Our Named Executive Officers in 2017
This CD&A describes the compensation of the following Named Executive Officers:
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Name
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Title
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Timothy Naughton
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Chairman, CEO and President
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Kevin O’Shea
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Chief Financial Officer
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Matthew Birenbaum
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Chief Investment Officer
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Sean Breslin
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Chief Operating Officer
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Stephen Wilson
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Executive Vice President, Development
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Compensation Overview
Our executive compensation programs covering the Named Executive Officers are designed to attract and retain key talent, to motivate behaviors that align with stockholders’ interests and to pay for performance. A substantial majority of the target pay of our Named Executive Officers is variable and contingent on performance.
Chairman and Chief Executive Officer 2017 Compensation At‑A‑Glance
Base Salary.
Mr. Naughton’s base salary for 2017 was $1,000,000. His salary had been maintained at $950,000 since he was first appointed as the Company’s Chairman and CEO in 2013. This was the first increase in base salary that he had received since 2013. The base salary increase aligned with the increases that the remaining Named Executive Officers received in 2017.
Cash Bonus.
Mr. Naughton’s target cash bonus increased from 150% to 175% of base salary in 2017. 75% of the target cash bonus is based on corporate performance factors and 25% is based on individual performance. The achievement levels for the corporate performance and individual factors were judged to be 95% and 115%, respectively, resulting in a final cash bonus for 2017 of $1,750,000.
Stock Bonus.
Mr. Naughton’s target stock bonus for 2017 was $1,250,000. The performance measures used in calculating the stock bonus reflect different elements of the Company’s performance and are not duplicative of the performance measures used to evaluate corporate performance under the annual cash bonus program. The achievement level for these stock bonus performance measures for 2017 was 115.1%, which resulted in a payout of $1,438,750. The payout is delivered in the form of restricted stock that vests ratably over three years from the date of grant. Please note that under applicable SEC rules this award will be disclosed in the 2019 proxy statement Summary Compensation Table as it was granted in 2018.
Performance Awards.
Mr. Naughton’s target performance award for the 2017 - 2019 performance period was $4,500,000. Sixty percent of the target award was tied to three-year total shareholder return (“TSR”) metrics, including absolute and relative comparisons, and 40% of the target award was tied to three-year relative financial operating metrics.
With respect to the prior performance cycle concluding in 2017, Mr. Naughton earned his 2015 - 2017 performance award totaling $4,903,240. The 2015 - 2017 performance award was awarded in February 2015 and the performance cycle ended in December 2017, with the Board of Directors certifying the actual achievement in February 2018. Consistent with the other performance awards granted by the Company, 60% of the target award was tied to three-year TSR metrics, including absolute and relative comparisons, and 40% of the target award was tied to three-year relative financial operating metrics. The Company achieved 107.3% of target payout for the 2015 - 2017 performance awards. Based on the closing stock price of the Company’s common stock on the
NYSE on February 15, 2018 of $161.10, the earned performance awards (paid out in restricted shares subject to three‑year time vesting based on continued employment but subject to earlier acceleration of vesting in the event of a termination due to death, disability, termination without cause, or retirement) were valued at $4,903,240.
Chairman and CEO 2017 Target Opportunity Mix
Impact of Company’s Performance on Named Executive Officer Compensation
A substantial portion of our Named Executive Officers’ compensation is linked to performance, both short‑term and long‑term.
Annual Cash Bonus
:
Core FFO per Share:
The Board believes that Core FFO per Share is a key measure of the Company’s performance and accordingly it was given a 50% weighting in determining achievement of the corporate component of the 2017 Annual Bonus goals. The following table shows that the Company increased its target goal for Core FFO per Share in each of the past four years, from $6.74 per share in 2014 to $8.64 in 2017. The target goal represents a compounded annual growth rate of 8.63% for the past three years.
