A certain industry
Take a certain industry, there are the original patterns. “Healthy industry segments bode well for rewards but greater formalization is still taking hold on the compensation front,” state Carl Bruno & Patty Mitchell in Maximizing compensation through value creation – real estate industry employee compensation (National Real Estate Investor, Sept 30, 1996).
“Private Real Estate Firms (Developers and Full-Service), ever cautious regarding maintaining and increasing their profit margins but anxious about rewarding key contributors, have grown to a level where they can no longer function with their current entrepreneurial-styled compensation plans,” overviewed then the contributors. At the time of competitive rivalry more formalized programs ensuring both external competitiveness and internal equity among positions and capitalizing on the firm’s strategic advantage are essential.
“Ensuring market competitiveness of base salary and incentive compensation is appropriate within both industry segments (Investment Advisory Firms and Insurance Companies),” say the authors. Managing and balancing the interests of the firm and their clients will drive future compensation programs. While the REITs continue their pace towards larger market capitalizations and greater total shareholder returns, compensation for senior management remains a controversial issue. The future of the REIT industry is still unknown.
The foretold wave of mergers and acquisitions within this industry hasn’t quite come to fruition. Many would say this industry segment is one in its infancy. Others contend that the REITs are in a state of old age and decline Realizing the limited value of stock options, alternative forms of long-term incentives are appearing in greater frequency. Those REITs with carefully crafted long-term incentive plans are showing analysts and investors that they expect to survive the long-haul and that they have a plan in place to reward the achievements that will allow them to do so.
Performance-based stock plans driven by total shareholder return will undoubtedly win out. When examining career opportunities, real estate professionals find out, “Within which industry segment is my function most closely associated with the firm’s value creation process? ” “The answer to this question may provide an individual with the key to maximizing compensation dollars for the services they can provide. From the organization’s perspective, understanding multiple industry segment’s pay practices is the only way to competitively reward highly mobile talent,” suggest Bruno & Mitchell.
Real estate companies acknowledge the impact a particular position has on value creation through their compensation programs, yet, dependent on the nature of the industry segment and the strategic objectives of the firm. Value for the firm is created within the investment advisory industry by achieving superior investment returns on the assets under management as well as increasing the number of assets under management by the firm. Therefore, although many functional areas ultimately aid in this process, marketing, acquisitions and asset portfolio management are most often associated with value creation.
This is substantiated by the fact that compensation levels for these functions are, in most cases, superior to that of other functions within Investment Advisers. As well as industry segment the compensation is affected by a firm’s specific strategic objectives. “For example, a firm may be operating in an industry segment that has in recent times derived much of its value through the acquisitions function, such as REITs. Yet, a particular REIT’s strategy might include goals that can only be met through a high volume of new developments or advantageous capital structures.
Within this REIT, development and capital market functions may be receiving compensation at or above that of acquisitions. ” (Bruno & Mitchell) Based on discussions they have had within the industry this past year as well as FPL Associates’ proprietary database of compensation information, the researchers have identified functions which appear to be most closely aligned with the value creation process within the private real estate (developers and full-service), investment advisory, insurance, REIT and homebuilder industry segments.
Chief Officer Private real estate firms that have more discretion in their compensation decisions and that typically present a greater risk than more institutionalized real estate industry segments, pay top dollar incentives to chief officers when performance warrants. Chief Officers of public homebuilders that have built a national presence continue to receive some of the most healthy compensation packages around.
During 1995, key issues relative to compensation for these two positions included the establishment of severance agreements (particularly in instances of change of control), performance based long-term incentive programs, and for REITs in particular, professional manager versus founder compensation comparisons. Finance The emphasis placed on finance by investors, particularly in the public market, has influenced the compensation packages of senior level positions within this functionality.
“Today, the true value of the seasoned financial professional is recognized by most every savvy real estate deal maker and public company manager around. ” (ibid. ) REITs that have fared well thus far owe much of their success to the chief financial officer or head of capital market’s ability to effectively communicate with industry analysts, investors and consultants and successfully manage the corporate capital structure. For these reasons, REITs and investment advisors alike offer fruitful compensation packages to talented financial professionals with a proven track record.
During this past year there have been situations where financial or capital market positions have received compensation packages greater than that of general management positions. Acquisitions Top-notch acquisitions professionals are in high demand in virtually every real estate industry segment. Investment advisors, REITs and private real estate firms with the capital to spend are particularly eager to have the right talent in place now to make the deals happen.
High demand in a labor market short on proven acquisitions professionals keeps this function paying top dollar. Key issues of concern relative to compensation include balancing the dollars placed and the dollars available as well as the dollars placed and the number of deals executed in relation to business unit and individual incentives earned. As with many volatile production positions, variable pay and continued employment are strategic issues that overwhelm this function. High earnings for two to four years may be a tradeoff for a more secure environment.
