REITs Executive Compensation Guide

awarded incentive compensation, the issuer must maintain documentation to support its reasonable estimate of the effects of the restatement and provide the documentation to the securities exchange on which its securities are listed. Notably, the clawback rules provide boards of directors very limited latitude in pursuing recovery of erroneously awarded incentive compensation, providing only narrow exceptions to the extent that recovery is impracticable. For purposes of the clawback rule, the SEC defined “incentive-based compensation” to mean any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any “financial reporting measure.” The expansive approach adopted by the SEC will, therefore, capture both equity-based awards as well as base salaries and cash bonuses to the extent that increases in base salaries and the award of cash bonuses are based in whole or in part on a financial reporting measure. Under the SEC’s rule, “financial reporting measures” means measures that are determined and presented in accordance with the accounting principles used in preparing the issuer’s financial statements, and any measures derived wholly or in part from such measures. Moreover, “financial reporting measures” includes non-GAAP financial measures as well other measures, metrics and ratios that are not non-GAAP measures, such as same-store measures. In addition, “financial reporting measures” includes stock price and total shareholder return. The clawback rules do not, however, apply to executive compensation that is awarded or vests based solely on continued employment or non-financial reporting measures.

Under the new compensation clawback rule, if an issuer is required to prepare an accounting restatement, the issuer must recover any incentive compensation that was erroneously awarded during the three-year period preceding the accounting restatement. For purposes of triggering recovery under an issuer’s clawback policy, the new rule captures any accounting restatement, regardless of whether the accounting restatement corrects an error in previously issued financial statements that is material to the previously issued financial statements (a so-called “big R” restatement), or the accounting restatement corrects an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (a so-called “little r” restatement). Importantly, the rule does not limit the scope of recovery to those current or former executive officers who may be “at fault” for accounting errors that led to a restatement, nor to those who were directly responsible for the preparation of the financial statements. Furthermore, the issuer’s clawback policy only will require recovery of incentive-based compensation received by a person (i) after beginning service as an executive officer and (ii) if that person served as an executive officer at any time during the recovery period. Recovery of compensation received while an individual was serving in a non-executive capacity prior to becoming an executive officer will not be required. In the event of a restatement, the clawback policy must provide for recovery of the amount by which the incentive compensation actually received by the executive officer exceeded the amount that the executive officer would have been awarded based on the restated financial measures, computed on a pre-tax basis. Given the myriad types of incentive-compensation vehicles used by issuers, the SEC’s rules are principles-based, and determination of the amount of recovery will require – particularly in circumstances in which a direct mathematical calculation of the effects of a restatement is not feasible – the exercise of reasonable judgment in estimating the effects of an accounting restatement. To the extent an issuer must estimate the effects of a restatement on previously

5 | 2023 Guide to REIT Executive Compensation