Development and Redevelopment Net Operating Income (“NOI”)
: The operating performance of development and redevelopment communities is compared against budget. The target goal is to have no variance against budget.
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Performance Measure
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Weight
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Threshold
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Target
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Max
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Actual
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% of Target
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2017 Development Lease-Up NOI vs. Budget
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10%
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-7.5%
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0.0%
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7.5%
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-7.2%
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51.8%
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2017 Redevelopment NOI vs. Budget
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5%
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-3.0%
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0.0%
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3.0%
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-1.8%
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69.8%
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Development Yield:
The development yield performance for communities that achieve stabilized occupancy during the year is compared to our target yield for such developments. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. The target goal is to meet our pre-established target yield for each development community.
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Performance Measure
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Weight
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Threshold
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Target
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Max
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Actual
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% of Target
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2017 Development Completions (Yield vs. Target Yield)
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10%
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-0.75%
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0.0%
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0.75%
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-0.2%
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87.7%
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Corporate Objectives:
Progress on Strategic and Corporate initiatives is a qualitative judgment of the Company's achievement on multi-year corporate investments and projects.
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Performance Measure
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Weight
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Threshold
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Target
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Max
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% of Target
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Progress on Strategic and Corporate Initiatives
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10%
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50%
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100%
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200%
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125%
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Effectiveness of Management
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15%
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50%
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100%
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200%
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110%
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Our 2017 strategic initiatives included projects related to data analytics to drive business intelligence and more robust organizational decision making; study on the customer segmentation of the renter market; mixed use retail partnerships with owners, operators, and developers of retail property; and study on the feasibility of co-living/furnished housing communities/floors. Our 2017 corporate initiatives continued to focus on enhancing our technology platform, expanding internal capabilities to provide new business insights and competitive advantages, and continuing the focus on strengthening our core operations and commitment to safety. Substantial progress
on each of these initiatives was made in 2017, and the Compensation Committee determined that the achievement on this category was 125% of target, based on significant progress on each of the initiatives during the year.
Effectiveness of Management is defined as capital allocation on development opportunities, portfolio management, balance sheet and liquidity management, as well as talent management and leadership development. For 2017, the Compensation Committee determined that achievement on this category was 110% of target, as management performed very well in all of these areas.
Annual Stock Bonus
:
Mr. Naughton's 2017 annual stock bonus component consisted of the following performance measures:
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Performance Measure
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Weight
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Threshold
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Target
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Max
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Actual
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% of Target
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Same Store Controllable Net Operating Income (NOI) vs. Budget
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20%
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-2%
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0%
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2%
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-0.09%
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95.5%
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Customer Service – Mid-Lease Net Promoter Score ("NPS")
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20%
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20
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25
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30
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29
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180.0%
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Construction Performance, including Budget, Quality, Schedule and Safety
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20%
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Qualitative Assessment
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100.0%
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Development Starts and Completions against plan
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20%
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Qualitative Assessment
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100.0%
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Talent Development and Succession Planning
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20%
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Qualitative Assessment
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100.0%
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Total
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100%
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115.10%
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The above performance measures represent different aspects of the Company’s business and are not duplicative of the measures under the corporate annual cash bonus program. Same store controllable NOI measures our stabilized community performance. In line with the Company’s focus on being customer service oriented, Net Promoter Score is a measure of customer loyalty and satisfaction. Construction and development metrics reflect key financial business drivers of the Company’s success and the CEO’s commitment to safety. Talent development and succession planning ensure that future leaders of the Company are thoroughly trained and developed.
The Annual Stock Bonus for the remaining Named Executive Officers was based on their respective business unit performance.
Once the final achievement for the annual stock bonus is determined, the number of shares of restricted stock is calculated and awarded to each Named Executive Officer. The restricted stock will vest ratably over three years after the date of grant, subject to the Named Executive Officer's continued employment through each such vesting date, but subject to earlier acceleration of vesting in the event of a termination due to death, disability, termination without cause, or retirement. The annual stock bonus performance period was calendar year 2017, with performance determined upon the completion of the 2017 year. The actual issuance of the time-based restricted stock occurred in early 2018.
