Federal Realty Investment Trust: Goals set on “company view” that turned out to be too modest; bonus increases 150%
Meeting May 4
CEO Donald Wood’s total compensation for 2021 was $7,520,917, down slightly from the prior year. But it has been the pay practices rather than the amount of pay that inspired shareholders to vote against pay at Federal Realty Investment Trust in the past and may inspire votes again this year. Of particular concern is that most achievements used for pay are based on market factors more than the CEO’s personal contribution. The annual bonus plan paid out at 125 percent of target and the long-term incentive plan paid out at 99 percent of target for 2021 performance.
The company uses funds from operations (FFO) per diluted share, a non-GAAP measure, in both the calculation of the annual bonus and the Long-term-incentive-program (LTIP). I’ve written in many posts this season about metrics that were set too low based on estimates of Covid results that turned out to be wrong. Federal Realty practically admits they set the achievement levels too low, “The FFO per diluted share achievement levels for our 2021 annual bonus program were established by the Compensation Committee early in the year based on our budget for the year which was heavily impacted by our view of the continuing impact of COVID-19 on our tenants’ ability to pay rent due under their leases.” Woods annual bonus increased by 150 percent year over year, for the reasons cited above, not because of his performance.
Similar comments are made regarding long-term compensation. Specifically, the company says, “Our actual FFO per share exceeded our bonus target by approximately 19% driven by the businesses of our retail tenants rebounding more quickly and with more strength than we contemplated in our budget. We were able to collect significantly more rent tenants owed for the prior year of 2020 than we had anticipated, fewer tenants closed their doors than expected.” This is good news for shareholders, but it should not translate into higher awards for the executives.
The LTIP is based on three metrics weighted equally: in addition to FFO Multiple Premium (described above) and Return on Invested Capital, the company uses a relative TSR metric. That final component of the bonus that would have paid out at 50% if the company met a threshold “index -5%.” Shareholders strongly object to any payment that offers a payout on TSR below that of peers. In 2021, it did not pay out because the company underperformed peers by such a margin that relative TSR paid out at 0 percent. The practice remains concerning, and the company has no upside limits.
Also, while shareholders have expressed a strong preference from performance shares, executives may choose whether LTIP long-term incentive program are paid in the form of restricted shares or a mix of restricted shares and stock options. The company reports: “For 2021, all of our NEOs elected to take the entirety of his/her award in the form of restricted shares.”
Of note, Federal Realty Investment Trust stock trades today below where it traded in 2019.