Let's make a deal: compensation trends: the apartment industry is changing rapidly as the "pay or go" employee attitude is giving way to a new "pay to stay" approach.

Driven by a desire to achieve a competitive advantage, motivated by an increasingly discerning customer base and guided by a need to produce bottom-line results, compensation and compensation program design in the apartment industry is changing--and changing fast.

The "pay-me-now" attitude of employees has shifted to a "pay-me-to-stay" approach to reward and recognize performance. Recruitment and retention of employees has emerged as the No. 1 priority, of apartment firms throughout North America.

Compensation now rivals "finding deals" as one of the highest priorities of apartment management leaders today The recognition that the global real estate talent pool is shrinking has generated new attitudes toward and new solutions regarding compensation. These findings and others were some of the many issues identified in the recently concluded 2005 National Real Estate Compensation & Benefits Survey conducted by CEL & Associates Inc.

During the past eight years, pay increases in the apartment industry have exceeded the rate of inflation. In 2005, base salary increases are expected to average 3.3 percent, down from 3.5 percent in 2004. Since 1998, the total wage increases within the apartment industry, have exceeded the total inflation rate over that same period. Base salary increases in 2005 will be higher for executives (4 percent), than for onsite maintenance employees (3.1 percent). Onsite managers should expect a 3.1 percent to 3.3 percent increase to their annual salaries in 2005.

While Cost of Living Adjustments (COLAs) are rapidly disappearing within the apartment industry, its organizations have mid continue to be very generous in awarding annual increases. This generosity, while generally well-placed, is increasingly being driven by the recognition that a few percentage points in a raise can actually save thousands of dollars in replacement costs if that employee were to leave.

Incentive Bonus or Re-Signing Bonus

The 2005 National Real Estate Compensation & Benefits Survey and other studies completed by CEL & Associates have consistently concluded that annual incentive bonuses are changing. The performance bonus is being replaced by the annual re-signing bonus. Rewarding past performance, apartment companies have discovered, is not as important or as valuable as rewarding or assuring future performance.

In 2005, annual incentive bonuses are expected to be approximately 87 percent of potential target bonuses. This bonus realization rate has increased during the past two years and is a quantitative testimony to the recognition that "what I gave you" is not as important as "what I'm giving you." The message of retention is more important than a message of recognition of past deeds. "Investing in the future" appears to have a more dramatic impact than "thanks for what has already been done." Annual incentive programs now feature more frequent rewards, rolling payouts and very often have multi-bonus characteristics.

Less-Risky Long-Term Incentives

Long-term incentives (LTI), formerly the exclusive domain of senior-level executives, are now becoming more commonplace with mid-level officers and department or functional leaders. While real equity long-term incentive plans are now being replaced by phantom or mirror equity plans, participating employees are embracing LTI plans that have all the features but are far less risky than traditional equity plans.

Apartment firms are now willing to share a higher percent of the profit with a broader audience, if the enterprise has been paid for its capital and level of risk. It is not uncommon to see apartment companies create "profits interest" long-term incentives that "mirror" the same benefits set aside for investors and shareholders. In addition, many firms "stair-step" LTI awards based on performance, yield or comparative industry benchmarks. Today "giving up" a percent of the profits (asset-based) or value creation (company-based) has increased from a range of 5 percent to 15 percent in the 1990s, to a range of 15 percent to 30 percent in 2005.

Passing Along Health Care Costs

The cost of employee benefits continues to rise (an 8 percent to 10 percent increase is expected in 2005) and apartment companies are passing all or a significant portion of these increases onto their employees. Paying health care premiums for an employee's family, vision and dental care are rare. With an average cost of $3,500 per employee, health care benefits are one of the largest employee-related costs that apartment firms appear to be addressing. Cafeteria-style benefits plans and health savings accounts are becoming viable solutions within an uncontrollable environment.

Employee turnover costs are now one time the level of base compensation, and the overall rate of employee turnover remains high. However, with an overall employee turnover rate of more than 30 percent, the apartment industry, continues to do a poor job of hiring and creating compelling reasons for employees to stay.

Employee Preference Profiles

Several apartment management companies such as AvalonBay Communities have created "employee preference" profiles, enacted core competency, hiring practices or appointed smiled hiring teams to reduce employee turnover. AvalonBay's "Predictive Index" is an example of identifying characteristics of candidates that would be successful in a particular position. Additionally, AvalonBay has designed behavioral-based questions that are used during the interview to identify leadership competency. Recruitment of prospective employees also has shifted "outside" the real estate industry with companies now actively recruiting in the public sector, hospitality, retail, military and consumer products industries.

The average age of a property manager is more than 42, and in a majority of apartment firms, less than 10 percent of employees (non-clerical or administrative) are under the age of 30. The absence of "grow our own" employee training and career development programs in many apartment firms has created a need to go to the "buy our own" approach to recruitment.

