The compensation structure of REIT managers: Impact on stock valuation and performance

Abstract

This paper examines the impact of managers' compensation structure on initial public offering (IPO) pricing and the subsequent corporate performance of 20 externally-managed real estate investment trusts (REITs) listed on the Singapore Exchange. The results indicate that the IPO market is somewhat efficient in pricing potential moral hazard problems arising from the way REIT managers are paid. In particular, we find that the market generally rewards REITs that pay their managers a low base fee coupled with a high incentive fee that is benchmarked against a pre-determined performance level. When tracking the post-IPO performance of the individual REITs, we find that it is related negatively to the size of the base fee, but positively to the performance-based fee. We also find weak evidence that the incentive-based fee that is benchmarked against a predetermined hurdle leads to superior performance by the managers. © 2009 Taylor & Francis.