EQUITY RESIDENTIAL (EQR)

Emphasis on Long-Term Compensation: Share Awards and Option Awards

The third element of direct compensation, after annual salary and cash bonus, is long-term compensation consisting of Share Awards and Option Awards, which are meant to:

The Company believes that share ownership by our executive officers is the most direct way to align their interests with those of our shareholders. As a result, each executive officer’s total annual compensation package includes a significant portion of Share Awards and Option Awards. The larger one’s total compensation is, the larger the percentage that Share Awards and Option Awards will make up of the total annual compensation. Sixty-five percent of Mr. Neithercut’s 2007 total annual compensation is comprised of Share Awards and Option Awards that vest over time.

Executive officers are awarded long-term compensation annually based on a number of factors, including both Company performance and individual performance for the previous year. The amount of the awards is determined as follows. Each executive officer is assigned a long-term compensation target amount. The long-term compensation target is expressed as a percentage of annual salary or of annual salary plus cash bonus. In any year, the long-term compensation an executive officer actually receives can be greater or less than the target.

Mr. Neithercut’s long-term compensation target was $2,343,750 — 150% of his total cash compensation (Annual Salary plus Annual Cash Bonus target). His annual long-term compensation is determined by the Compensation Committee together with the other independent members of the Board. Factors taken into account in this determination include the long-term compensation target, Company performance, the value of similar awards to chief executive officers of comparable companies, the long-term compensation awards given chief executive officers in past years, the Company’s overall financial condition, long-term compensation paid to the other executive officers and employees for the current year, as well as any other factors deemed relevant by the Committee.

Mr. Neithercut’s long-term compensation was 87.3% of target, reflecting current-year performance, as well as his leadership role in the long-term financial success of the Company and in building the value of the Company’s portfolio.

Long-term compensation targets for 2007 for the named executive officers other than Mr. Neithercut are Mr. Spector, 188% of total cash compensation target; Mr. George and Mr. Tuomi, 100% of

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total cash compensation target; and Mr. Parrell, 61.5% of annual salary, reflecting nine months as Senior Vice President and Treasurer and three months as Executive Vice President and Chief Financial Officer.

The actual long-term compensation award is determined by Mr. Neithercut in consultation with Mr. Spector (except for his own long-term compensation) and the Compensation Committee, using the target as a baseline. Factors taken into account in determining each executive officer’s actual long-term compensation award include Company performance for the year, as previously discussed, the Company’s overall financial condition, the executive’s performance against annual goals and objectives, and the percentage of long-term compensation target paid to the other executive officers and employees.

Long-term compensation earned by the ten executive officers as a group for 2007 was 3.5% above target as a result of the achievements discussed in Company Performance in 2007, as well as each executive’s individual performance. Long-term compensation paid to the ten executive officers as a group for 2007 was 7.7% lower than long-term compensation paid to the ten executive officers for 2006.

Mr. Spector’s long-term compensation was 93.6% of target, reflecting current-year performance, as well as his ongoing contribution to the long-term financial success of the Company and value of the Company’s portfolio.

Mr. George’s long-term compensation was 131% of target, reflecting current-year performance and his significant contribution to the long-term financial success of the Company and value of the Company portfolio, particularly in the area of portfolio transformation.

Mr. Tuomi’s long-term compensation was 123.7% of target, reflecting current-year performance and his contributions to the long-term financial success of the Company and value of the Company’s portfolio.

Mr. Parrell’s long-term compensation was 166.7% of target, reflecting 2007 performance, his contribution to the long-term success of the Company and his promotion to Executive Vice President and Chief Financial Officer, a greatly expanded role that significantly increases his potential for enhancing the Company’s future financial results.

The amounts of long-term compensation awards for the named executive officers are shown in the Summary Compensation Table below.

Share Awards. For all executive officers, 75% of long-term compensation is issued as Share Awards (or “restricted shares”). The number of restricted shares is determined by dividing the dollar value of the Share Award by the grant price. Share Awards vest in full upon completion of three years of continuous employment from the grant date, encouraging the retention of key executives. Dividends are paid on restricted shares at the same rate as on unrestricted common shares.

Option Awards. The remaining 25% of long-term compensation is issued as Option Awards. The Company believes that Option Awards are particularly well-suited to aligning executives’ interests with those of shareholders and for motivating future performance because Option Awards have no value unless the share price appreciates. The number of options is determined by dividing the dollar value of the Option Award by the option value per share. Option Awards vest over a period of three years of continuous employment at a rate of one-third of such award each year, providing further encouragement for the retention of key executives.