Performance Awards
: Our performance awards with performance periods ending in 2017 consisted of the following measures:
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Performance Measure
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Weight
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Threshold
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Target
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Max
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Actual
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% of Target
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Achievement
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Absolute 3 yr TSR
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33.4%
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4.0%
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8.0%
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12.0%
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6.2%
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77.4%
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Above Threshold
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AVB 3 yr TSR vs. NAREIT Equity REIT Index
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33.3%
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-4.0%
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0.0%
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4.0%
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0.5%
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112.8%
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Above Target
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AVB 3 yr TSR vs. NAREIT Apt Index
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33.3%
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-3.0%
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0.0%
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3.0%
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-1.6%
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73.6%
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Above Threshold
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100.0%
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87.9%
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Performance Measure
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Weight
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Threshold
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Target
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Max
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Actual
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% of Target
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Achievement
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3-yr Core FFO per share growth vs Peers
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62.5%
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-4.0%
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0.0%
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4.0%
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1.8%
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145.9%
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Above Target
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3-yr Net Debt-to-Core EBITDA vs Peers
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37.5%
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1.5X
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0.0X
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-1.5X
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-0.5X
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135.1%
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Above Target
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100.0%
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141.9%
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Final Achievement %
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100.0%
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107.3%
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Sixty percent of each officer's total performance award target value was tied to the TSR metrics identified above and 40% of the total performance award target value was tied to the operating metrics identified above. Because the Monte Carlo value of a unit was used to calculate the number of target performance units tied to TSR metrics and the actual stock price was used to calculate the number of target performance units tied to operating metrics, the actual total number of units awarded reflected 64.1% based on the TSR metrics and 35.9% based on the operating metrics.
Realized Pay for 2017 Performance
The following table shows one way in which our Compensation Committee looks at the compensation paid and awarded to each of the Named Executive Officers for service and performance with respect to 2017. This table differs from the Summary Compensation Table provided on page 48, which includes several items that are driven by accounting and reporting requirements that are not necessarily reflective of the compensation actually realized by the executive with respect to a particular year. The primary difference between this supplemental table and the Summary Compensation Table is the timing and method used to value multi‑year performance awards units and stock awards.
SEC rules require that the grant date fair value of all performance award units and stock awards be reported in the Summary Compensation Table in the row for the year in which they were granted, regardless of which year the awards were made or (in the case of performance awards) which year the awards pay out in the form of restricted shares. As a result, a significant portion of the total compensation for 2017 reported in the Summary Compensation Table relates to restricted stock awards granted in early 2017 for performance in 2016 or, in the case of performance awards, awards for the 2017 – 2019 performance cycle for which performance has not yet been determined and for which the value is uncertain (and which may end up having no realized value at all).
In contrast, the table immediately below is provided to illustrate the actual cash and restricted shares received by each Named Executive Officer for service and performance in 2017 and the restricted shares realized for performance awards maturing on December 31, 2017. Note that the amounts reported below differ substantially from the amounts determined under SEC rules and reported in the Summary Compensation Table. This table is not a substitute for the Summary Compensation Table. Total compensation figures reported below are higher than the Summary Compensation Table primarily due to the fact that actual payouts for the 2015-2017 performance cycle were above target for the performance awards that concluded in 2017.
