By James Wright

Proxy season brings marketplace exposure to executive compensation decisions. One fundamental goal of compensation governance should be communication: clear presentation of information and the rationale for board/ committee decisions. But does current compensation disclosure achieve this goal?

Although the annual proxy statement is the most comprehensive presentation of compensation information to the marketplace, usually proxies aim at meeting only the minimum SEC requirements, avoid much important information altogether, and "bury" other key information in detailed footnotes. The real message may be lost in format and formality.

So, what do REIT proxies tell investors? Reading one or two provides comparison, but a review of 130 proxy filings offers a window into the information and message presented to shareholders, investors, employees and the financial community. The wide range of proxy content is indicative of the challenges facing boards and management in governing executive compensation.

REITs have made numerous strides in their proxy statements in recent years and they now compare favorably to even the largest companies in other industries. Other proxy improvements include: CEO disclosure appropriately more detailed than other executives; larger REITs providing more detail on all compensation plans and structure; in a few cases, an obvious effort to exceed SEC regulations; committee meeting frequency presented by some REITs; and performance based long-term compensation vehicles, particularly those linked to underlying operating partnership units, reasonably well explained.

However, the proxy review offered up many future opportunities for improving the overall REIT compensation "conversation" with the investment marketplace. Here are a dozen steps that REITs can take (or are in some cases already taking) to improve the dialogue with shareholders.

1. Convince with Clarity:
Clear explanations of how incentive compensation is determined demonstrate command of company performance management process and its rewards. Confidentiality has risk management, but more concise presentation of the essence of the methodology offers opportunity for a more compelling message.

2. Guidance and Control:
Investors are reassured by compensation with limitations or specific policy to guide decisions—e.g., bonus as a percentage of salary, or policy related to market benchmarks. Controls are more prevalent than documented, creating an opportunity to demonstrate management and governance restraint.

3. Pinpoint Performance:
Defining performance criteria—short or long-term, financial or market—delivers the message that objectives are clear. Over emphasis on board/committee discretion, or generic, sweeping broad criteria for incentive compensation appears weak, unstructured and non-operational.

4. Making the "Market":
The weight of the "market competitive" point of reference in board decision rationale warrants proportional additional disclosure—e.g. peer groups, benchmark targets and un-conflicted outside advisor assessments, to build the most effective argument for attracting/ retaining strong leadership.

5. "Why" is More Meaningful:
Investors would rather hear "why" than "how," and generally, proxy presentations lean too much toward what is done, at the expense of why, diluting the context and intent of the presentation.

6. Aggregate Views Simplify:
Bottom-up disclosure emphasizes components rather than the whole—base salary, annual bonus and long-term (equity)—misdirecting investors from important questions of total compensation, and its relationship to performance and competitors. SEC formats aside, important context is derived from a top-down "look" adding potent reinforcement of board/committee actions—e.g. cash/long-term awards relative to total remuneration, or aggregate management incentive payout versus peers or public company value-added benchmarks.

7. Trends Provide Context:
Three years of compensation disclosure offers opportunity to present growth figures, comparisons to performance, and linkage to issues that have/are facing the company. Directing investor focus to compensation over time can clarify governing judgment, and its correlation with performance, offering far more insight than in annual increments.

8. Team Recognition:
Focusing on the CEO and each senior executive position separately can mask important aspects of complementary skills/experience, responsibility, and the success of working together to create value. Team compensation compared to peer companies, and documenting the impact of changes in personnel or executive suite structure will further boost investor confidence.

9. Dynamic Benchmarks:
Leading governance is advancing beyond conventional market comparison, assuring that compensation is also clearly aligned with performance. Contemporary methods now calibrate award/payout versus company size or performance, using relationship metrics to market cap, assets or cash flow, presenting a stronger rationale for decisions.

10. Stand Out:
Statements of compensation philosophy are the guiding framework to investors, instilling confidence in board and committee. Set the tone of pay for performance, leadership development and retention with an articulate, unique and detailed philosophical foundation that is visible throughout all compensation assessment, governance and disclosure.

11. Lead with Strategy:
Sweeping statements about the alignment of executives with company strategy, without details, dilutes the conversation. Investor confidence would be strengthened with presentation of a specific and distinct compensation strategy designed to match, integrate and motivate short, medium, and long-term company objectives, demonstrating management’s capacity to plan and execute.

12. Answer Pay/Performance Questions:
This important aspect of public perception regarding the integrity of governance is the most persuasive context for decisions. Despite variations among property sectors, emerging evidence of statistically valid relationships—over time, among sectors and peers, and for positions and teams now allow boards to present compelling justification to investors.

Benefits of Communicating

Over the years, executive compensation disclosure has moved from near secrecy to today’s increasing demands for transparency, but has also witnessed consistent propensity to meet only threshold disclosure requirements. Arguments of the risk of greater disclosure relative to competitors who do not is an understandable position, but may need to change. In the age of online access to detailed financial and market information, it is time to consider the strategic value of more proactive communication of compensation to the marketplace.

The nature of once proprietary information has changed, with performance figures, target objectives, and strategy offered from frequent financial reporting, investor conference calls, 8-K’s, Form 4’s, press releases, industry sources, and company presentations. Shareholders will be less inclined to be concerned or reactionary regarding compensation if they receive more information, clear context, greater understanding of compensation versus performance, and the insight from policy and strategic considerations in its governance. Focusing on the message, not just the required data and format will help shareholders and investors better understand decisions, mitigate negative reactions, and instill greater trust in board wisdom and independence.

Shifting the objective to communication rather than disclosure requires viewing compliance not only as obligation, but also as an important marketing opportunity to all stakeholders, building investor confidence and long-term enterprise value. Should not the leading industry in corporate governance also lead the emerging transition in compensation disclosure? REITs have an important success story to tell, and the methods and rationale for compensation decisions that impact leadership and motivate success are essential to continued market confidence.

James Wright is CEO of The Bradford Group, a real estate industry corporate management issues advisory firm, www.bradfordgroup1.com.