Executive Compensation in EREITs: EREIT Size Is but One Determinant
Hardin, William G., III, The Journal of Real Estate Research
Abstract. Prior research of senior executive compensation in real estate investment trusts (REITs) has found REIT size as the sole statistically significant determinant of compensation. This research finds that size is only one of several determinants of equity REITs (EREIT) senior executive compensation. In addition to size as measured by EREIT market value, the designation of the EREIT as a retail EREIT, the percentage of stock owned by the senior executive, the dollar amount of dividends paid to the senior executive and the number of years since an EREIT's initial public offering were found to be significant factors impacting senior executive compensation. The results also contrast with the general executive compensation literature that shows proxies for size as the primary determinants of executive compensation. This research indicates the need for industry specific compensation models to account for variation in executive compensation.
Because of the substantial gap between the compensation of senior corporate executives and the wages of non-executive corporate employees, the compensation of senior corporate executives continues to be subject to harsh criticism (Byrne, 1996). Since firm size has generally been the primary determinant of senior executive compensation (Ciscel and Carroll, 1980; Lambert, Larcker and Weigelt, 1991; and Davis and Shelor, 1995) and firm stock performance has generally not been shown to affect compensation, additional industry specific empirical research is needed.
Unlike most prior studies of senior executive compensation, this study uses only one industry and one type of corporate entity to generate a sample frame. By only using equity real estate investment trusts (EREITs), the extraneous variation in executive compensation that is inherent in most prior studies using samples from related, but differing industries is eliminated. The large number of publicly traded EREITs allows for a clearer analysis of the relationship between executive compensation and industry specific corporate performance measures.
The executive compensation literature has focused on firm size as the major determinant of senior executive compensation. Baumol's (1959) postulate that larger corporate operations increase the scope of a business with a resultant positive correlation between corporate revenues and executive compensation has served as the primary basis for most executive compensation research. The operationalization of corporate size, however, has been problematic with researchers using proxies such as sales revenue and net income. Lewellan and Huntsman (1970) showed net income to be a greater determinant of senior executive compensation than revenue. Ciscel and Carroll (1980) found that net income is the key determinant of executive compensation. Coughlan and Schmidt (1985) and Murphy (1985) showed that revenue and stock performance influence senior executive compensation. Leonard (1990) found a relationship between firm revenue and executive compensation that was subsequently confirmed by Lambert, Larcker and Weigelt (1991). Lambert, Larcker and Weigelt also showed that a change in revenue is not significant in determining executive compensation. Bartlett, Grant and Miller (1992) found net profit, revenue, and a firm's beta to be determinants of senior executive compensation while Ely (1991) showed that there are inter-industry differences in the determinants of senior executive compensation.
The study of senior real estate executive compensation has been minimal. Davis and Shelor (1995) showed firm size, as measured by total assets, and earnings per share to be determinants of executive compensation. A subsequent study by Chopin, Dickens and Shelor (1995) found a relationship between net income and REIT executive compensation, but did not examine the relationship between either REIT market value or funds from operations (FFO), more common measures of REIT operating performance and executive compensation. …