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Name and Principal
Position
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Year
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Salary ($)
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Annual Bonus and Earned
Performance Awards
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All Other
Compensation
($)
(3)
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Total ($)
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Cash
(1)
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Restricted Stock
(2)
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Timothy Naughton
Chief Executive Officer
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2017
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990,385
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1,750,000
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6,341,990
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88,486
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9,170,861
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Kevin O’Shea
Chief Financial Officer
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2017
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570,192
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711,528
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1,508,870
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23,608
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2,814,198
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Matthew Birenbaum
Chief Investment Officer
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2017
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570,192
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725,880
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1,719,580
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23,608
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3,039,260
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Sean Breslin
Chief Operating Officer
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2017
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570,192
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734,712
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1,741,980
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23,445
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3,070,329
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Stephen Wilson
EVP, Development
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2017
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495,192
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632,400
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1,480,632
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21,527
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2,629,751
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(1)
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Amounts in this column reflect the cash awards made in February 2018 with respect to performance under the Annual Bonus program in 2017.
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(2)
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Amounts in this column reflect the value of shares of restricted stock awarded in February 2018 (i) with respect to performance under the Annual Bonus program in 2017, and (ii) for achievement under the long‑term incentive performance awards maturing on December 31, 2017, all with a value per share of $161.10, the closing price of the Company’s common stock on the NYSE on February 15, 2018.
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(3)
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Amounts in this column include the same components described in the “All Other Compensation” column of the Summary Compensation Table.
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Our Compensation Programs Incorporate Best Practices
The Company implements and maintains leading practices in its executive compensation programs. These practices include the following:
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Review of competitive market information when considering executive pay
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•
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Caps on annual and long‑term incentives
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•
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No employment agreements with officers
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Policy on recoupment of incentive compensation (clawback policy)
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•
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Double-trigger equity compensation vesting in the event of a change in control
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•
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Director and executive officer stock ownership guidelines
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•
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Separate board and management compensation consultants
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•
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Director and officer prohibition against hedging, pledging or borrowing against Company stock
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ADDITIONAL DISCUSSION
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Consideration of the Results of the 2017 Stockholder Advisory Vote on Executive Compensation and the Say-on-Pay Frequency Vote in 2017
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As previously announced at the 2017 Annual Meeting of Stockholders, the Company’s executive officer compensation for 2016 was approved by over 90% of the votes cast on the matter. The Compensation Committee and the Company considered these results to be an endorsement by stockholders of the Company’s compensation structure, target level and actual executive compensation.
In accordance with a majority of the votes cast at the 2017 Annual Meeting of Stockholders, the Company intends to hold an advisory stockholder vote on its executive compensation annually.
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Our Decision Making Process
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Who is Involved in Compensation Decisions
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Independent Board Members
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Independent Compensation Committee
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Review and approve the Company’s business plan
Review and approve the compensation of the Chief Executive Officer and the Section 16(b) officers
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Reviews and recommends to the independent members of the Board the setting of performance goals for Section 16(b) officers after the full Board reviews and approves the business plan
Recommends to the independent members of the Board the target and actual total compensation of the CEO and Section 16(b) officers
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Independent Compensation Consultant
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Shareholders and Other Key Stakeholders
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Provides guidance on executive compensation programs in terms of prevailing market practice
Steven Hall & Partners is the Board’s independent compensation consultant
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Provide feedback on various executive pay practices and governance during periodic meetings with management
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How We Review Market Compensation
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In determining the total compensation for each Named Executive Officer, which is the sum of base salary, bonus and long‑term incentives, the Compensation Committee generally considers a number of factors on a subjective basis, including:
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(i)
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the scope of the officer’s responsibilities within the Company and in relation to comparable officers at various companies within the peer group described below;
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(ii)
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the experience of the officer within our industry and at the Company;
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(iii)
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performance of the Named Executive Officer and his or her contribution to the Company;
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(iv)
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the Company’s financial budget and general level of wage increases throughout the Company for the coming year;
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(v)
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a review of historical compensation information for the individual officer;
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(vi)
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the recommendations of the Chief Executive Officer (other than with regard to his own compensation); and
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(vii)
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data regarding compensation paid to officers with comparable titles, positions or responsibilities at REITs that are considered by the Compensation Committee to be comparable for these purposes.
