REIT Executive Compensation and Firm Risks
AbstractThis paper examines REIT executive compensation in the REIT S&P index era with a focus on the relationship between compensation and firm risks. Using a sample of U.S. equity REITs from 2001 to 2015, we find that total compensation of REIT executives rose significantly in the new era and a large portion of the increase came from the rise in stock grants. Moreover, consistent with principal-agent theory, total executive compensation of REITs is positively correlated with the lagged stock price risk and credit risk measures, indicating that REIT executives working at riskier firms are compensated with higher pay. Furthermore, compared with financial firms, REIT executives seem to be compensated for higher risks largely through cash-based compensation, not through equity-based compensation. These results imply that a subtle difference may exist among firms in terms of how executives are compensated for risks. Finally, stock grants awarded to REIT executives are strongly
correlated with the lagged firm performance. Taken together, this paper provides new evidence to the debate about the pay and risk relationship in the cross-section, suggesting that risks play an important role in the optimal compensation contract design. Also, the findings in the paper suggest that REITs have improved their compensation plans by closely linking executive pay to the firms’ long-term financial performance.