REITs Executive Compensation Guide

Severance Policies Given the recent uptick in M&A activity, many REITs have been reviewing their severance polices to ensure that severance provisions are in line with the market and that key employees are properly compensated in the event of a Change in Control (“ CiC ”). Severance payments in connection with a CiC are generally slightly higher than those outside of a CiC (e.g., from 2x without to 3x in connection with a CiC); this serves to protect executives in the case of a change in ownership or control. This step-up in payment often impacts other components of severance, including benefits continuation, which is becoming more prevalent for REIT executives in both CiC and non-CiC scenarios. Many companies are moving away from employment agreements and are instead favoring simplified severance and CiC agreements. Additionally, many companies are establishing these severance agreements as more broad-based policies when reviewing executive severance provisions. Regardless of where severance provisions are housed, there are certain provisions that are considered poor governance, which can lead to negative voting recommendations from proxy advisory firms and are highly scrutinized by most institutional investors. These include: ■ Cash severance payments in excess of three times the executive’s then-current base salary plus cash bonus (target, average or most recent cash bonus; cannot include equity). ■ Single-trigger (i.e., benefits are triggers upon the occurrence of a CiC, with no other factors necessary) and modified single-trigger provision allowing the executive the right to walk away and voluntarily terminate during a specified period following a CiC (often after 13 months) and receive CiC benefits (see “Single-Trigger Change-in-Control Provisions” below).

■ If equity awards vest automatically upon a CiC (i.e., the board of directors or compensation committee lacks discretion to determine the treatment of unvested equity awards upon a CiC), ISS believes that a disconnect in pay for performance may result and that executives may be incentivized to pursue transactions that are not in the interests of stockholders.

280G excise tax gross-ups.

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It is important for companies to understand their 280G exposure to mitigate any excise tax penalties that could arise in the event of a CiC.

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Generally, if these problematic provisions are part of grandfathered agreements, it is not considered an overriding factor that would result in a negative voting recommendation by proxy advisory firms. However, REITs should keep these provisions in mind when renewing any agreements or executing new agreements. Even in cases where material terms are not amended in a renewed employment or severance agreement, proxy advisory firms will no longer consider these terms to be grandfathered.

REITs should not have single-trigger cash severance payments under any circumstance, but it is not uncommon to see single-trigger treatment for the acceleration of equity awards, which is not considered best practice but is common market practice.

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19 | 2023 Guide to REIT Executive Compensation