How to make top talent a strategic priority; faced with a continuing talent deficit, the apartment industry must depend more on the structure and perceived value of incentives than the "opportunity" for employment.Demand in the apartment sector continues to increase, as evidenced by capital flow into acquisition and development, cap rate compression, asset pricing, steady job growth, rental rate increases and the benefits of rising interest rates cooling a little of the single-family sin·gle-fam·i·ly adj. Relating to or being a dwelling designed for one family only: a single-family home; single-family occupancy. and condominium condominium In modern property law, individual ownership of one dwelling unit within a multidwelling building. Unit owners have undivided ownership interest in the land and those portions of the building shared in common. markets. The multifamily housing sector (public) has shown the highest total return in the industry so far in 2006 (15.8 percent at the end of the first quarter). With improving fundamentals and a stronger owner market looming looming: see mirage. comes the potential for improved performance, and in turn, pressure to find and retain talented professionals at the executive, management, operating and administrative levels. However, improving asset performance has not solved the continued talent shortage within the apartment sector. In 2006, the recruitment and retention of talent will depend more on the structure and perceived value of incentives than the "opportunity" for employment. During the past 12 months, compensation within the apartment industry has continued its upward trend. The combination of a declining pool of talented professionals and an active free agent market has raised compensation to a strategic consideration. This dramatic shift is just one of the many findings in the recently concluded 17th Annual CEL CEL Cellular CEL Celestial CEL Check Engine Light CEL Degrees Celsius (temperature) CEL Comisión Ejecutiva Hidroeléctrica del Río Lempa (El Salvador) CEL Center for Entrepreneurial Leadership & Associates, Inc. 2006 National Real Estate Compensation & Benefits Survey. In 2006, more so than any of the past few years, compensation can no longer be only an annual business plan look-back consideration, as appropriate incentive opportunity and retention can no longer be addressed reactively. The art and science of compensation requires longer-term thinking and a long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. perspective in design and structure. Like the industry as a whole, the apartment sector has matured, and the deal-closing, short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. NOI NOI Net Operating Income NOI Notice of Intent NOI Nation of Islam NOI Notice of Inquiry NOI Neuro Orthopaedic Institute NOI New Organizing Institute NOI Notice of Interest NOI No Offense Intended NOI National Olympiad in Informatics improvement mentality men·tal·i·ty n. The sum of a person's intellectual capabilities or endowment. has shifted to the development of greater long-term perspective for resident relations and retention and portfolio and corporate financial success, and this requires a re-thinking of how executives and professionals are paid and retained at all levels. Aligning a·lign v. a·ligned, a·lign·ing, a·ligns v.tr. 1. To arrange in a line or so as to be parallel: align the tops of a row of pictures; aligned the car with the curb. annual apartment asset operating goals with performance-based compensation is only the first step in a broader and more strategic approach to compensation. A strategic-based compensation philosophy ensures that compensation and performance, measured on an absolute and relative basis over time (three to five years), becomes the foundation for property and asset management, growth, governance Governance makes decisions that define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of management or leadership processes. Sometimes people set up a government to administer these processes and systems. and investor confidence. Increasing Role of Bonus Plans The survey reveals the increasing compensation levels in a sector experiencing growth and profitable performance. Table I (page 32) shows median salary and bonus levels for an array of residential multifamily positions--from division executives to onsite leasing representatives across a broad spectrum of multifamily housing companies, across the country--private and public, large and small. Executives and management averaged approximately 6.4 percent and 4.9 percent growth, respectively, in median total cash compensation (base salary plus annual bonus) in 2005 compared to 2004. Expect similar change in 2006. Property operations personnel reported an average growth in median total cash compensation of 3.1 percent over the same period. Bonus plans play an increasing role in total cash compensation, as bonus plans are now included in the annual incentives of nearly 90 percent of firms. Award achievement has reached the 88 percent level, offering insightful questions to managers relative to how high to "set the bar" for performance and how to handle the unintended consequences For the "Law of unintended consequences", see Unintended consequence Unintended Consequences is a