The Big Squeeze: Incentive-Based Compensation Benefits Both Owners and Property Management Companies

Article excerpt

Our economic picture is looking rosier again. However, the pressures that drove down property management fees in recent years continue to have their effect on the real estate industry. Property owners are understandably demanding efficiency at every level of building management and across their portfolios, while property management companies (PMCs) feel the double pinch of increased responsibility and squeezed fees in a marketplace made highly competitive due, in part, to consolidation.

Speaking at IREM's 19th Annual Asset Management Symposium, John G. Combs, CPM [R], president of U.S. property services for Insignia/ESG, Inc., AMO [R] in Irvine CA, said, "Looking ahead, owners likely will continue to increase their performance expectations of PMCs, while management companies will have to find and retain skilled employees to meet owners' demands. Meanwhile, owners will have to generate enough profit to make the business worthwhile."

How can both parties come together?

"Align their interests to encourage high performance and added value for owners and a structure built to incentives for the management team," said Russell Blackwell, senior vice president of LaSalle Investment Management in Columbus, OH. "You can do this by creating and implementing an incentive-based compensation plan."

RELATED ARTICLE: Helpful Hints

According to Russell Blackwell of LaSalle Investment Management, a good performance-based plan starts with a design based on these points:

Consensus -- Obtain consensus between the property management and investment management companies over what they have a right to expect for a reasonable fee. Get the agreement in writing, with everyone involved actively agreeing on what the fee should be.

Parameters -- Determine what parameters would truly add value to the owners' assets, in quantifiable terms.

Simplicity and clarity -- Create a simple plan design that is easy to understand, communicate and administer, as well as easily measurable.

Quantified impact -- Come up with a set of key performance indicators (KPIs) that allow the plan's progress to be easily quantified from data in existing processes, programs or tasks. If a KPI doesn't fall into one of these areas, don't use it.

Key Performance Indicators (KPIs)

The management team can add value to owners' property with well-defined KPIs. The team can then justify premium fees by exceeding expectations, such as surpassing NOI targets, maintaining a high level of occupancy, keeping receivables low, putting together leasing deals that are better than the competitions' and consistently satisfying the majority of tenants.

Net Operating Income (NOI) -- The return on money invested in a real estate product, this indicator mainly is used with office and industrial properties.

Occupancy -- Keep buildings as full as possible.

Receivables -- Collect all the rent, all of the time. …