Pricing and Dates of Share Awards and Option Awards. The Company has a detailed policy establishing the grant date and valuation for its annual issuance of Share Awards and Option Awards. The Share Award value and the exercise price of the Option Awards shall be the price of the Company’s common shares at the close of business on the grant date approved by the Company’s Board. The

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Company’s Chief Financial Officer and/or Chief Accounting Officer provides the Compensation Committee with management’s recommendation for the value of each option to be used in the Option Award, including all assumptions to be used. The Company uses the same valuation methodology for the value of each option as it uses to determine accounting expense for Option Awards in accordance with Statement of Financial Accounting Standards No. 123, Share-Based Payment, as revised (“SFAS 123 (R)”). The Company's Board, after reviewing the Compensation Committee's recommendation, then approves the grant date (which must be on or after the approval date and is typically one business day after the Company's release of its fourth quarter earnings), the value of each option, the allocation between Share Awards and Option Awards, and the annual salary increases and Share Awards and Option Awards for all employees, including its executive officers. Any grant date for out of cycle grants (i.e., an initial award to a new hire or an award to an existing employee in the case of a promotion) to the Company's executive officers requires the approval of the Compensation Committee and/or the Company’s Board.

Performance Share Unit Awards. For services performed for years prior to 2006, executive officers were granted Performance Share Unit Awards, which made up ten percent of their total compensation. The purpose was to promote the overall financial objectives of the Company and its shareholders by linking the financial interests of the executives to the achievement of long-term growth in shareholder value, and to continue their employment with the Company. The Performance Share Units gave the executive an opportunity to earn in common shares an amount as little as 0% to as much as 225% of the number of Performance Share Units earned, depending on Company performance, as more fully explained in the Executive Compensation section of this proxy.

The Company discontinued the awarding of Performance Share Units at year-end 2006 and did not award any such units for services performed during 2006 or 2007. The Company believes that the objectives of Performance Share Units are accomplished by Share Awards and Option Awards. The amount that previously would have been granted to each executive officer as Performance Share Units is now included in the 2007 long-term compensation, with 75% issued as Share Awards and the remaining 25% issued as Option Awards.

Emphasis on Long-Term Compensation: Share Awards and Option Awards

      The third element of direct compensation, after annual salary and cash bonus, is long-term compensation consisting of Share Awards and Option Awards, which are meant to:

• align the interests of key executives with the interests of the Company and its shareholders;
• motivate current and future performance by providing opportunity to participate in the appreciation in the value of the Company’s shares over time;
• recognize and reward Executive Officers’ ongoing contributions to the business; and
• encourage the retention of its Executive Officers.

The Company believes that share ownership by our Executive Officers is the most direct way to align their interests with those of our shareholders. As a result, each executive officer’s total annual compensation package includes a significant portion of Share Awards and Option Awards. The larger one’s total compensation is, the larger the percentage that Share Awards and Option Awards will make up of the total annual compensation. Sixty percent of Mr. Neithercut’s 2006 total annual compensation is comprised of Share Awards and Option Awards that vest over time.

      Executive Officers are awarded long-term compensation annually based on a number of factors, including both Company performance and individual performance for the previous year. The amount of the awards is determined as follows: Each Executive Officer is assigned a long-term compensation target amount. The long-term compensation target is expressed as a percentage of annual salary or of annual salary plus cash bonus. In any year, the long-term compensation an Executive Officer actually receives can be greater or less than the target.

      Mr. Neithercut’s long-term compensation target for 2006 was $2,250,000 - 150% of his total cash compensation. His annual long-term compensation is determined by the Compensation Committee together with the other independent members of the Board. Factors taken into account in this determination include the long-term compensation target, Company performance, the value of similar awards to chief executive officers of comparable companies, the long-term compensation awards given chief executive officers in past years, the Company’s overall financial condition, long-term compensation paid to the other executive officers and employees for the current year, as well as any other factors deemed relevant by the Committee.

      Long-term compensation targets for 2006 for the named executive officers other than Mr. Neithercut are Mr. Spector: 188% of cash compensation; Mr. George and Mr. Tuomi: 100% of cash compensation; and Ms. Brandin: 75% of annual salary.

      The actual long-term compensation award is determined by Mr. Neithercut in consultation with Mr. Spector (except for his own long-term compensation) and the Compensation Committee, using the target as a baseline. Factors taken into account in determining each Executive Officer’s actual long-term compensation award include Company financial performance for the year, the Company’s overall financial condition, the executive’s performance against annual goals and objectives, the percentage of long-term compensation target paid to the other Executive Officers and employees.

      Long-term compensation earned by the ten Executive Officers as a group for 2006 was 18.6% above target as a result of the achievements discussed in Company Performance in 2006, as well as each executive’s individual performance. Long-term compensation paid to the ten Executive Officers as a group for 2006 was 21.7% higher than long-term compensation paid to the ten Executive Officers for 2005.

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