With growing income inequality and an increasingly vocal backlash against unfair business practices, the salaries of American chief executive officers have been heavily scrutinized in recent years. The income inequality debate has been around for a while (remember Occupy Wall Street?), and it’s one of the biggest drivers of Vermont Senator Bernie Sander’s rise to political stardom.
Sanders and his cohorts have plenty of data to back up their protests. According to Bloomberg, the average U.S. CEO among the 1,000 largest publicly-traded companies earns 144 times more than their median employee. Some CEO-to-worker pay ratios are even more extreme. For example, at Walmart, the CEO-to-worker pay ratio is 1,013:1. In 2021, the average employee earned $25,335 while CEO Doug McMillon raked in $25.6 million.
Many people are angry that CEO compensation has skyrocketed since the late 1970s while average worker salaries have stagnated. CEO pay based on realized compensation increased by 1,322 percent from 1978 to 2020, far outpacing S&P stock market growth (817%) and top 0.1 percent earnings growth (341%). By comparison, compensation for the average American worker has grown by just 18 percent from 1978 to 2020.
Much has already been written about rising CEO compensation, but the gridlocked U.S. Congress can’t agree on what to do about it, or even agree if it’s a problem. Some argue that the pervasiveness of lavish CEO compensation is a contributing factor to income inequality, causing destructive societal issues in social and economic mobility for average folks by making less money available for them, and perhaps even the deep political divisions in the U.S.
Most of the talk of CEO compensation has centered on some of the biggest American executive earners. The top five CEO compensation packages in the U.S. in 2021 included Peter Kern of Expedia ($296,247,749), Andrew Jassy of Amazon ($212,701,169), Patrick Gelsinger of Intel Corporation ($178,590,400), William McDermott of ServiceNow, Inc. ($165,802,037), and Timothy Cook of Apple ($98,734,394). Names like this end up on AFL-CIO’s list yearly, only to stoke worker resentment. But in the real estate world, CEO compensation hasn’t often been in the public eye—not yet, at least. But as executive compensation becomes more of an issue, it’s not guaranteed that real estate CEO pay won’t be thrust more into the spotlight.
Bonuses, incentives, and pushback
The highest-paid CEOs in the real estate industry in the fiscal year 2019 earned far less than the exorbitant compensation packages we just listed for the Peter Kerns and Timothy Cooks of the world. Hamid Moghadam of Prologis was the highest-paid real estate CEO in 2019, and his income was bonus and incentive-heavy. Moghadam earned a salary of $1, but his incentives and other income amounted to $30,383,438. Marc Holliday of SL Green Realty Corp. was the second-highest-paid real estate CEO with another incentive-heavy package that totaled nearly $21 million. The rest of the top five included Andrew Florence of CoStar Group ($19,324,540), Charles Meyers of Equinox Inc.($16,575,596), and Gary Kain of AGNC Investment Corp. ($16,130,400).
Total compensation for real estate CEOs increased by 2.7 percent in 2020, according to a Pearl Meyer analysis of almost 400 public, private for-profit, and not-for-profit real estate firms. The total compensation packages included base salary, annual incentives/cash bonuses, and long-term incentives like stock options. Base salaries only increased 1.3 percent, and yearly incentives jumped 3.4 percent on average. Long-term incentives accounted for 66.5 percent of real estate CEO salaries in 2020, with an increase of 5.6 percent from 2019.
Long-term incentives like stock options can be especially lucrative for real estate CEOs. As the office market rebounded in 2021, SL Green CEO Marc Holliday’s total compensation spiked almost 39 percent, primarily because of his incentives. SL Green’s net income rose 22 percent in 2021, while funds from operations fell 14.5 percent. SL Green said multiple measures were used to gauge Holliday’s performance, including the company’s performance compared to rival office REITs. Holliday and SL Green executives helped deliver a 27 percent return to shareholders in 2021, the third highest among all publicly traded office REITs. The company also noted that Holliday helped SL Green achieve nearly 94 percent office occupancy, which outpaced the broader NYC office market by more than 10 percentage points.
Real estate CEOs like SL Green’s Holliday don’t earn as much as the top executives at firms like Amazon, but it’s still a ton of money, and more than most of us could ever dream of. But industry insiders say these compensation packages are needed for the top real estate executives. The boards at real estate firms know they need heavy hitters who can drive the stock price up, and they need “brand name” executives. Real estate firms will also ensure CEOs like Holliday and Boston Properties’ Owen Thomas have access to the best country clubs and VIP events. Many real estate deals get done on the golf course or at exclusive art galas, and the biggest CEOs need to be there rubbing elbows with other power brokers.
But are real estate companies and other corporations getting what they pay for? It’s debatable, according to recent research. A study by MSCI found that the relationship between how much CEOs earned and long-term stock performance was misaligned at three-fifths of the companies they studied between 2006 and 2015. Twenty-three companies underpaid CEOs for superior stock performance, while 18 overpaid for below-average stock returns. MSCI determined that pay and performance were misaligned at most large-cap U.S. companies because of an over-reliance on short-term stock price performance and poorly managed CEO successions that too often led to extraordinary one-year payouts.
In most cases, real estate company boards and investors are fine with paying big-time salaries to top executives. As long as the CEOs are adding value and driving business success, their compensation packages aren’t scrutinized much. Real estate boards and investors know chief executives are valuable, and they need to pay competitive salaries while they battle it out with other top firms in the industry. Many argue that an exceptional chief executive is essential for a company’s success, and there are few people that have the skills, personality, and disposition to handle the role at major companies. Because there’s such a limited number of people who are qualified for the pressure-cooked top position, businesses are willing to pay huge sums of money for them.
