Making a play to keep the CEO at Federal Realty …

October 13, 2010

Mixed Cash

There’s pay for performance — a good thing, generally, we tend to think. Then there’s throwing buckets of money at a guy.

At Federal Realty Investment Trust (FRT), a big real-estate investment trust managing more than 18 million square feet of retail space, Chief Executive Donald C. Wood is certainly poised to get the bucket. According to an 8-K the company filed this morning, the board voted yesterday to bump his salary up 21%, to $850,000 from $700,000, and at the same time boosted his target annual bonus from $700,000 to $1.275 million and his potential long-term equity incentive award to $4 million from $2 million. All in all, he stands to make $6.13 million where he previously would have made $3.4 million.

In addition, the board also showered him with 60,931 shares, valued at $5 million,

in exchange for an agreement by Mr. Wood that he would not accept a position with another public or private retail real estate company or public real estate investment trust nor solicit any of the Trust’s employees for a period of one (1) year in the event he resigns from the Trust.

He gets the shares in three years (or immediately if FRT is acquired). In explaining the changes — and it’s a nice touch that the company does so, since some don’t bother — the REIT calls the increases “prudent” and consistent with the company’s compensation philosophy, as well as good for shareholders, and cites a laundry list of reasons. The first is a Mercer Consulting analysis of “comparable real estate companies”; others include:

“(b) the historical outperformance of the company over the last decade in terms of shareholder value creation and the prospects for continued outperformance in the future; (c) the active recruiting for Mr. Wood’s services in the marketplace and the related strong desire to retain him and his senior management team at the Trust; and (d) the ability of the current senior management team to take advantage of future opportunities to increase shareholder value.”

We suspect the clincher is in item (c), particularly given that $5 million grant of shares restricted for three years: Someone made a play for Wood and the board wants to hold on the guy. The “historical outperformance” is subject to a little more examination. The company has clearly outperformed other retail REITs in the last decade (and in more recent periods), but in terms of total return, it actually trailed competitors by 11 points in 2009, by Morningstar’s analysis. Net income has been drifting downward the last few years, to $98 million at the end of last year, from $195 million at the end of 2007; net income and operating income in recent quarters has been fairly level.

Perhaps sometimes an executive is worth buckets of money. In any case, FRT’s board has acted. Now it’s up to Wood to actually make good on those “future opportunities to increase shareholder value.” For the shareholders’ sake, we hope he does.

Update: If you think this post looks different, you’re right. We changed the photo because it turned out we had misread the conditions attached to the photo we initially used. Our apologies to the photographer of the original item.

Image source: stopnlook via Flickr

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