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An officer’s target compensation is not mechanically set to be a particular percentage of the peer group average, although, as noted, the Compensation Committee does review the officer’s compensation relative to the peer group to help the Compensation Committee perform the subjective analysis described above.
An officer’s target compensation may vary from the peer group data for the following reasons:
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(a)
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the officer’s role and experience within the Company may be different from the role and experience of comparable officers at the peer companies;
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(b)
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the actual compensation for comparable officers at the peer companies may be the result of a year of over-performance or under-performance by the peer group;
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(c)
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the target compensation and performance goals for comparable officers at peer companies may not have the same rigor as at the Company; and
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(d)
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the Compensation Committee believes that ultimately the decision as to appropriate target compensation for a particular officer should be made based on the full review described above.
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Our incentive programs are designed so that actual performance in excess of the performance targets results in payouts above target and actual performance below the performance targets results in payouts below target or no payout, but there are caps on above‑target payouts.
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How We Select and Use Peer Groups
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Companies for Market Compensation Purposes
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The Company regularly reviews the reference peer group described below, which it uses when evaluating the appropriate levels of executive compensation in order to maintain consistency and relevancy. In determining the peer group composition, the following elements are considered.
The final peers selected have one or more of the following characteristics:
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Asset Focus (multi‑family/complexity of operations): contains a meaningful portfolio of multifamily properties and/or intense property management operations
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•
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Size: defined as total capitalization (equity plus debt) within 0.5x to 2.0x of AvalonBay
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Talent: contains companies with whom we could compete for talent
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The Company now uses the following 16 companies in its peer group for comparison of total compensation.
Source: S&P Global
Companies for Performance Award Measurement Purposes
The Company uses a different peer group for determining performance under its performance awards. The peer group for determining the level of total target compensation is based in part on size parameters since the Company is competing with similar sized companies for executive talent. For the performance awards, size is less of a consideration and more emphasis is placed on multi‑family peers since operating performance and shareholder return are more appropriately compared with direct competitors in our specific industry.
For the 2015 – 2017 performance awards relating to three‑year relative TSR, the following indices were used:
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•
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FTSE NAREIT Apartment Total Return Index represents REITs in the multifamily housing industry across the U.S.
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•
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FTSE NAREIT Equity REITS Index represents a comprehensive group of REIT performance indices that spans a variety of commercial real estate space (such as retail, office, storage and multifamily) across the U.S.
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For the 2015 – 2017 performance awards relating to operating metrics, the following multifamily REITs were used as peer companies:
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–
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Apartment Investment and Management Company
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–
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Associated Estates Realty Corporation
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–
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Mid‑America Apartment Communities, Inc.
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–
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Essex Property Trust, Inc.
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These companies were chosen primarily because they are publicly-traded companies in the multifamily industry.
Please note that Associated Estates was acquired in August 2015, Home Properties was acquired in October 2015, and Post Properties was acquired in December 2016. For companies that were acquired during the performance period, their operating metrics were factored in for the portion of the performance period for which they were publicly traded companies that published operating results.
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Who Are our Compensation Consultants
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The Compensation Committee has engaged Steven Hall & Partners, an executive compensation consulting firm, to provide it with advice and counsel on executive compensation as well as competitive pay practices. Steven Hall & Partners did not provide any services directly to the Company or its management. Management uses the services of FPL Associates, another compensation consulting firm, to provide it with advice and competitive pay practices and data. The Compensation Committee undertook an assessment of whether any material conflict of interest exists in connection with the services of Steven Hall & Partners to the Compensation Committee or the services of FPL Associates to management and concluded that there was no such material conflict of interest.