novel by author John Ross, first published in 1996 by Accurate Press. of creating a culture of expectations. The basis for determining bonus compensation awards has changed over the past few years, as more firms are defining performance in more specific terms and are improving the measurement and monitoring of success throughout the year. The CEL survey results showed that in 2006, real estate firms will evaluate performance using the following criteria in various combinations: formula based--33.8 percent; individual performance--33.8 percent; management discretion--39.7 percent; and other methods--2.2 percent. Benefits on the Rise The survey also revealed the increasing competition in the area of benefits practices. This demanding and costly component of business is as important as compensation in the recruitment and retention of talent. The rising cost of benefits is a corporate and human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. challenge, and this year's survey results reflect the trends in the market place. Health Care Benefits. Health care costs and benefits offerings are rising among real estate firms. Table II (page 32) shows the growth in health care benefits among companies from 2005 to 2006. CEL anticipates that the use of health savings accounts A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to the account are not subject to federal income tax at the time of deposit. will rise considerably in the next several years as more employers and employees see and encourage the economic advantages of this plan, as related to the company's management of an appropriate deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). amount in alternative plans. Tax-Oriented Benefits. The use of tax-incentive based benefits is also an increasing practice among firms, as seen in Table III (page 32), which presents the increasing share of companies using these plans in 2006. Deferred compensation plans remained steady over 2005 as changing IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. rules on the timing of commitments and other governing gov·ern v. gov·erned, gov·ern·ing, gov·erns v.tr. 1. To make and administer the public policy and affairs of; exercise sovereign authority in. 2. regulations have slowed the use of this benefit plan for many firms. Health Care Costs. The cost of health care benefits to employer and employee is presented in Table IV (above). Cost to employer and pressure to not pass additional costs directly to employees is a reflection of market competition for recruiting and retention, and the creative plan design and structuring of health benefits by human resources management. Retirement savings accounts Noun 1. retirement savings account - a plan for setting aside money to be spent after retirement pension account, pension plan, retirement account, retirement plan, retirement program, retirement savings plan for most firms in the industry are oriented o·ri·ent n. 1. Orient The countries of Asia, especially of eastern Asia. 2. a. The luster characteristic of a pearl of high quality. b. A pearl having exceptional luster. 3. around 401(k) programs and not defined benefit plans Defined benefit plan A pension plan obliging the sponsor to make specified dollar payments to qualifying employees at retirement. The pension obligations are effectively the debt obligation of the plan sponsor. Related: Defined contribution plan . For 2006, 401 (k) plans are steady in their average match as a percent of contribution (57 percent), and steady in the ratio of firms using a cliff-vesting schedule versus a stair-step method over the vesting Vesting The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee's qualified retirement plan account. Notes: period (41 percent--cliff vesting; 55 percent--stair-step; and 4 percent--other methods). Executive Decisions Although both public and private real estate executives remain bullish Bullish Word used to describe an investor's attitude. Bullish refers to an optimistic outlook, while bearish means a pessimistic outlook. bullish , they must carefully consider the delicate balancing act among competing forces of compensation policy and programs within the apartment sector--reward, incentive, retention, governance, market perception, investor confidence and potential changes in the future drivers of the business. The survey revealed that during the past few years, improving financial performance has created a safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. , allowing executives to avoid much questioning over compensation decisions. However, every real estate firm must be aware of several issues. For public companies, implementation of FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). 