When it comes to compensation, there's pretty good news — and then there's even better news. Base pay is up an average of 5 percent to 9 percent from a year earlier, while bonuses increased on average 16 percent or more, according to a new survey from Specialty Consultants Inc. (SCI) of Pittsburgh. “Hiring is up across the board,” says Paul J. Lewis, managing director of SCI. “We've seen a tremendous expansion in the industry, and that's affected compensation.”
The raises are being implemented against the backdrop of greater scrutiny by compensation committees, especially as they relate to performance. At the same time, these committees are increasingly weaning themselves from awarding stock options as long-term incentives, in favor of new alternatives.
The action in bonuses has been intense. Jim Wright, president of the Bradford Group in Los Angeles says he's seen an average 24 percent boost for executives at the top five levels of REIT organizations. The winners, according to SCI: vice presidents of development, with a 31 percent rise; senior construction managers, at 27 percent and vice presidents of management, at 31 percent.
Not everyone was bonus crazy. Two notable exceptions were David Simon, CEO of Simon Property Group, who gave up his bonus last year, and John Bucksbaum, CEO of General Growth Properties, who did the same. A Simon spokesperson declined to comment, but Bucksbaum who makes just $225,000 in salary, generally forgoes his bonus, since his family owns about 25 percent of the company. “If the company does well, we do well,” he says. “And I feel that's enough.”
Why have bonuses had such a heady ride? For one thing, they give companies a cost-efficient and flexible way to pay high performers. “Shopping center developers and investors are trying to keep fixed overhead down, yet reward employees for their successes,” says Lewis. Another contributing factor has to do with pressure from boards of directors to have a greater percentage of total pay come from bonuses and other incentives. That, in part, is a response to mandates from the Sarbanes-Oxley Act.
But, it also stems from the evolution of the industry. “As REITs mature and get more outside directors, compensation committees are starting to more closely scrutinize pay in relation to performance,” according to Lewis.
In fact, some industry observers say there's been a substantial change in how compensation committees determine incentive pay. “Today, bonus packages are being tied to very specific hurdles,” says Larry Portal, a partner with Schonbraun McCann Group, a consulting and accounting firm in Roseland, N.J. specializing in real estate. “Five years ago, it wasn't uncommon for executives to receive bonuses that were completely subjective.”
Portal points to several unidentified companies that gave their CEOs a maximum compensation of 150 percent of base salary, with 80 percent tied to FFO growth. The other 20 percent would have been set according to more subjective criteria, such as succession planning. During the past five years, Portal says he has also seen an increase in the range of pay offered. Whereas the pay range for a typical top executive might have been in, say, a $1 million to $1.5 million range, today it would be more on the order of $500,000 to $2.5 million. “Companies are more and more willing to pay if performance is behind it. If not, they're going to pay less,” he says.
Then there's the matter of stock options that have traditionally been the main ingredients of long-term compensation. With new rules by the Federal Accounting Standard Board mandating the expensing of options, however, some REITs are abandoning them. “Every single one of the public companies I've dealt with is reducing the use of stock options,” says John Cigna, a partner with Crown Advisors, a Pittsburgh executive search firm.
What's taking their place? Largely, it's restricted stock. Portal says some companies are awarding stock annually, with vesting depending on both the executive's staying with the company for, say, three to seven years, and a financial measurement of performance, usually total return to shareholders. Other companies award stock over a period of several years. In case the stock doesn't increase, even if there's solid financial performance, some companies are putting in a cash component, allowing for the executive to receive cash if the company achieves specific revenue or profit goals
Of course, the 800-pound gorilla is interest rates. With eight hikes in the past year, it's unclear whether more increases are on the horizon. “That would certainly put pressure on borrowing and on consumer spending,” says Wright. “It's a question mark.”
For base pay, the situation over the past year has been decidedly mixed. The biggest increases were at the median level in all categories, with an average rise of 8 percent to 9 percent, according to SCI. The record wasn't quite as good at other levels, however. For the 25th percentile, base rose only 3 percent to 5 percent, while, at the 75th percentile it rose about 5 percent. The bottom line: About 33 percent of executives received an increase of about 9 percent, while 66 percent got about 5 percent, according to SCI.
That's great for those who got that 9 percent, but not so wonderful for the rest. Indeed, not everyone sees the 5 percent increases as entirely welcome.