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What We Pay and Why: Elements of Compensation
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Our executive compensation program contains the following pay components:
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Base Salary – payable in cash
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•
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Annual Incentive Award – payable in cash and stock contingent upon achievement of performance measures and goals
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•
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Long‑term Incentive Awards – payable in the form of performance based awards with pre‑established measures and goals
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Type
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Component
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Description
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Connection to the Company’s business
strategy/philosophy
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Fixed Compensation
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Base Salary
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This amount, payable in cash, is generally established each year in February and effective in March
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Competitive base salaries help attract and retain key talent
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Performance‑based Compensation
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Annual Incentive Award
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Threshold, target and maximum targets and goals are established in February of each year and payouts are made the following year. Two forms of payments – cash and restricted stock that vests ratably over three years.
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Drive Company and business unit performance
Motivate individual performance
Retain the services of the executive
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Long‑term Incentive Awards
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A target number of performance units is granted with final payouts that may increase or decrease contingent upon absolute and relative TSR and operating performance against peer groups.
The 2017 – 2019 performance awards are subject to additional three‑year time-vesting requirement.
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Align executive officers’ compensation with the interests of stockholders
Maximize the Company’s performance and reward management’s long‑term perspective
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How We Establish Goals and Determine Achievement for Incentive Compensation
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Setting Goals:
At the beginning of the year, the Board of Directors reviews and approves the Company’s business plan and budget. Subsequently, the Company’s management proposes corporate goals for that year for the annual bonus program and long‑term incentive program. The Compensation Committee reviews these proposed goals, adopts any revisions it may deem appropriate, and recommends the final corporate goals to the full Board of Directors for ratification and approval by a vote of the independent directors who would qualify for membership on the Compensation Committee.
Annual business unit goals are drafted by the head of each business unit and reviewed, modified and approved by the Chief Executive Officer.
The individual goals for the annual bonus program are determined in a similar manner, with the exception that the goals for the Chief Executive Officer are determined by the Compensation Committee and ratified by the independent directors of the Board who would qualify for membership on the Compensation Committee.
Determining Achievement:
At the end of each year, the Chief Executive Officer reviews and recommends to the Compensation Committee his assessment of the achievement of corporate goals for both the annual bonus program and the long‑term incentive program, and the business unit and individual goals for the annual bonus program for the other Named Executive Officers. Recommendations for bonus awards and compensation changes for the Chief Executive Officer and all executive officers are approved by the Compensation Committee and are then ratified by the independent directors who qualify for membership on the Compensation Committee.
Design of the Annual Cash Incentive Program:
Our annual bonus program emphasizes short term goals and is paid in cash.
Three components are measured to determine performance under the 2017 Annual Cash Incentive Program:
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Corporate performance, consisting of Core FFO per share, Development and Redevelopment NOI, Development Yield and Management Performance
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•
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Business unit performance (applies to all Named Executive Officers except the Chief Executive Officer)
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Why These Performance Measures are Selected:
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Corporate Performance
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Rationale
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Core FFO per Share
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Core FFO per Share (or similar measures such as Operating FFO) is a key metric used by many REITS and tracked by equity research analysts.
Core FFO per Share is reported in our quarterly results and periodic guidance to the market.
Growth in Core FFO translates to confidence in the Company’s stock price.
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Development Lease-Up NOI & Redevelopment NOI vs. Budget
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Development and Redevelopment are core competencies of the Company that contribute to value creation.
Development and Redevelopment NOI are profit related measures that are important to fulfillment of the annual business plan.
NOI helps investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual assets or groups of assets.
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Development Completions (Yield vs. Target Yield)
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Development yield is a return measure that reflects the economic returns from a development community as a percentage of the capital we invested in it.
As a performance measure, we measure development yield on completed developments against the target yield we have for that asset.
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Management’s Performance against Goals
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There are two components to the qualitative assessment of management’s performance: (i) strategic and corporate initiatives, and (ii) management effectiveness, where we gauge ourselves against pre‑established annual and multi-year goals.
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Review of 2017 Performance and Pay
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Annual Cash and Stock Incentive Program:
The goals, metrics and achievement for the corporate component of the 2017 Annual Cash Incentive Program are graphically illustrated in the following charts. Total performance under all corporate goals was determined to be 95% of target.