Nearly 60 percent of apartment companies, according to a recent CEL & Associates survey, have not been satisfied with "purchased" employees. These "going-to-the-highest-bidder" employees typically have a harder time adjusting to established standards and traditions, struggle with "finding their place" among existing employees and leaders and appear to have an eye out for "something better." CEL & Associates estimates that there will be between 9 percent and 15 percent fewer "qualified" candidates to fill open positions by 2015.

Training and Career Development

The "pay to stay" compensation trend is also changing the staffing model within apartment organizations. Today, more than 80 percent of apartment employees are full time. By 2010, the ratio of full-time to part-time employees will have shifted to 60/40. By 2015, this full- to part-time ratio will be closer to 40/60 and by 2020, the ratio will be approximately 20/80.

Today, there is an apparent trend to categorize or segment employees into one of three labels: those who create value; those who add value; and those who protect value. Creators of value typically are harder to find, get paid the most (75th to 90th percentile) and participate in LTI plans. Those who protect value, on the other hand, are more easily replaced, receive cash compensation closer to the 50th percentile range (when compared to their peers) and are generally not eligible to participate in LTI programs.

Training and career development are two of the most important or desired attributes employees seek in their employer. According to a recent CEL & Associates study, employees in apartment firms who are "satisfied" or "very satisfied" with the level of training they receive and with their opportunities for career development are nearly four times more likely to stay with their employer--even though they perceive their overall cash compensation to be "below market"--than those employees who view the training and career development opportunities they receive as inadequate. In 2005, apartment firms are expected to spend approximately $1,000 per employee on training.

"Nothing gets done without an employee," one CEO remarked, "and therefore, we need to place more, not less, emphasis on talent ... or we will never reach our performance potential." Apartment firms, according to the CEL & Associates survey, must review their compensation plans annually to remain current and competitive. If this trend continues, the "pay and I'll stay" theme of 2005 will be replaced by an "I'll stay because you pay" theme in the years ahead.

6 Things to Keep In Mind

1 During the past eight years, pay increases in the apartment industry have exceeded the rate of inflation.

2 Companies are realizing that a few percentage points in a raise can actually save thousands of dollars in replacement costs if that employee were to leave.

3 The performance bonus is being replaced by the annual re-signing bonus.

4 Apartment firms are now willing to share a higher percent of the profit with a broader audience.

5 "Going-to-the-highest-bidder" employees typically have a harder time adjusting to established standards and traditions; struggle with "finding their place" among existing employees and leaders; and appear to have an eve out for "something better."

6 Training and career development are two of the most desired attributes employees seek in their employer.--C.L.

remains high. However, with an overall employee turnover rate of more than 30 percent, the apartment industry, continues to do a poor job of hiring and creating compelling reasons for employees to stay.

Employee Preference Profiles

Several apartment management companies such as AvalonBay Communities have created "employee preference" profiles, enacted core competency, hiring practices or appointed smiled hiring teams to reduce employee turnover. AvalonBay's "Predictive Index" is an example of identifying characteristics of candidates that would be successful in a particular position. Additionally, AvalonBay has designed behavioral-based questions that are used during the interview to identify leadership competency. Recruitment of prospective employees also has shifted "outside" the real estate industry with companies now actively recruiting in the public sector, hospitality, retail, military and consumer products industries.

The average age of a property manager is more than 42, and in a majority of apartment firms, less than 10 percent of employees (non-clerical or administrative) are under the age of 30. The absence of "grow our own" employee training and career development programs in many apartment firms has created a need to go to the "buy our own" approach to recruitment.

Nearly 60 percent of apartment companies, according to a recent CEL & Associates survey, have not been satisfied with "purchased" employees. These "going-to-the-highest-bidder" employees typically have a harder time adjusting to established standards and traditions, struggle with "finding their place" among existing employees and leaders and appear to have an eye out for "something better." CEL & Associates estimates that there will be between 9 percent and 15 percent fewer "qualified" candidates to fill open positions by 2015.

Training and Career Development

The "pay to stay" compensation trend is also changing the staffing model within apartment organizations. Today, more than 80 percent of apartment employees are full time. By 2010, the ratio of full-time to part-time employees will have shifted to 60/40. By 2015, this full- to part-time ratio will be closer to 40/60 and by 2020, the ratio will be approximately 20/80.

Today, there is an apparent trend to categorize or segment employees into one of three labels: those who create value; those who add value; and those who protect value. Creators of value typically are harder to find, get paid the most (75th to 90th percentile) and participate in LTI plans. Those who protect value, on the other hand, are more easily replaced, receive cash compensation closer to the 50th percentile range (when compared to their peers) and are generally not eligible to participate in LTI programs.

Training and career development are two of the most important or desired attributes employees seek in their employer. According to a recent CEL & Associates study, employees in apartment firms who are "satisfied" or "very satisfied" with the level of training they receive and with their opportunities for career development are nearly four times more likely to stay with their employer--even though they perceive their overall cash compensation to be "below market"--than those employees who view the training and career development opportunities they receive as inadequate. In 2005, apartment firms are expected to spend approximately $1,000 per employee on training.