123 (R) (Share Based Payments) begins in 2006, and with it comes a host of financial and strategic changes impacting compensation, including fair market value model test, defining service period and grant date, the tracking of option exercise behavior and the design of option vesting relative to corporate expense without diluting perceived value. Additionally, proposed SEC Compensation Disclosure Regulations for executive compensation in proxy statements Proxy Statement A document containing the information that a company is required by the SEC to provide to shareholders so they can make informed decisions about matters that will be brought up at an annual stockholder meeting. will likely alter compensation design and reporting and will further emphasize both the compensation/performance relationship and its strategic alignment with the company and the market. New disclosure regulations and continued pressure to demonstrate the performance/compensation relationship will reduce the extent of reliance on the traditional "peer and market mirrored" bottom-up bot·tom-up adj. Progressing from small or subordinate units to a larger or more important unit, as in an organization. Adj. 1. assessment of individual compensation components for executives, instead building an assessment review from the top-down, which will emphasize total compensation comparisons and targets. For private companies, a crowded investment market from capital flow has put pressure on finding appropriate deals for investment criteria and their yields, which has reduced fees across core, opportunistic opportunistic /op·por·tu·nis·tic/ (op?er-tldbomacn-is´tik) 1. denoting a microorganism which does not ordinarily cause disease but becomes pathogenic under certain circumstances. 2. and value-added val·ue-add·ed adj. Of or relating to the estimated value that is added to a product or material at each stage of its manufacture or distribution: investments, which reduces incentive payouts. Long-term compensation plans continue to be the most difficult aspect of incentives for management as limited ownership, liquidity and market valuation make equity-based incentives complex. Proper incentives for the acquisition and development teams also continue to be a compensation issue, allowing the full integration of creative resources to share in an aligned opportunity to add value. Once upon a time, investment funds Noun 1. investment funds - money that is invested with an expectation of profit investment assets - anything of material value or usefulness that is owned by a person or company and financing were the constraints CONSTRAINTS - A language for solving constraints using value inference. ["CONSTRAINTS: A Language for Expressing Almost-Hierarchical Descriptions", G.J. Sussman et al, Artif Intell 14(1):1-39 (Aug 1980)]. to the business; now the constraint Constraint A restriction on the natural degrees of freedom of a system. If n and m are the numbers of the natural and actual degrees of freedom, the difference n - m is the number of constraints. has shifted to the acquisition of talent and appropriate incentive opportunity to retain them long-term. Planning for the Future The survey has exposed many trends and changes in the industry. As the industry matures in public investment and portfolio status, so does its compensation practices. Prediction is one thing; preparation is another. Many trends and changes in compensation practices are occurring and should be included in executives' and boards' planning over the next several years. Following are a few important trends and changes: * Boards and compensation committees will be adding more and tougher performance measures linked to compensation opportunity and award criteria. * CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. and senior-executive-level base salary adjustment is moving away from serial, annual orientation to multi-year structures, which is shifting compensation emphasis toward performance (risk)-based components. * Bonus realization remains high (88 percent of target), which fuels the expectations issue and requires the constant assessment of appropriate performance evaluation Performance evaluation The assessment of a manager's results, which involves, first, determining whether the money manager added value by outperforming the established benchmark (performance measurement) and, second, determining how the money manager achieved the calculated return criteria. The distinction of "true performance" will be the challenge of 2006. * Less emphasis on a strictly annual bonus structure will allow for multiyear performance criteria. Using rollover A graphic element in an application or on a Web page that changes its color or shape when the pointer is moved (rolled) over it. See JavaScript rollover. See also n-key rollover. , it also allows for deferral deferral - Waiting for quiet on the Ethernet. and multiple payout pay·out n. 1. The act or an instance of paying out. 2. A percentage of corporate earnings that is paid as dividends to shareholders. opportunities designed for a better alignment with the range of time frames and risks in multifamily housing development, investment, financial and operating activities. * Companies are using a broader variety of long-term structures, including payout of a portion of cash incentive in shares or units, the use of deferred payout programs and arrangements, "artificial sales," performance units, "mirrored" profits interest opportunity and phantom equity. * Health care and other benefits costs continue to rise, likely by 9 percent to 10 percent in 2006, putting pressure on companies' margins (and dividends and distributions), forcing the question of pass-through pass-through n. 1. An opening between two rooms, especially a shelved space between a kitchen and dining room that is used for passing