Real Estate Forum - March 2008

working as tenant/buyer reps on a fee basis. Service and advice will once again be a guiding force in what clients seek.”

Such responses are in line with what Anthony Saitta, a principal in the executive compensation practice at the Schonbraun

McCann Group in Roseland, NJ, is witnessing in the industry. “I think it has a lot to do with the general economic climate and the performance that has taken place in real estate,” he asserts. “If you look at public companies, they are down 25% to 30% from last year, and that is reflected across all aspects of the real estate market. If you were doing this a year ago, you would have gotten much different responses, probably about the 10% level” in salary raises.

Anthony J. LoPinto, CEO of Equinox Partners, a New York City-based executive search firm, and founder of SelectLeaders, an online job-posting site, concurs that the present dim outlook for the economy did have an effect on the respondents’ collective psyche. “If you rewind 12 months, the mood, the environment, was dramatically different than it is now,” he says. “I don’t see compensation going down. Depending upon the function, it is relatively stable or up slightly.”

LoPinto says, however, that companies, particularly those in the investment field, are looking beyond the current credit crunch and bad economic news. “The real estate markets are still in reasonable equilibrium and there is a significant, if not growing, amount of capital essentially pent up for investments,” he says. “There is still demand for talent, particularly on the investment side. A lot of companies are making sure their bench is strong right now, but they are also looking to pick up new talent at a more affordable price.”

Yet it’s not just individual paychecks that are taking a hit, but staffing levels as well. Said one owner/broker in the Southeast: “Salaries are to remain flat and some layoffs are expected.”

“The firm is closely watching all costs, including payroll. Some positions have not been filled when vacated,” wrote a director of commercial leasing at a Northeast-based development firm.

The outlook isn’t much better for the industry as a whole, with 55.8% declaring that the sector will not see higher salaries over the next 12 months. Blame it on a slowdown in deal volume. And for an industry whose lifeblood is deal-making—and the bonuses those deals generate—that is a near-fatal blow.

“Real estate activity—of all types—has hit the skids,” said a self-employed consultant out West. “The compensation for most people in the industry is based on transactions, and transaction activity is way down.”

Since a fairly decent portion of the compensation in commercial real estate is based on incentives and bonuses, it is likely that wallets will be lighter in a tougher deal environment. (A few even wrote in that their salaries are entirely dependent upon commissions.) On average, per our poll, 67.3% of compensation is derived from a base salary and 37.2% from incentives.

According to an SVP at a national real estate services firm, her company tries “to keep compensation tied to revenue and margin performance, and is therefore more incentive-based.”

Salaries are further dependent on where one sits in the hierarchy of the company, points out an HR director at an engineering

firm in the Midwest. “The top managerial positions are paid a higher level of variable compensation, while the technical and administrative personnel are predominately base salary.”

That is consistent with general industry practice, Saitta says. “For senior executives, it is geared more toward the incentives.

As you move through middle management and then lower down the scale, it’s a base salary.”

Increasingly, the pay of those senior managers relies on how their companies actually perform. Nearly 70% of the participants said their firms have instituted a pay-for-performance policy for top executives, with 52.7% relating that the standard is based on meeting a combination of long-term, multi-year goals as well as short-term, annual objectives. (Interestingly, more than a third—

38.4%—stated the criterion is dependent upon reaching short-term goals.) When asked what form the reward took—restricted stock and/or stock options versus a monetary payout—72.1% checked the monetary payment option.

Annual bonuses, whether paid in cash or stock, are typically tied to a company’s particular business plan, and whether the executives reach their yearly benchmarks, Saitta says. Longer-term or multi-year performance goals are commonly based on such metrics as shareholder or investment returns or stock price appreciation.

Comments from the participants reflect a mixture of long- and short-term goals used to reward management. “Bonuses are paid annually,” said one managing director at a private equity firm in the Midwest, “but equity compensation is vested over years.”

“It’s mostly based on short-term annual goals, but 10% to 20% of bonus over a certain amount may be withheld as long-term incentive,” stated a

VP at a national investment bank.

LoPinto concurs, adding that public firms in particular look at the long term. “What is emerging now is a blend of vesting on the basis of time and performance,” he says. “As we look at the new proxy statements that will be out in the next month or two, we are going to start to see some new plans. You’re going to see a lot more focus on the multi-year, performance-based vesting as opposed to purely time-based vesting.”

Whether an executive is at a public or private entity influences the form the payout takes, Saitta notes. “If you are at a private company, the currency is not necessarily equity, so you will see more cash being paid as the incentive compensation,” he says. “In a public company or even in some of the larger private firms, there is more equity provided.”

Others, however, relayed that the standards are somewhat hazy or in a state of flux. “We are in transition as a company about how to measure short-term pro forma and have senior managers participate with carried interest in the funds,” said an associate to a VP at a pension fund in the Northeast. “Today, it is vague as to how we actually pay for performance, but the