lowering performance goals for the cash bonus program may be appropriate given forecasted performance, but care must be taken to show stockholders and proxy advisory firms the rationale behind the goals. Goal-setting for LTI programs can be more challenging because REITs and compensation committees must balance incentivizing long-term performance, while setting goals that will properly reward executives for that performance. If goals are set at levels that are excessively challenging, executives may not be properly incentivized, but if goals are set too low, executives may be rewarded for merely average performance.

2023 Guide to REIT Executive Compensation | 16