food. 2. A route through which something is permitted to pass. 3. to employees. * With pressure for greater disclosure and clarity in executive compensation, communication will become paramount for investors and recruiting, requiring a company's "message" on rationale rationale (rash´  nal´),n the fundamental reasons used as the basis for a decision or action. to emphasize not just compensation value, but the value of compensation. Shifting Strategies Compensation is becoming more strategic and, within the industry, is changing rapidly. Recent years, including 2005, were good to most apartment executives, company owners and investors. But the trends are clear, and changes in the economic conditions and market place for the apartment sector are improving. Apartment companies are increasing their investments in talent, both in compensation and training and career development. The shift to strategic thinking about compensation, compensation plan designs and the relationship to retention and company performance has become a practical reality for competitive position. Compensation Structure: Questions to Consider For executives, corporate and property/asset management, the favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. trends in the apartment market place and the pressure to recruit and retain top talent are seeds for key questions related to a company's compensation structure and administration. MEASURING AND MANAGING PERFORMANCE * Are the performance metrics Performance metrics are measures of an organizations activities and performance. Performance metrics should support a range of stakeholder needs from customers, shareholders to employees [1]. used to measure success at the asset, portfolio and company levels appropriate, and are they aligned and adapted to variations in economic conditions and growth rates Growth Rates The compounded annualized rate of growth of a company's revenues, earnings, dividends, or other figures. Notes: Remember, historically high growth rates don't always mean a high rate of growth looking into the future. nationally, among regions and in markets and sub-markets? * Is the company's alignment of short-term performance with short-term compensation distinct from long-term performance and long-term compensation? Do the performance measures set an appropriate "standard" for apartment markets in the next cycle? * Does management have sufficient discretion in managing performance compensation? Is more flexibility needed to adapt to specific markets, assets or competitive environments? RETAINING EXECUTIVE TALENT * How should an owner manage expectations and measure and evaluate performance in an economic environment of growth in demand and leasing? * How can succession planning Management Succession Planning In organizational development, succession planning is the process of identifying and preparing suitable employees through mentoring, training and job rotation, to replace key players — such as the chief executive officer (CEO) — , leadership and career development at all levels of property and asset management further secure talent and develop stronger leaders? * After five years of investment strength, will there be a shift in capital flow away from public and private real estate to the broader investment market? Will it also create a shift in talent? * Will new public company regulations affect private companies regarding the market for talent, compensation levels and structures and disclosure? APPROPRIATE PLAN DESIGN * What creative incentive design strategies better ensure motivation and retention of talent and distinguish a company from competitors? * Does stronger demand for apartment product require a rethinking of compensation structure at a company? * How does the increasing requirement for affordable housing components ("inclusionary" zoning requirements) in projects change performance measurement, incentives and property operations? * How deep into an organization should participation in a long-term compensation plan be designed to be effective? ORGANIZATION AND CULTURE * How does a company best manage and communicate the rising costs of health benefits and minimize their impact on company values and culture, particularly at the property operations level? * How does a company improve hiring practices and improve company policies to reduce turnover? * What kind of an organization structure and employment policy will better accommodate the trend in part-time part-time adj. For or during less than the customary or standard time: a part-time job. part workers and the market for "as needed as needed prn. See prn order. " skill acquisition? James James, person in the Bible James, in the Gospel of St. Luke, kinsman of St. Jude. The original does not specify the relationship. James, rivers, United States James. B. Wright is Managing Partner--CEL Compensation Advisors, LLC (Logical Link Control) See "LANs" under data link protocol. LLC - Logical Link Control , a division of CEL & Associates, Inc., based in Los Angeles Los Angeles (lôs ăn`jələs, lŏs, ăn`jəlēz'), city (1990 pop. 3,485,398), seat of Los Angeles co., S Calif.; inc. 1850. . For information on compensation, compensation program design or emerging compensation trends, call 310/571-3113 or e-mail cel@celassociates.com.
