REITs Executive Compensation Guide

Spotlight: ESG and Compensation Amid increasing investor prioritization of ESG issues, companies are taking a more holistic approach to corporate strategy that considers stakeholders other than investors (such as employees, tenants, vendors, customers and the communities in which the companies operate) and incorporates enhanced concepts of transparency, accountability, sustainability, and social equity. Companies are learning that the establishment and implementation of a cohesive ESG strategy within the context of the broader business strategy is necessary to remain competitive. Mounting pressure from investors, activists, and proxy advisory firms and a desire to remain competitive tells only part of the story. Some studies have found a positive correlation between a strong ESG profile and a company’s financial performance. As a result, many boards of directors and senior management teams have embraced the implementation of ESG initiatives and accountability by linking — at least to some extent — executive compensation to the successful execution of those initiatives. As a result, the incorporation of one or more ESG metrics into REIT compensation programs has increased in recent years. In 2022, approximately 56% of REITs included an ESG metric in either their short-term or long-term incentive program. ■ Stage of development of ESG strategy The desired effect of incorporating ESG metrics as an incentive plan metric should be to incentivize and measure actual progress toward the company’s ESG initiatives. As such, companies should carefully consider how to effectively incorporate ESG metrics in their compensation programs. vehicle used to incorporate ESG goals. A small minority of REITs include an ESG metric in their long-term programs. As companies continue to formalize their long-term ESG strategies and set longer term ESG targets, it may be more appropriate to incorporate these targets in long-term incentive programs. Short-Term vs. Long-Term Incentive Program Short-term incentive programs are the most common Approaches to incorporate ESG metrics in incentive plans vary based on a variety of factors including: ■ Alignment with current business priorities

No ESG

ESG in STI or LTI

56%

44%

STI

LTI

Both

8%

4%

88%

17 | 2023 Guide to REIT Executive Compensation