The Advisors' Blog

FW Cook recently reviewed incentive plan practices among the Top 100 publicly traded REITs. They found that REITs “generally align with broader-market conventions in overall plan structure, but differ meaningfully in the selection, weighting and application of performance measures.” Here are a few of their key findings:

FFO remained the defining annual incentive measure, used by 73% of REITs, while 58% used other profit measures such as earnings before interest, taxes, depreciation and amortization (EBITDA), net operating income (NOI), earnings per share (EPS) or funds available for distribution (FAD).

Individual performance was also prevalent (61%), and approximately half of REITs incorporated strategic or operational measures.

Non-financial measures represented an average 26% of annual incentive weighting among REITs versus 19% in general industry.

Moreover, REITs overwhelmingly incorporated individual and strategic performance as separately weighted metrics rather than as modifiers, in contrast to the more modifier-oriented approach prevalent in general industry

Stock options were rare (2%), compared with 38% prevalence among the Top 250 general industry companies—a notable distinction given the importance of dividends to REIT shareholder returns.

Ninety-four percent of REITs used rTSR, reflecting the sector’s emphasis on measuring shareholder returns relative to market or industry conditions. Unlike general industry, where rTSR was more frequently used as a modifier to internal performance measures, 90% of REITs using rTSR employed it as a stand-alone metric. Fifty-eight percent compared performance against an index, 30% used a custom performance peer group, and 12% used both. Percentile ranking was the predominant measurement methodology, although approximately one-quarter used an rTSR differential approach that measured the magnitude of outperformance or underperformance versus a benchmark.

– Meredith Ervine