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CEO Pay Rules at German Landlords Dubbed Worst by Green Street

A German national flag hangs from a window of a residential housing apartment block located in the Mitte district of Berlin, Germany, in April 29, 2013. Photographer: Krisztian Bocsi/Bloomberg
A German national flag hangs from a window of a residential housing apartment block located in the Mitte district of Berlin, Germany, in April 29, 2013. Photographer: Krisztian Bocsi/Bloomberg

Aug. 28 (Bloomberg) -- German landlords have some of the worst pay policies for chief executive officers among European real estate companies when it comes to ensuring the best returns for shareholders, a study by Green Street Advisors Inc. showed.

Deutsche Wohnen AG, Germany’s second-largest rental-home owner, and retail property company Deutsche Euroshop AG have “poor” compensation policies because their CEOs don’t receive a significant portion of their pay in stock and compensation isn’t tied to per-share performance, Green Street said in a report. British companies such as Great Portland Estates Plc and Derwent London Plc ranked near the top, according to the Newport Beach, California-based real estate research firm.

“The CEO is the primary actor in delivering returns for the shareholder,” said John Lutzius, managing director at Green Street in London. “It’s important that CEOs’ personal compensation is aligned with what shareholders really care about.”

Executive compensation is coming under scrutiny across Europe as the continent’s share of global real estate investment shrinks. The U.K. and Swiss governments have backed tougher rules including shareholder votes on compensation and France and Germany plan to implement similar controls. The market value of European property stocks is 14 percent of the global total, down from 18 percent five years ago, according to data compiled by the European Public Real Estate Association.

‘Absolutely Transparent’

“We are absolutely transparent,” Deutsche Wohnen spokeswoman Manuela Damianakis said. “We use a variety of metrics to measure long-term incentives, including the share price.”

Deutsche Euroshop declined to comment.

Compensation policies cited as poor in the report include a lack of disclosure on how bonuses are calculated, performance measures that aren’t linked to per-share results, and rewards paid in cash instead of stock, according to the report.

Songbird Estates Plc in the U.K. and Swiss Prime Site AG are among the companies that have the least transparent bonus policies, Green Street said. That can hurt shareholders because they’re unable to tell whether the CEO’s interests are aligned with their own.

Songbird declined to comment.

Swiss Prime Site chief financial officer Peter Wullschleger said by email the company’s pay policies comply with Swiss law and International Financial Reporting Standards. Swiss Prime Site, which signed new contracts with its top executives that took effect on Jan. 1, plans to publish the new compensation details in its 2013 annual report to be released next year, he said.

Faster Updates

Green Street’s Lutzius said the company should update shareholders sooner.

“CEO compensation is such an important element of a company’s overall strategy,” he said. The company should disclose the key elements of the compensation package now.’’

Deutsche Euroshop, Deutsche Wohnen and TAG Immobilien AG, also of Germany, rank low because they link payments to absolute profit growth and not to per-share results. That can encourage executives to issue more shares to finance acquisitions, Green Street said.

TAG Immobilien declined to comment.

“Measures like funds from operations are not always well correlated with total shareholder returns,” said Lutzius. “You can manufacture FFO growth artificially, for example by loading up on debt or buying lesser-quality properties that have higher yields.”

Share Awards

Giving CEOs a large portion of their pay in shares is another way to ensure alignment of interests, Green Street said.

“Skin in the game really matters,” said Lutzius. “The best way to ensure alignment is to require significant share ownership.”

In the U.S., real estate investment trust CEOs own shares valued at about 20 times their base salaries on average, the Green Street report found. That ratio was 4.8 in the U.K. and 0.5 in continental Europe.

“On the continent, we were surprised to see so many CEOs have so little investment in the companies they lead,” Lutzius said. “Ideally, we’d like to see that CEOs have a material ownership in the company, ownership that’s material to their own personal net worth.”

U.K. companies were praised for making a large portion of CEO pay dependent on the company’s performance. At Great Portland, about 73 percent of the CEO’s 2.6 million-euro average pay over three years depended on results he produced. At Corio NV of the Netherlands, only 24 percent was linked, according to Green Street.

Stock Performance

Some companies can benefit from changes that would lead to “quick wins,” while others require more extensive reforms, according to Green Street.

At Eurocommercial Properties NV, where 50 percent of the annual bonus is based on dividend growth, Green Street says investors should request that bonuses follow total shareholder returns.

Vicki Bradley, a spokeswoman for Eurocommercial, confirmed the basis of the bonus and said dividends are subject to shareholder approval.

At TAG, where there is no long-term incentive plan, Green Street recommends implementing one that’s linked to share performance.

“Getting CEO pay right is an important ingredient to delivering appropriate returns over a full real estate cycle,” Green Street said.

To contact the reporter on this story: Dalia Fahmy in Berlin at

To contact the editor responsible for this story: Andrew Blackman at

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