The 2008 pay day will be a mixed bag for multifamily REIT CEOs. Compared to recent years, compensation packages for these boardroom head honchos will trend between “mixed” and “more somber” for the remainder of 2008, according to Chicago-based FPL Advisory Group's mid-year Global Business Update, an annual report highlighting key trends shaping the real estate industry. Much of the drop will be due to a decline in REIT stock prices—halfway through the year, multifamily apartment REIT stock prices were down by an average of 10 percent, according to data released June 30 by the National Association of Real Estate Investment Trusts (NAREIT). That follows a 25.2 percent fall in 2007. The hit to CEOs? Despite operating fundamentals at historic highs, the most lucrative portions of their compensation packages (those tied to stock performance) will be down.

“The volatility in the industry will definitely be reflected in overall compensation package values for 2008,” says FPL managing director Jeremy Banoff. “We are in a period of very solid multifamily real estate fundamentals, but at the same time REIT stock prices have dropped substantially.” As a result, REIT compensation packages are likely to show sizable net decreases this year, particularly when it comes to long-term incentives tied to stocks and options. Salaries and bonuses, on the other hand, will remain steady as the bulk of multifamily public operators see positive increases in funds from operations (FFO) and same-store net operating income (NOI).

Interestingly enough, there have been some changes in the rules around reporting executive pay packages. New proxy reporting rules established late in 2006 by the Securities Exchange Commission (SEC) took full effect last year and are bringing greater clarity on just how the boys in the corner offices are pulling their checks. One of these regulations requires a company to provide “clear, concise, and understandable disclosure of all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers and directors by any person for all services, rendered in all capacities,” according to SEC guidance on executive compensation.

The 2007 compensation packages for multifamily REIT CEOs reflect a shift towards pay for performance on Wall Street.
The 2007 compensation packages for multifamily REIT CEOs reflect a shift towards pay for performance on Wall Street.

As a result, “public companies—including multifamily REITs—are now breaking out executive compensation by cash, cash equivalents, and long-term stock compensation in a very transparent manner,” says Jason Lail, senior real estate research analyst at Charlottesville, Va.-based SNL Financial. “It gives the investor/observer a much better idea about how much of total compensation is based on performance of the company versus base salary.” (For more information on CEO compensation packages, see “REIT Pay Stub” on page 12.)

Terry Considine at AIMCO exemplifies the absolute model, receiving no salary, no bonus, and zero cash perks. Tied exclusively to long-term stock and option compensation, Considine's total 2007 compensation of $2.6 million was nearly halved compared to his 2006 take of $4.9 million. Still, total compensation for the AIMCO chief falls around the median, both within the multifamily sector and the broader REIT arena, where the average CEO raked in $2.78 million in 2007, down more than 10 percent from 2006, according to FPL.

“Comp packages are definitely moving closer to a pay-for-performance [model] in the REIT industry. There are some big pay packages in REIT land, but they are the anomaly,” says Ric Campo, CEO of Houston-based Camden Property Trust, who took in $1.4 million in 2007. “I think REITs and multifamily REITs in particular are getting the message that when you have a bad year, you don't get top pay. That's just a fact.”

Banoff agrees, citing the multifamily industry as an example for other REIT segments. “It's nice to see that in a time where investors lost money on negative total return, CEO comp declined for each of these individuals,” he says. “That's not always the case.” That means that the new transparency requirements—and the push to positive operational performance—will likely lead to interesting discussions among REIT compensation committees trying to determine the appropriate level of incentive and bonus pay for the coming years, Banoff says. “Those meetings used to be a bit of a rubber stamp: Did you meet the targets or not? [In light of the disparity between stock price and performance], I think you'll begin to see firms this year incorporate more relative comparisons to industry peers—and to FFO and rent and revenue increases. The whole discussion of CEO compensation is going to become a longer event.”

Source: SNL Financial