“It's not a positive thing; it's a negative thing,” says John Charles Morrow, senior associate with John Morrow & Associates, an Irwin, Pa., executive search firm. “It's barely keeping up with inflation.”
What jobs got the best hikes? The top three were vice president of development, with a 14 percent raise, director of site acquisition/approvals, at 14 percent, and vice president, leasing, which received a 16 percent increase. Lewis points to the skyrocketing increase in new development and acquisition activity as the reason for most of that plenty. Take directors of site acquisition/approvals, for example.
With more companies seeking new sites, demand for people with appropriate experience has risen, at the same time that there simply aren't a lot of candidates for the positions. “Six years ago, no one saw this huge need for new retail space,” says Lewis. “The demand for these skills has outstripped the supply.”
What other jobs or skills are in demand? One area is senior managers with expertise in acquisitions, development and construction. The reason: “You can no longer simply buy a property that is undervalued and create a windfall,” says Cigna. “Capital is too readily available and the competition too steep.”
In addition, people with the skills needed to tackle redevelopment in anything from enclosed malls to lifestyle centers are also highly sought after. Base pay increases for executives in redevelopment have been 12 percent to 15 percent and can be expected to continue to be strong.
Why? It's an area that requires an unusual sleight of hand: the ability to visualize and conceptualize a project, together with practical construction experience and a capacity for handling everything from budget adjustments and major unforeseen delays. Other recruiters say that executives with proven ability to sign deals are also hot.
“The people with relationships in the business and knowledge of the industry can really drive the success of the business,” says Craig Rowley, a Dallas-based vice president of the national retail practice at compensation consultant Hay Group.
| BASE SALARY | INCENTIVES | |||||
|---|---|---|---|---|---|---|
| POSITION | 25th Percentile | 50th Percentile | 75th Percentile | 25th Percentile | 50th Percentile | 75th Percentile |
| President/Chief Executive Officer | $199,000 | $268,000 | $412,000 | $62,000 | $95,000 | $162,000 |
| Vice President of Development | 158,000 | 215,000 | 295,000 | 22,000 | 111,000 | 172,000 |
| Director of Development | 114,000 | 127,000 | 153,000 | 18,000 | 46,000 | 66,000 |
| Vice President of Leasing | 172,000 | 226,000 | 279,000 | 68,000 | 142,000 | 192,000 |
| Senior Leasing Executive | 92,000 | 126,000 | 151,000 | 18,000 | 39,000 | 76,000 |
| Vice President of Construction | 150,000 | 177,000 | 225,000 | 36,000 | 66,000 | 126,000 |
| Senior Construction Manager | 95,000 | 112,000 | 149,000 | 17,000 | 28,000 | 53,000 |
| Vice President of Property Management | 122,500 | 165,000 | 225,000 | 21,000 | 34,000 | 61,000 |
| Regional Property/Asset Manager | 81,500 | 110,000 | 140,000 | 9,000 | 18,000 | 27,000 |
| Director of Site Acquisitions/Approvals | 101,000 | 132,000 | 173,000 | 29,000 | 39,000 | 76,000 |
SCI's Practice Leaders for each industry segment included in the survey worked in conjunction with our research department to identify the top 50 percent of firms in each category. A cross-section was then taken to create a representative sample for each sector (to include both public and privately-held firms) and the senior operations and human resource executives were then identified as potential participants.
Questionnaires were delivered via postal mail and e-mail to potential participants. Additionally, a significant number of individuals were interviewed either in person or via telephone. Figures for each position included are based on a minimum of fifty responses.
To supplement employer-reported data, candidates recruited by SCI on searches for positions included in the survey were invited to confidentially participate by providing W-2 & 1099 verification of their compensation. Approximately 6% of all survey data was collected in this manner. The data from questionnaire and interview responses was checked against this verified data set to ensure consistency.
The survey results are not delineated by geographic area; rather, survey responses were adjusted to the ACCRA Cost of Living Index average of 100. For more information on the ACCRA Index and how to calculate the figures for your area, please go to www.accra.org.
The ranges presented in the survey results reflect actual cash compensation packages (base salary and annual incentives), with all figures are rounded to the nearest thousand. The 50th percentile represents the median of all salaries reported for a given position. The ranges listed represent the half of salaries closest to the median figures, roughly equating to the typical market range for each position. The minimum of the range is the 25th percentile (25 percent of salaries reported for a particular position fall below this level); the maximum of the range is the 75th percentile (25 percent of all salaries reported for that position are above this amount).