TABLE I
MULTIFAMILY POSITION COMPENSATION
BASE ACTUAL
SALARY $ BONUS $
50TH 50TH
JOB TITLE PERCENTILE PERCENTILE
Top Division Executive $196,500 $85,100
Top Regional Executive $162,300 $78,800
Top Acquisitions Officer $160,000 $71,600
Acquisitions Associate $75,300 $15,500
Top Asset Management Executive $142,800 $37,100
Asset or Portfolio Manager $85,300 $12,800
Top Property Management Executive $151,300 $35,400
Regional Vice President $100,500 $21,700
District Manager $74,900 $8,900
Onsite Community Manager (<300 Units) $40,600 $4,200
Onsite Community Manager (>300 Units) $52,200 $5,500
Assistant Manager $30,700 $2,100
Maintenance Supervisor $40,800 $3,100
Maintenance Engineer $29,400 $1,900
Onsite Leasing Representative $25,500 $2,200
Top Development Executive $173,700 $51,900
Project Manager $91,200 $18,100
Top Construction Executive $124,000 $26,500
Jr. Construction Manager $77,400 $10,800
BONUS AS % TOTAL
OF BASE CASH $
50TH 50TH
JOB TITLE PERCENTILE PERCENTILE
Top Division Executive 54.5% $270,000
Top Regional Executive 51.0% $223,700
Top Acquisitions Officer 63.2% $209,700
Acquisitions Associate 29.2% $86,700
Top Asset Management Executive 35.8% $176,900
Asset or Portfolio Manager 17.8% $92,000
Top Property Management Executive 33.9% $171,300
Regional Vice President 23.3% $124,200
District Manager 15.0% $81,100
Onsite Community Manager (<300 Units) 11.5% $43,600
Onsite Community Manager (>300 Units) 12.4% $56,800
Assistant Manager 8.9% $31,900
Maintenance Supervisor 8.4% $42,400
Maintenance Engineer 7.2% $30,700
Onsite Leasing Representative 12.0% $27,500
Top Development Executive 43.7% $230,200
Project Manager 25.1% $96,200
Top Construction Executive 39.6% $150,000
Jr. Construction Manager 20.0% $95,000
'04 TO '05
GROWTH TOTAL
CASH $ 50TH
JOB TITLE PERCENTILE
Top Division Executive 7.3%
Top Regional Executive 8.5%
Top Acquisitions Officer 7.5%
Acquisitions Associate 7.3%
Top Asset Management Executive 3.6%
Asset or Portfolio Manager 3.4%
Top Property Management Executive 6.5%
Regional Vice President 3.1%
District Manager 3.0%
Onsite Community Manager (<300 Units) 3.1%
Onsite Community Manager (>300 Units) 3.1%
Assistant Manager 2.9%
Maintenance Supervisor 3.2%
Maintenance Engineer 3.0%
Onsite Leasing Representative 3.4%
Top Development Executive 4.6%
Project Manager 4.5%
Top Construction Executive 7.1%
Jr. Construction Manager 5.0%
Source: CEL & Associates, Inc./CEL Compensation Advisors,
LLC, 2006
TABLE II
HEALTH CARE BENEFITS OFFERED--2005 TO 2006
2005 2006
ITEM PERCENT PERCENT
Medical Insurance 89% 92%
Dental Insurance 80% 85%
Vision Plan 61% 67%
Employee Assistance Plan 43% 53%
Health Ins.--Part-Time Employees 20% 22%
Health Savings Accounts 6% 10%
Source: CEL & Associates, Inc./CEL Compensation Advisors, LLC
TABLE III
TAX ORIENTED BENEFITS OFFERED--2005 TO 2006
2005 2006
ITEM PERCENT PERCENT
Flexible Benefits--Pre-Tax Premiums 64% 69%
Dependent Care Reimbursement Account 58% 62%
Health Care Reimbursement Account 52% 60%
Deferred Compensation Plan 19% 19%
Cafeteria Plan--Cash Options 6% 7%
Source: CEL & Associates, Inc./CEL Compensation Advisors, LLC
TABLE IV
MEDICAL AND DENTAL INSURANCE COSTS PER EMPLOYEE0--ESTIMATED 2006
EMPLOYEE COSTS PER EMPLOYEE 2005 2006
Under $2,500 11.3% 10.2%
$2,500 to $3,999 33.3% 27.3%
$4,000 to $5,999 31.1% 34.7%
Over $6,000 24.3% 27.8%
Total 100% 100%
EMPLOYEE COSTS 2005 2006
Under $500 25.5% 27.8%
$500 to $699 14.3% 10.5%
$700 to $899 7.1% 7.4%
Over $900 53.1% 54.3%
Total 100% 100%
Source: CEL & Associates, Inc./CEL Compensation Advisors, LLC
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