Asset Management “Maximizing net operating income and creating value within an asset are key revenue production functions within most real estate industry segments,” observe professionals. Large independent investment advisors, private real estate firms and insurance companies will pay top dollar for asset management talent that can consistently increase the value being created within their assets. The value of the asset(s) and the extent to which the asset manager is involved in the leasing, property management and dispositions of the asset(s) also influences the compensation packages of these professionals.
The future of this function’s pay however is driven by balancing the short term financial needs of the firm with the long-term economic interests of the client or property owner. Portfolio Management The extent to which these professionals manage large complicated portfolios and interact with investors determined the level of appropriate compensation. Performance against industry indexes would be “the barometer for future compensation in this function. ”
Development Private companies built compensation packages around project equity for these key professionals, who were able to build a healthy portfolio of properties that would appeal to investors. REITs followed. Construction Construction professionals were involved into the value creation process within the public homebuilders and to a lesser extent, the private developers and the REITs. REITs and private developers heavily involved in development had construction positions on staff or employed mid-level construction professionals who served as the firm’s general contractor.
Talented construction professionals who could ensure the cost, timing and quality of construction projects that are built were being compensated at a premium. As with acquisitions professionals, tradeoffs were frequently made between current income versus stability of employment. Property Management Property management positions that both generate new business and deliver quality services for existing clients, provided a steady source of revenue for private developers and full-service firms.
These firms rely on this income to fund development deals that generate revenue on a more cyclical basis. Moreover, REITs with talented property management professionals are finding it easier to maximize their NOI and provide superior growth in funds from operations. These firms provide the best opportunities for property management professionals today. (Bruno & Mitchell) Leasing The leasing and investment sales functions derived the majority of their compensation in the form of incentive pay.
Topnotch professionals with solid track records were some of the highest paid professionals in the industry. Nonetheless, the majority of professionals earned compensation at or just slightly below their counterparts in other functions. Tenant representation leasing professionals maximized their compensation through incentives that allowed them to generate huge commissions. Given the 1990s trend towards pay-for-performance, base salary increased within most industries have been minimal for the aftercoming several years in real estate industry.
In sum, key forces, such as the stock market, the labor market, interest rates, tax laws and inflation, continued to impact executive compensation in 1997 and beyond. “A function’s ability to create value for the firm will serve as a major determinant of the compensation dollars earned. Whatever the design, programs for 1997 should be easy to understand and should carefully incentivize the individual, and functional team to achieve goals that will collectively ensure the success of the organization both today and in the years to come.
As always communication is the key to any well crafted program’s success. ” drew the bottom line the authors. Wage-and-salary employment increased markedly in construction – and faster than in industries overall – from 1992 to 2001 (Index of labor costs for construction and all industries, 1989-2001. CPWR). But “real” wages, adjusted for inflation, increased only slightly, starting in 1997. As of 2000, wage and salary levels were still lower than in 1973. If construction workers earned wages as high as they earned, on average, in 1973, adjusted for inflation, they could have bought $18.
90 worth of goods and services for an hour’s pay in 2000. Instead, on average, an hour’s pay got a construction worker only about $15. 81 worth of living expenses, a decline of about 16%. Since 1991, the average construction wage has fallen below the average for manufacturing; in 2000, the average wage for manufacturing was $16. 74. Another way to look at employee value in construction is to use an index of total costs to employers of employee benefits and wages and salaries.
The Employment Cost Index, a component of the National Compensation Survey conducted by the Bureau of Labor Statistics, provides quarterly and annual percentage changes in labor cost, which includes wages, salaries, and employer costs for employee benefits. Wages and salaries are defined as total earnings before payroll deductions, excluding premium pay for overtime and for work on weekends and holidays, shift differentials, and nonproduction bonuses such as lump-sum payments provided instead of wage increases.
Benefits are defined as paid leave, supplemental pay, insurance benefits, retirement and savings benefits, legally required benefits, and other benefits such as severance pay and supplemental unemployment insurance. When construction and all civilian workers are compared, using Employment Cost Index data, the finding, again, is that the construction worker has not gained as much (or as steadily) as have workers in all industries combined. Labor costs have declined in manufacturing and mining also. The average total compensation per hour in construction ranked fourth among industries.
In all industries, paid time off was the most prevalent benefit available to most workers in private establishments, averaging 6. 6% of the total, but such time off accounted only for 3. 5% of compensation for construction wage-and-salary workers. Construction has the highest level of mandated benefits – workers’ compensation, unemployment insurance – as a percentage of total compensation, reflecting the costs of unsafe working conditions. Benefits coverage varies by union and non-union status, establishment size, occupations, and other factors, of which the industrial type is the most weighty (see Table 6).