As a specialist real estate investor, Cohen & Steers has long viewed executive compensation and stock ownership as a critical pillar of governance, underpinning longer-term alignment with investors and broader stakeholders of the listed REIT sector across Asia-Pacific.
Managed properly, executive compensation can enhance value creation and growth over the longer run, help retain and develop talent and encourage sustainable business practices. Managed sub-optimally, compensation may encourage short-term behaviour, poor capital allocation and strategy, loss of key talent and risk losing the firm’s social license to operate.
Compensation and equity alignment can be challenging to get right. The pandemic has shown for a number of listed REITs that remuneration structuring and key performance hurdles were not fit for purpose, resulting in a wholesale “shifting of the goal posts” thereafter. Schemes with longer-term performance hurdles focused on securityholder returns and sustainability, with a greater lean into longer-dated stock grants, generally fared better through the cycle. An emphasis on nearer-term performance targets with outsized cash components or short-dated stock grants were ultimately more impacted by cyclical factors that were (at least partly) out of management’s control. Similarly, schemes that lacked a meaningful performance objective and were linked predominantly to the passage of time have generally not fared well.
In our view, some of the more successful remuneration schemes have featured >50% weightings to longer-dated stock with a 5+ year vesting period. Implicit in these schemes is a requirement for Boards to be hands-on with management succession and retaining emerging talent. Some level of staff turnover is generally healthy, necessitating appropriate planning in the context of longer-dated stock schemes. We also encourage challenging stretch targets around a REIT’s Environmental, Social and Governance (ESG) objectives to the extent they are embedded within the firm’s broader objectives. In our view, the upfront disclosure of these targets and subsequent periodic disclosure of realised performance provides best practice transparency.
With the growing prevalence of externally managed REITs across the region, we also encourage the voluntary disclosure of key management remuneration and stock schemes, including clear disclosure of performance hurdles and achieved outcomes. While not necessarily required under local listing or regulatory requirements, we believe constructive stakeholder discussions lead to improved outcomes over the longer run.
Dane Garrood
Portfolio Manager – Asia-Pacific
Cohen & Steers