"Nothing gets done without an employee," one CEO remarked, "and therefore, we need to place more, not less, emphasis on talent ... or we will never reach our performance potential." Apartment firms, according to the CEL & Associates survey, must review their compensation plans annually to remain current and competitive. If this trend continues, the "pay and I'll stay" theme of 2005 will be replaced by an "I'll stay because you pay" theme in the years ahead.

6 Things to Keep In Mind

1 During the past eight years, pay increases in the apartment industry have exceeded the rate of inflation.

2 Companies are realizing that a few percentage points in a raise can actually save thousands of dollars in replacement costs if that employee were to leave.

3 The performance bonus is being replaced by the annual re-signing bonus.

4 Apartment firms are now willing to share a higher percent of the profit with a broader audience.

5 "Going-to-the-highest-bidder" employees typically have a harder lime adjusting to established standards and traditions; struggle with "finding their place" among existing employees and leaders; and appear to have an eve out for "something better."

6 Training and career development are two of the most desired attributes employees seek in their employer.--C.L.

Compensation Raises

       Senior     Exempt     Non-Exempt
Year    Mgmt.    Employees   Employees

1998      4.7%        3.9%         3.0%
1999      5.2%        4.0%         3.4%
2000      5.5%        4.8%         3.7%
2001      5.8%        4.8%         4.2%
2002      4.0%        8.8%         3.5%
2003      3.7%        3.6%         3.4%
2004      3.9%        3.5%         3.2%
2005      4.0%        3.3%         3.1%

        Company    Inflation      Bonus
Year    Average      Rate        Realize

1998      3.8%        1.6%        90.0%
1999      3.9%        2.2%        91.0%
2000      4.2%        3.4%        89.5%
2001      3.9%        2.8%        92.0%
2002      3.7%        1.6%        86.0%
2003      3.6%        2.3%        80.0%
2004      3.5%        2.7%        83.4%
2005      3.3%      2.8% *        87.0% *

* Forecast

Multifamily Base Salaries

                                                  2004

                                            50th         75th
Position                                 Percentile   Percentile

Regional Vice President-Multifamily        $93,600     $119,300
District Manager--Multifamily              $70,500      $75,600
Onsite Community Manager (<300 units)      $38,400      $45,300
Onsite Community Manager (>300 units)      $49,200      $53,600
Maintenance Supervisor                     $38,600      $42,500
Development Executive                     $158,000     $200,500
Top Acquisitions Executive                $145,000     $190,000
Top Asset Executive                       $131,000     $158,800
Project Manager                            $85,300      $95,800

                                                  2005

                                            50th         75th
Position                                 Percentile   Percentile

Regional Vice President-Multifamily        $96,800     $123,500
District Manager--Multifamily              $72,800      $78,100
Onsite Community Manager (<300 units)      $39,600      $46,700
Onsite Community Manager (>300 units)      $50,800      $55,400
Maintenance Supervisor                     $39,800      $43,800
Development Executive                     $164,200     $208,500
Top Acquisitions Executive                $150,800     $197,600
Top Asset Executive                       $135,900     $165,100
Project Manager                            $88,300      $99,100

Multifamily Turnover Rates

Employee        Overall     Senior      Regional
Turnover Rate    Rate     Executive    Executive

1998 Average     38.8%      8.6%         10.3%
1999 Average     41.4%      9.2%         11.2%
2000 Average     40.3%      8.4%         10.8%
2001 Average     38.8%      7.8%          9.7%
2002 Average     37.0%      7.4%         10.4%
2003 Average     33.1%      5.5%          8.6%
2004 Average     31.8%      5.2%          9.0%
2005 Forecast    32.1%      5.2%          9.1%

Employee        Onsite     Onsite       Onsite
Turnover Rate   Manager    Leasing    Maintenance

1998 Average     21.3%      33.7%        43.2%
1999 Average     23.5%      37.4%        45.3%
2000 Average     22.0%      35.5%        44.2%
2001 Average     19.6%      31.6%        41.5%
2002 Average     20.3%      32.5%        41.0%
2003 Average     18.5%      27.6%        37.9%
2004 Average     19.7%      28.9%        38.6%
2005 Forecast    20.2%      30.3%        38.4%

NAA Conference Speaker

Lee will be a speaker at the 2005 NAA Education Conference & Exposition to be held June 9-11 at the Gaylord Palms Resort & Convention Center in Orlando, Fla. His will present on Friday, June 10, at 8:30 a.m. and 11:30 a.m.

Christopher Lee is President and CEO of Los Angeles-based CEL & Associates Inc., a national real estate consulting firm serving the apartment industry. View www.celassociates.com for information or call Lee at 310/571-3113.