Christenson

By Matthew Bechard and Anatole Pevnev

Executive compensation and benefits continue to be top-of-mind corporate governance-issues for industry professionals and shareholders alike. To that end, FPL Associates joins NAREIT in conducting the annual NAREIT Compensation Survey. The survey addresses questions regarding base salary, cash bonus and long-term incentive structures, including performance metrics as well as total compensation.

Banoff

The results of the 2007 survey will be released this summer. However, Kevin Christenson, senior managing director and CEO of FPL Associates, and Jeremy Banoff, senior director of FPL Associates, joined The REIT Report* to discuss the most important compensation issues in the REIT industry today. The REIT Report is a regular podcast hosted by Portfolio's Associate Publisher Matthew Bechard and REITCafe.com founder Anatole Pevnev. Here is an excerpt of the discussion.

Matthew Bechard: What are some of the major compensation trends in the REIT and real estate investment industry today?

Jeremy Banoff: In the REIT industry, we've seen total compensation increase significantly in the last several years. Breaking that down, base salary tends to develop at a faster clip than the rest of corporate America. Cash bonuses have been strong and driven by funds from operations (FFO) numbers that have increased over the past year. The REIT market has done very well in terms of performance, and that has translated into some great pay packages.

Anatole Pevnev: There have been a lot of developments in the past year with compensation accounting practices and disclosure requirements. How are these going to impact the way senior executives, board members and company shareholders view the executive compensation process?

Kevin Christenson: In addition to base salary, cash bonuses and equity awards, the SEC rules call for proper disclosure and evaluation of all compensation and benefits.

Shareholders are fed up with scandals in this arena and are focusing more on pay-for-performance. Additionally, independent board members are working harder and diving into details to prepare for meetings. Because of liability concerns, you will see them sitting on fewer boards.

2007 NAREIT Compensation Survey NAREIT is once again partnering with FPL Associates to conduct the 2007 NAREIT Compensation Survey. The survey and result-ing report aim to capture current trends and up-to-date information on compensation programs and practices within the real estate industry. The survey will collect data on four major components of compensation: base salary, total annual cash compensation, long-term incentive value, and total remuneration. It will also gather information on board compensation and employment agreements. 'This year’s annual installment follows the extremely successful 2006 NAREIT Compensation and Benefits Survey, which collected data from 95 companies covering over 80 positions," says Kevin Christenson, senior managing director and CEO of FPL Associates. "Participating publicly traded companies represented approximately 70 percent of the total capitalization in the publicly traded, U.S. commercial real estate industry, making this one of the most comprehensive surveys of its kind to date." The survey will be released this summer. Please visit www.nareit.com for updates on its availability.

Pevnev: There have been a number of compensation-related scandals recently, particularly tied to exit packages and back dating of options. How can REITs avoid falling into these same traps?

Christenson: In recent years, real estate has performed strongly and the industry has received very high marks for corporate governance. That said, market downturns and pressure from Wall Street can push companies to do things that they ordinarily wouldn't do.

For example, the sub-prime mortgage industry is under pressure and is going to have winners and losers. The winners will be companies with good internal controls, which are better at underwriting the associated risks. The losers will be companies that assume too much risk, don't have good internal controls and are not well managed.

It's key for REITs to avoid succumbing to pressure and to continue on the path of good corporate governance, good corporate controls, moderate risk-taking and implementation by great management teams.

Pevnev: Over the last few years, privatization of REITs has been growing. How does going from public to private impact the overall compensation opportunity?

Christenson: When going from public to private, the last thing you want to do is reduce an executive's overall compensation because the private industry is growing right now and recruiting for talent is crucial.

Bechard: In this competitive real estate talent marketplace, would you say that companies are putting more emphasis on developing executives from within?

Banoff: Companies are doing a much better job of looking within, but at the same time, there is a new focus on recruitment. If you're looking to attract top talent into your organization, you are going to pay heavy premiums.

It is costly to recruit now, especially for the executive and senior level range. Even lower down in the organization, you are going to have to pay some up-front sign-on bonuses and provide equity grants.

Bechard: Is there a focus on recruiting upper-level executives from other industries or are companies looking for someone with a well-developed real estate background?

Banoff: Companies mostly want executives with a real estate background so that companies do not have to provide extensive training. However, there are certain situations where you do look outside the industry. For example, a CFO or human resources executive will not need a real estate background.

Pevnev: Are there certain positions that are in higher demand than others?

Christenson: Some executive positions, such as those for CFO, development, and portfolio and asset management, are in particularly high demand. Also, entry-level analyst associates, who are your "next generation," are hard to find.

Bechard: As the REIT industry matures, succession planning is becoming more relevant. Are companies creating effective leadership succession programs?

Banoff: More companies are beginning to focus on this issue. This isn't something that you can do efficiently and effectively overnight. You want to look three to five years out, and boards are now putting more pressure on CEOs to groom a successor.