Public company compensation committees face their own set of governance issues that must be addressed. For investors, the most nagging question is the perception (or reality) of the relationship between compensation and performance. This rationale is the biggest challenge CEOs and boards face relative to compensation governance. However, other issues also are topics of scrutiny, including large awards of stock options to CEOs and boards, expensing of stock options, retention of executive talent, expanding retirement benefits, peer group definition and peer performance, among others. Another frequent challenge is managing the ”ratchet effect” on compensation levels, in which the most recent market survey of “what everyone else is paid” raises the baseline for compensation regardless of its relationship to performance.

For REITs, the transition from entrepreneurial-based real estate owners/developers to public company managers focused on long-term operational efficiency and cash flow growth in a public forum is essential for building investor confidence and enhancing shareholder value. The mandate of contemporary corporate governance standards is a part of this transition, incorporating REIT compensation committees and compensation practices. In the near term, the catalyst for change will center on committees needing to be more independent, more involved, more strategic and more proactive.

REITs have generally hired a single compensation consultant, working with the board and management to provide independent assessment, analysis, conclusions and recommendations regarding compensation. This traditional “compensation consultant” is usually hired by management to assess industry market levels of compensation for specific positions, trends in compensation policy/practices, and the review/design of recommended plans or changes to existing plans.

However, an alternative and complementary approach to capture the trends for more effective governance may be to engage a separate advisor, reporting directly to the compensation committee, supporting and coordinating their responsibility and mandate in both content and process.

Beyond the traditional outside compensation consultant retained by management, this additional category of independent support may offer the compensation committee the opportunity to engage its own advisor to assist them in fulfillment of their governance charter and mandate. A separate advisor for the committee could insure independence, and provide a vehicle to facilitate all committee members’ ability to fully understand all aspects of their decisions, and to allow them an independent opportunity to ask questions, clarify impact and risk, and challenge information, concept, structure or recommendations.

Acting to provide distinction and separation between the work of compensation review and the responsibility for effective governance, this additional resource is not intended to promote confrontation, “dueling” consultants, or create overlap. Rather, its intent is to facilitate greater dialogue, effective communication among members, an independent forum for questions and clarifications, increased accountability, stronger decision rationale, and greater assurance of fairness, thoroughness, independence, consensus, as well as shareholder representation–and thereby greater enterprise value.

Although the compensation committee advisor may well be an appropriate and permanent aspect of industry leading REIT governance, specific situations that could benefit from an independent consultant would be when the committee has new members or chairmanship, when member compensation knowledge and experience is limited, when investor issues have been raised, where members are located with great distance and meetings are difficult to coordinate, where retention is an issue, when merger, strategy, market changes or performance issues are occurring, CEO/leadership change, or where conflicts of control, philosophy, policy or practice are apparent.

In the current economic downturn for many REIT sectors, such a resource could be proactively utilized to support a committee’s—and ultimately the board’s—understanding of the overall relationship between pay and performance, their essential responsibility. If found to be at risk (too high or too low over time), the committee (and company) could make adjustments to the compensation recommendations. If not at risk, the company could proactively enhance their investor relations. Additionally, the independent committee advisor will inspire greater creativity in compensation design, and may offer more financial opportunity over the long term.

An ideal “committee advisor” would provide a platform of REIT executive compensation and real estate experience, and the capacity to work directly with the chairman and committee members to assist in: an effective and independent process, clarifying and embellishing issues and results, reviewing compensation assessment, enhancing the execution of committee responsibility, providing independent technical review, balancing competing opinion and interests, and defining and validating the strategic rationale for decisions and recommendations to the board. Although vital, the scope is smaller, the cost less, and the focus are governance and oversight, rather than specific design and implementation.

In the area of executive compensation, where very personal and carefully reviewed decisions are both reflections as well as perceptions of executive value and success, the committee advisor concept offers significant incremental independent support for both the content and process of industry leading governance policy.

Future shifts toward greater participation and involvement in compensation review and recommendations by the committee will occur in various ways and in various degrees.

The concept of an advisor, separate and apart from the traditional compensation consultant, and reporting directly to the compensation committee chairman, may offer REIT leadership a potentially compelling and significant strategy for achieving greater market recognition and confidence in REIT ownership, while allowing the committee needed support for greater independence and involvement. The rewards of proactive action outweigh the risks of defending a challenged practice or decision.

Moreover, corporate governance measurement is already being used to evaluate investments, and the future may soon incorporate metrics of corporate compensation to performance relationships in the same vein as P/E ratios or price/FFO multiples measure relative market value. Structured properly, an independent resource for compensation committees can provide support in a more participative environment without jeopardizing current trusted relationships or the arms length “distance” for appropriate oversight. It will also foster greater understanding of compensation issues between board and company management, stimulate creative compensation design to motivate the achievement of strategic objectives, strengthen the overall rationale for decisions, and likely offer greater executive compensation opportunity, all which will make a lasting contribution to greater enterprise value.