Editor's Note: When Kimco Realty Corp., the nation's largest publicly traded owner of neighborhood shopping centers, decided to tap a new CEO-designate to replace the retiring Milton Cooper, it turned to an industry outsider — David Henry, a 23-year veteran of General Electric and GE Capital Real Estate.
The practice of hiring “outside” talent is a major trend in today's retail real estate market, particularly among larger publicly traded companies. The increasingly institutional nature of the business is creating some unique management challenges, and along with them, the need to hire talented individuals with unique skill sets. This cultural shift also is filtering down the corporate ladder, often directly to the property level where customer service and management issues require new ways of thinking.
Pegging exactly how these changing skillsets and management issues are affecting compensation levels, though, is tricky business. For the past five years, Shopping Center World has partnered with Chicago-based FPL Associates to conduct an authoritative conmpensation survey of retail real estate firms. The following highlights from this year's survey are courtesy FPL director Cimi Silverberg.
We constantly hear that economic recession might curb consumer spending would decrease, affecting retailers nationwide. However, the performance of retailers in 2001 was relatively strong and it flowed through to retail property owners. Total returns for public retail real estate investment trusts (REITs) were strong in 2001, outperforming both an all-equity REIT index and the S&P 500. Whether one attributes this to “recession plays”, such as outlet centers and grocery-anchored neighborhood shopping centers, or simply consumer confidence, retail real estate did well in 2001.
But, will the future be quite as rosy? Several factors contribute to a somewhat pessimistic view. High-profile retail bankruptcies (e.g., Kmart, Montgomery Wards) cause many to question what other retailers are in trouble. Although most analysts and economists predict an end to the recession by late 2002, real estate tends to lag the economy by a year or so, adding to the uncertainty facing these companies. In addition, there is the risk that as the broader market recovers, investors will move out of value plays such as REIT stocks into growth stocks. And, any increase in interest rates could adversely affect the industry.
A key concern to retail real estate companies will be attracting and retaining the talent to lead their organizations through this uncertainty. With increasing industry consolidation and greater scrutiny by investors (especially in the public markets), retail real estate companies are becoming more and more “institutional” and sophisticated. Thus the caliber of management talent required continues to increase, as does the cost to hire them.
What follows are results from our recently completed annual executive compensation survey for the retail real estate industry. Participation in this year's survey included national and large regional retail real estate players. Sixty-two percent of the participating companies are public.
Base salaries
Table I (p. 26) shows 2002 base salary data for 25 of the positions included in the study.
Participants reported base salary increases for 2002 lower than those reported for 2001 (see Table 2, p. 26). But, in a time of salary freezes and lay-offs, the fact that there were any increases at all speaks well for the retail real estate industry.
Base salaries for a particular position vary based on scope of responsibility, size of the organization, experience level of the incumbent and past performance of the executive, among other factors. A company's pay philosophy directly impacts base salary levels, as compensation philosophy should address the definition of the competitive market, the company's desired position within that competitive universe and the importance of salary in the total remuneration mix.
| Base Salary Increases | 2002 | 2001 |
|---|---|---|
| Executive Management | 3.4% | 5.2% |
| Senior Management | 3.7% | 6.9% |
| Middle Management | 4.4% | 6.2% |
| Other Professisonals | 3.8% | 5.8% |
Total annual cash compensation
In the retail real estate sector, performance was strong. In fact, assuming a pay-for-performance system, one would expect compensation levels to increase from last year, given the generally strong performance of the retail real estate sector.
Annual incentive (or bonus) compensation provides companies one mechanism by which to link pay to performance. Usually annual incentive compensation is tied to short-term performance measures established at the beginning of the year to reward the achievement of corporate, business unit and individual goals. More senior positions tend to receive a larger portion of their total remuneration in the form of incentive compensation. As a percentage of salary, the earnings opportunity is higher for more senior positions, and decreases as one moves down the organizational hierarchy.
In addition, more senior positions tend to have a larger percentage of their bonuses tied to corporate performance measures, while more junior positions tend to have a larger portion tied to individual performance measures, in keeping with the philosophy of rewarding employees based on factors they can influence.
Table 3 (opposite) provides summary statistics for several positions, in terms of total annual cash compensation, defined in this case as 2002 base salary plus performance year 2001 annual incentive compensation.
Median total annual cash compensation (defined as the data point at which 50% of the observations are above and 50% of the observations are below) for the chief executive officer and chief operating officer positions increased over last year.
For the CEO, the compensation range seems to have tightened, while for the COO it appears to have widened. Such widening could be a result of the increased importance the COO role is playing in some companies as they grow from more entrepreneurial cultures into larger, institutional organizations, or it may reflect variations in scope and magnitude of responsibilities.
Median compensation for chief financial officers increased, with little change in the range. FPL anticipates that CFO compensation will increase over the next year or so, as financial reports undergo more investor scrutiny and as interaction with the capital markets increases in complexity.
The change in compensation for the head of leasing position is a result of decreased incentive compensation for 2001. Leasing compensation tends to have substantial volatility from year to year, since it is usually highly incentive-based.
The range of total annual compensation for the head of property management position expanded, with a slight increase in the median statistic. The data for the head of acquisitions/dispositions clearly identifies the increasing importance of acquisitions/dispositions function.
Compensation for the head of development position also increased, and the range became even wider than it was last year. Compensation for development and acquisitions/dispositions professionals, like that for leasing professionals, tends to be very transaction-oriented and volatile from year to year.
Over the past few years, development professionals tended to be paid more than acquisitions professionals; however, FPL predicts a reversal in this relationship over the next few years, as acquisitions become a more important revenue driver again.
Total annual compensation for construction positions tends to be more stable, as evidenced by the narrow range of total annual cash compensation and only slight increase in median compensation.
Public vs. private trends
For senior level executives, cash compensation at private companies tends to be lower than cash compensation in public companies. However, private companies often provide a much higher long-term incentive compensation component through direct participation in the value created in real estate assets.
This is especially true for development and acquisitions executives, mainly through incentive programs, and for “C-level” executives (CEO, COO, etc.) by virtue of the usually large ownership positions in their firms.
About 85% of participating companies have a long-term incentive compensation program. Long-term incentive compensation is provided to more employees in public companies than in private companies, where it is typically reserved for only the senior-most executives.
Clearly options and restricted stock are the most popular long-term incentive vehicles for public companies.
Unlike in other public sectors, which use primarily stock options, the REIT industry tends to use restricted stock heavily in its long-term incentive programs. Options simply have not proven to be an effective long-term incentive vehicle for REITs, given that much of shareholder value is provided in the form of dividends.
Future considerations
If pay is truly linked to performance, we would expect compensation levels, especially incentive-based pay, to decrease if retail real estate fares poorly this year. On the other hand, companies are forced to balance their desire to link pay to performance with the need to attract and retain high-quality talent, especially when times get tough.
Logical, organized incentive compensation structures are effective methods to attract and retain key talent and motivate management to achieve company goals. Those companies with well-articulated, understandable compensation programs will have a competitive advantage over those that don't.
Cimi Silverberg is a director of FPL Associates L.P., a subsidiary of FPL Advisory Group, based in Chicago.
Word to the wise
If pay is truly linked to performance, we would expect compensation levels, especially incentive-based pay, to decrease if retail real estate fares poorly this year.