ISS Consultant Outlines Steps for REITs to Win Say-on-Pay Vote
04/22/2014 | by Sarah Borchersen-Keto

John Roe, head of advisory for Institutional Shareholder Services Corporate Services, joined REIT.com for a video interview during REITWise 2014: NAREIT’s Law, Accounting and Finance Conference held in Boca Raton, Fla.

Roe was asked about the steps he would recommend a REIT take in order to win “say-on-pay” approval for executive compensation.

The first step, according to Roe, is to create a “compelling” compensation program right from the start. He recommended that a large portion of an executive’s pay package be performance-contingent.  It should also be set up to create long-term alignment between the executive and the shareholders, he said.

“We see companies making mistakes in this area time and time again over things like guaranteed multi-year bonuses, or excessive perquisites, or benchmarking practices that are simply out of line with market norms,” Roe said.

A second step concerns the drafting of a company’s Compensation Discussion & Analysis (CD&A), Roe explained. He stressed that companies should focus primarily on explaining the reasons behind “why” their decision on executive pay was made in a particular way.

Roe was also asked whether new guidance from ISS is changing the state of play.

“ISS this year has made an important shift in how it’s looking at some REITs. Before, internally and externally managed REITs were all lumped together when it came to say-on-pay evaluations. That really disadvantaged internally managed REITs, as externally managed REITs often didn’t have any highly paid executives at all,” he said.

This year, ISS is excluding externally managed REITs from the mainstream group of REITs, “and I think that’s generating a lot of tailwind for internally managed REITs to help improve where they are standing in terms of the quantitative testing that ISS does, and ultimately resulting in a better say-on-pay vote recommendation,” Roe said.

Roe also spoke about what he considers to be the most critical governance-related issue for publicly traded REITs. He emphasized that a perception problem exists in that REITs are not being recognized for the advances they have made in corporate governance. Oftentimes, Roe said, REITs are actually ahead of their non-REIT peers in governance areas such as board declassification.

“Managing that perception issue of governance practices that may have been in place 10 or 15 years ago but aren’t there today, seems to be the biggest challenge,” he said.