This excerpt taken from the EQR DEF 14A filed Apr 17, 2006.
COMPENSATION COMMITTEE REPORT
The responsibilities of the Compensation Committee, as more fully described in Governance of the Company, include overseeing the Companys compensation programs and practices. The purpose of the Companys executive compensation programs is to establish and maintain a performance and achievement oriented environment so that the interests of its executives are aligned with the interests of the Companys shareholders.
Pay-for Performance. An important part of the Companys commitment to a results-oriented culture is recognizing and rewarding our executives and employees based on their contributions to our success. The Company does this through its Equity Pay-for-Performance, a performance management program, which links incentive compensation to both individual and Company results for approximately 1,700 corporate and property-level employees. The program rates each participants achievement against financial objectives and also non-financial objectives that support both our employee and customer service programs. In addition to aligning incentive pay with performance, the program is designed to make the Companys performance expectations clear to employees and to measure and reward performance consistently throughout the organization. The performance data generated by the program also forms the basis for decisions that drive the Companys career development and succession planning programs.
There are four major components of the Companys executive compensation program: (1) annual base salary; (2) a short-term incentive of a cash bonus; (3) long-term incentives of restricted shares and share options; and (4) performance share unit awards. Each of these components is discussed below.
Base Salary. The Companys overall salary structure is reviewed annually, using compensation surveys of the real estate industry in general and public real estate companies in particular, as well as other public companies of similar size to the Company, to ensure that it remains competitive. Positions are classified on the basis of assigned responsibilities and on an evaluation of the latest survey information available, as to appropriate compensation levels. Individual base salaries are reviewed at least annually. Salary increases may be granted based on each executives performance as well as such executives position in the applicable salary range.
Bonus. Annual cash bonuses are awarded based on the executives achievement of Company and individual performance goals and objectives, as well as a range of short-term incentive targets applicable to that executive. The Companys overall bonus structure is also reviewed annually, taking into account data and general trends in the real estate industry and public real estate companies in particular.
Restricted Share and Option Awards. The Committee recognizes that the interests of shareholders are also served by giving key employees the opportunity to participate in the appreciation of the Companys common shares through the granting of options and/or restricted share awards. The Committee believes that over an extended period of time, share performance will, to a meaningful extent, reflect executive performance. Accordingly, such arrangements further reinforce management goals and incentives by aligning the interests of the Companys key personnel with the interests of the Company
and its shareholders. The options vest over a period of three years of continuous employment at a rate of one-third of such grant each year, thereby encouraging the retention of key employees who receive awards. The restricted shares vest in full upon completion of three years of continuous employment from the date of grant. The number of restricted shares or options awarded each executive is determined utilizing the executive compensation surveys mentioned above, an assessment of the executive officers achieved performance goals and objectives, and a range of long-term compensation targets applicable to that executive.
Performance Share Unit Awards. The grant of performance share units, as more fully described in Long-Term Incentive Plan Awards, is designed to focus the Companys executive officers eligible under this plan on achieving a high level of financial performance (i.e., common share dividends and FFO growth), and to encourage them to continue their employment with the Company. Awards are made to selected executive officers on an annual basis by setting a target number of common shares for each executive with an approximate value of 10% of the executive officers total annual compensation.
Share Ownership Guidelines for Senior Officers. In keeping with its belief that tying the financial interests of senior officers of the Company to those of the shareholders will result in enhanced shareholder value, the Board has established ownership guidelines for the senior officers of the Company. These guidelines provide that within three years of joining the Company or a promotion, the following officers should own shares equal to the following respective multiple of their annual base salary:
Chief Executive Officers Compensation. In general, the Committee meets annually, without the Chief Executive Officer present, to evaluate his performance and to determine his compensation. In considering the Chief Executive Officers compensation, the Committee considers his principal responsibilities, which are to provide the Companys overall mission, vision and strategic direction, to attract and retain highly qualified employees and to develop and maintain strong relationships with the overall investment and analyst community. The Committee also considers the Companys financial performance and the Chief Executive Officers individual performance in achieving his goals and objectives.
As further described in Employment Contracts and Change in Control Agreements, in March 2005 (as further amended in June 2005), the Company entered into an Amended and Restated Employment Agreement with Mr. Duncan, the Companys Chief Executive Officer at that time, to reflect the changes needed in view of Mr. Duncans planned retirement as Chief Executive Officer and Trustee as of the end of 2005. Based on this process and Mr. Duncans favorable contributions to the Company as Chief Executive Officer, the Committee awarded Mr. Duncan the compensation described in Executive Compensation. The Committee believes Mr. Duncans total compensation for 2005 was reasonable, competitive and consistent with prevailing practices for retiring Chief Executive Officers.
Section 162(m). Section 162(m) of the Internal Revenue Code of 1986, as amended (IRC), limits the deductibility on the Companys tax return of compensation over $1 million to any covered employee unless, in general, the compensation is paid pursuant to a plan which is performance-related, non-discretionary and has been approved by the Companys stockholders. The Company believes that because it has no covered employees whose compensation is subject to the $1 million deduction limit
under Section 162(m), and because it qualifies as a REIT under the IRC and pays dividends sufficient to minimize federal income taxes, the payment of compensation that may not satisfy the requirements of Section 162(m) will generally not materially affect the Companys net income. For these reasons, the Committees compensation policy and practices are not directly guided by considerations relating to Section 162(m).