But there have been some instances where investors have pushed back against executive compensation. A recent example in the real estate world is the saga involving Cantor Fitzgerald CEO Howard Lutnick, who faces allegations that he improperly received a $50 million bonus after claiming he added value to the firm’s Newmark commercial real estate unit. Newmark’s board of directors agreed in 2021 to award a one-time bonus to Lutnick, who serves as the commercial real estate unit’s principal executive, for his help in monetizing shares of the Nasdaq stock-trading platform that Newmark acquired in 2017.
But a lawsuit filed in Delaware by a Newmark investor claims board members approved the bonus even after discovering that Lutnick’s transactions involving the Nasdaq shares didn’t boost Newmark’s stock value. Robert Garfield, the shareholder, said in the lawsuit that Lutnick’s bonus is “patently excessive and unfair to the company and its minority stockholders.” The suit was brought on behalf of all Newmark investors and seeks to return any legal recovery to the Cantor affiliates.
Lutnick is Newmark’s controlling shareholder, and the firm was spun off from Cantor’s BGC Partners in 2017. Newmark acquired $847 million in Nasdaq shares from BGC Partners as part of the spinoff, and Lutnick claims his financial engineering brought in $500 million for Newmark. He demanded that Newmark’s board of directors reward him for his efforts with a $50 million bonus. The board initially turned Lutnick down, but they changed their minds after learning he had a “strong adverse reaction” to the decision, according to the lawsuit.
Lutnick isn’t the only executive facing pressure for his compensation. Earlier this year, shareholders shot down a $52.6 million retention bonus for JPMorgan Chase CEO Jamie Dimon. Investor support for CEO bonuses is near its lowest levels since so-called say-on-pay votes became mandatory in 2011. Say-on-pay is a process required by law in the U.S. where shareholders vote on executive compensation. The say-on-pay provisions were introduced after the financial crisis and as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. At least 12 S&P 500 companies have failed to secure majority support for say-on-pay proposals so far this year.
Main Street is angry
The anger directed toward CEO compensation isn’t usually focused on real estate CEOs. It’s easier to get ticked off about how much the top executives of Bank of America make, and we saw that after the financial crisis. It’s also understandable that Walmart employees would be angrier at their top executives’ compensation than real estate employees. For one thing, the CEO-to-worker pay ratio at a company like Walmart is much larger, where legions of cashiers and service workers earn the minimum wage.
Walmart is among the top employers in the U.S., including Amazon and McDonald’s, that has the most employees who are recipients of federal aid like Medicaid and food stamps, according to a study by the Government Accountability Office. Real estate employees are better paid, more educated, and may not care as much that their CEO is earning top dollar. For example, according to the website Comparably, the average employee at SL Green earns more than $114,000 annually. Even administrative workers, the lowest-paid at the company, earn more than $52,000 a year on average, which is twice as much that the average Walmart employee makes annually.
Real estate’s top executives also don’t have the same household-name recognition as bigwigs like Goldman Sachs’ David Solomon. But just because real estate executives have flown under the radar for a while doesn’t mean that will always be the case. The housing crisis continues to garner major headlines and fuel resentment nationwide. Tenant rights groups are becoming more organized and aggressive than ever. If tenant rights groups are smart enough as political operators, they’ll find a way to make real estate CEO salaries an issue. This would obviously affect multifamily executives the most and probably not executives at big office REITs or industrial firms like Prologis.
Renters Rising is one example of a tenant rights group that has been organizing nationwide. They describe themselves as a national alliance of renters working to shift the balance of power between renters and corporate landlords. Renters Rising says on its website, “Housing can no longer be used as a wealth-building toy for super-rich corporate landlords, real estate developers, and hedge fund managers.” The national group lists links to local organizations in almost all 50 U.S. states on its website.
A recent story by the New York Times told the tale of KC Tenants, a citywide tenant union in Kansas City. KC Tenants have been active in Kansas City politics lobbying for more tenant-friendly housing laws, and their protesting has been aggressive and, at times, disruptive. The rabble-rousing group has been known to show up at City Council meetings. They even logged onto virtual court hearings during 2020 and tried to halt evictions by continuously saying, “Every eviction is an act of violence,” so judges and lawyers couldn’t hear each other.
Median U.S. rents were down in September by $22 from their July peak of $1,759, according to Realtor.com, but the figure is still a 7.8 percent increase from a year ago. Rents in some cities continue to surge by double-digits, such as in Chicago (where rents grew 24 percent annually), Boston (20 percent), and New York City (18 percent). Rising rents have led to a slew of tenant organizing, rent stabilization policies, and anger among renters dealing with inflation elsewhere.
The point of bringing this up is that if tenant organizations pay attention to multi-million-dollar compensation packages for real estate CEOs, especially in the multifamily sector, it could cause trouble. It’s not a stretch to imagine groups like KC Tenants who have gone so far as to chain themselves to courthouses in protest, zeroing in on real estate executives’ salaries. Multifamily operators nationwide may already be aware of this, as extravagant top executive salaries can be the type of bad press coverage that can drag their firms’ names through the mud.
In the eternal battle of Wall Street versus Main Street, CEO compensation has become a heated political issue and something that won’t die down anytime soon. Traditionally, real estate executives have flown under the radar compared to CEOs of other companies like big banks and tech firms. Most real estate executives don’t make as much compared to some of America’s most filthy rich top execs, and names like Marc Holliday of SL Green are only familiar to professionals in the real estate industry.
But as the housing crisis continues to intensify, not all real estate executives may get a pass. The pernicious effects of income inequality may be a pivotal contributor to America’s toxic politics, and lavish CEO salaries in any industry, including real estate, can become a focal point for protest and controversy at any time. The real estate firms who realize this threat and possibly rein in exorbitant executive compensation may be able to head off PR damage now before a rash of bad headlines or disruptive protesting targets them.