Individual Goals and Achievement for Annual Cash Component
Individual goals for the officers include the executive’s leadership and managerial performance, as well as specific objectives, and are evaluated on a subjective basis annually. Individual performance for Mr. Naughton was determined by the Compensation Committee. The Compensation Committee also determined individual performance for the other Named Executive Officers after receiving recommendations from Mr. Naughton. The Compensation Committee determinations were ratified and approved by the independent members of the Board who would qualify to serve on the Compensation Committee.
Mr. Naughton’s individual goals for 2017 included (i) strategic portfolio management; (ii) investment and capital management with a focus on our balance sheet strength, liquidity management and development; (iii) operational and infrastructure enhancements and efficiency; (iv) continued focus on talent management, leadership development and succession planning; and (v) continued commitment on safety, innovation and stockholder engagement.
Individual goals for Mr. O’Shea in 2017 included (i) effective management of the Company’s capital plan; (ii) providing effective oversight of the accounting, financial reporting, financial planning and analysis, risk management, tax, treasury, and investment management functions; (iii) providing oversight of the Company’s shared service center; (iv) providing administrative oversight of the Company’s internal audit group; and (v) directing the Company’s investor relations efforts.
Mr. Birenbaum’s individual goals in 2017 included (i) advancing our portfolio management; (ii) developing market penetration strategies for potential market expansion; and (iii) continuing focus on brand implementation efforts.
Mr. Breslin’s individual goals in 2017 included (i) developing talent within the departments that fall under his primary areas of responsibility; (ii) executing initiatives to enhance portfolio revenue growth and reduce operating expenses; (iii) effectively managing the lease up performance of the Company’s Development and Redevelopment Communities; (iv) improving the Company’s Net Promoter Score and Online Reputation customer satisfaction metrics; and (v) maintaining high associate engagement scores.
Mr. Wilson’s individual goals in 2017 included: (i) effectively managing and staffing the West Coast and Mid Atlantic Development groups, with particular focus on building bench strength and succession planning; (ii) developing plans for regional rollout outs; and (iii) maintaining development rights pipeline with a balanced mix of new opportunities.
The achievement of individual goals by each of the Named Executive Officers in 2017 was determined to be within 20% of individual target performance.
Annual Stock Bonus Component
Each of the Named Executive Officers had an annual stock bonus component in their total pay package in 2017. Mr. Naughton’s annual stock bonus is based on a mix of quantitative and qualitative factors, as described below. Messrs. O’Shea, Birenbaum, Breslin and Wilson each received an annual stock bonus based upon the achievement of their business unit goals. When the annual stock bonus award is earned, it is awarded in the form of restricted stock that vests ratably over three years, based on continued employment but subject to earlier acceleration of vesting in the event of a termination due to death, disability, termination without cause, or retirement.
Mr. Naughton
: Mr. Naughton’s performance measures for his annual stock bonus consisted of the following: (i) same store controllable net operating income vs budget; (ii) customer service – Net Promoter Score; (iii) review and assessment of overall construction performance, including budget, quality, schedule and safety; (iv) review and assessment of development starts and completions against plan; and (v) talent development and succession planning. Mr. Naughton’s achievement was determined to be 115.1%.
Mr. O’Shea
: Mr. O’Shea’s business unit component was based on the achievements of the Financial Services Group, for which Mr. O’Shea has direct supervisory responsibility. The Financial Services Group includes the areas of capital markets, accounting, financial reporting, financial planning and analysis, risk management, tax, internal audit (for which he has administrative oversight), investor relations, and investment fund management, as well as our call center operations which support our apartment communities. The major goals of the Financial Services Group in 2017 included: (i) sourcing an attractive mix of debt and equity capital from the capital and transaction markets to fund our capital uses, primarily related to our investment and financing activity; (ii) executing the Company’s accounting, financial reporting, tax and risk management activities; (iii) executing and enhancing the Company’s budgeting and forecasting process; (iv) executing our internal audit program; (iv) ongoing management of the Company’s investment management funds; (v) executing the Company’s investor relations activities; and (vi) making improvements on the process and productivity for the Company’s shared service center. For 2017, the overall achievement for Mr. O’Shea’s business unit was determined to be 107.8% of target.
