Something's Not REIT: Real Estate CEOs Are Landing Huge Raises

Once upon a time on Wall Street, if you wanted to make big bucks, you'd make a beeline for the usual suspects: big banking powerhouses or maybe a private equity or hedge fund. Those companies were where the best money was to be made.

Lately, however, things have taken a turn for the surreal.

These days, if you want to earn some serious coin by managing a company "for the shareholders," you might be better off running a fuddy-duddy real estate investment trust.

With many of America's banks still subject to Treasury Department restrictions on what they can pay their employees, banking paychecks aren't what they used to be. Hedge funds are hurting lately, too. As an industry, hedge funds have booked three consecutive months of losses through May of this year. And individual funds have done even worse. Billionaire gold investor John Paulson has seen the value of his hedge fund fall 22.5% so far this year.

Since their compensation is based on the amount of money they manage and the profits they make managing it, that's bad news for the hedge fund bosses.

But while paychecks over on the slick side of Wall Street have taken a hit, they've gotten fatter on the boring side of the street, which manages real estate investment trusts, investments historically considered a refuge for "widows and orphans," or retirees hoping to supplement their Social Security paychecks with a few generous dividend checks.

Nice Work If You Can Get It

According to a new report by The Wall Street Journal, CEO compensation at America's 100 largest real estate companies last year grew almost twice as fast as their companies' stock prices -- up 14% over 2010 levels. Base salaries, which rose 10% on average, outgrew stock returns, which averaged 6%. Meanwhile, payouts in the form of bonuses and "long-term incentive awards" grew four times as fast.

Among the richest-rewarded were the CEOs of...


Total Compensation

Percentage Change From 2010 to 2011

Change in stock price

Annaly Capital Management (NLY)

$35 million



Simon Property Group (SPG)

$32.2 million



Kilroy Realty (KRC)

$17.9 million



SL Green Realty (SLG)

$14.7 million



Ventas (VTR)

$12.1 million



Sources: WSJ, Yahoo! Finance.

As you can see, not only did all these folks receive rather generous pay increases, but in every case, the boost in compensation far outweighed the benefits shareholders received. (In some cases, you could argue the shareholders received no benefit, other than the return of some small portion of their own money in the form of dividends, as their portfolios shrank while the CEOs' paychecks grew.)

What It Means to You

Of course, maybe you don't own stock in any of these companies, and your response to these pay packages -- however rich they might seem -- is "So what? It's no skin off my nose." But as a matter of fact, the money REIT CEOs collect just might end up costing you a pound or two of flesh.

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How? When deciding on a pay package, corporate compensation committees routinely point to what "peer" firms -- a term open to wide interpretation -- pay their bosses, and use that as justification for picking a number for their own CEOs.

So maybe you don't own shares of Annaly Capital, for example, but do own shares of Sysco (SYY). Well, the compensation committee at Sysco could decide to pay their CEO a salary commensurate with Annaly's, based on the theory that while the companies aren't in the same industry, they do have similar market caps -- $16 billion, give or take. Or perhaps you don't own Simon Property, but invest in Alaska Air. You might one day find your CEO demanding a raise on his $1 million salary, arguing that Simon's boss gets a bigger paycheck, despite managing a firm with identical annual revenues of $4.4 billion.

Sound crazy? Consider how Activision Blizzard's compensation committee arrived at the decision to pay their boss $2 million, plus a bonus of up to $6.4 billion: The "peer" companies used in that comparison ran the gamut from Electronic Arts (logical) to Netflix (less so) to Clorox (say what?!).

Then again, in a world in which glorified apartment managers are collecting $35 million paychecks, maybe the word "crazy" has lost all meaning.

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Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Clorox, Annaly Capital, Activision Blizzard, and Netflix, and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Annaly Capital Management, Activision Blizzard, and Netflix, as well as creating a synthetic long position on Activision Blizzard.