Mr. Birenbaum
: Mr. Birenbaum’s business unit component was based on the achievements of the Market Research, Design, Sustainability/Corporate Responsibility (CR) and Investments groups, for which Mr. Birenbaum has direct oversight responsibility. The major achievements of these groups in 2017 included: (i) investments transaction volume exceeding the target goal; (ii) actual acquisitions exceeding the target measure; (iii) total dispositions higher than the target goal; (iv) continuous development of new portfolio modeling and allocation tools to enhance portfolio management decisions; (v) rollout and implementation of the corporate philanthropy strategy and continued improvements against our 2020 Corporate Responsibility goals; and (vi) development of custom submarkets in the market research platform. For 2017, the overall achievement for Mr. Birenbaum’s business unit was determined to be 113.0% of target.
Mr. Breslin
: Mr. Breslin’s business unit component was based on the achievements of the Residential Services, Redevelopment and Asset Management and Marketing, Consumer Insight and Brand Strategy functions, for which Mr. Breslin has direct oversight responsibility. The major goals of these groups in 2017 included: (i) the achievement of certain absolute and relative revenue, expense and NOI targets for the Company’s portfolio of properties; (ii) achievement of Net Promoter Score targets; (iii) redevelopment start volume and the completion of redevelopment communities at stabilized yields at or above pro forma expectations; and (iv) the execution of the Company’s marketing and brand strategy business plan for the year. For 2017, the overall achievement for Mr. Breslin’s business units was determined to be 116.2% of target.
Mr. Wilson
: Mr. Wilson’s business unit component was based on the achievements of the West Coast and Mid Atlantic Development groups, as Mr. Wilson was the senior executive with oversight of those groups. Mr. Wilson’s business unit was evaluated against the following goals: (i) sourcing of new development rights, (ii) construction start volume and projected stabilized yields relative to target yields; (iii) construction completion volume as determined by total capital cost and actual stabilized yields relative to target yields; and (iv) actual construction costs relative to budgeted costs and actual schedule performance relative to budgeted schedule performance. For 2017, the overall achievement for Mr. Wilson’s business unit was determined to be 163.7% of target.
Long‑Term Incentive Program:
Design of the Long‑Term Incentive Program:
Under our multi‑year, long‑term incentive award program, performance awards are granted each year with a target number of performance units that may be reduced or increased at the end of the three year performance period depending on achievement against established metrics. For the 2017-2019 performance period, the performance units that are earned at the end of the performance period are settled in restricted shares of common stock that are subject to an additional three‑year vesting requirement, based on continued employment but subject to earlier acceleration of vesting in the event of a termination due to death, disability, termination without cause, or retirement.
The metrics under the performance awards made in 2017 with a three‑year performance period ending on December 31, 2019 are as follows:
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TSR Metrics (Weighted 60%)
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Performance Level and Metric
(1)(2)
(relative performance stated as basis points
above or below index performance)
|
|
Threshold
|
Target
|
Maximum
|
Percent of
Total Award
|
Absolute metric
|
4.0%
|
8.0%
|
12.0%
|
33.4%
|
Relative to FTSE NAREIT Equity REITs Index
|
-4.0%
|
0.0%
|
4.0%
|
33.3%
|
Relative to FTSE NAREIT Apartments Index
|
-3.0%
|
0.0%
|
3.0%
|
33.3%
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|
|
|
|
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Operating Metrics (Weighted 40%)
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Performance Level and Metric
(1)(2)
(relative performance stated as (i) basis points
above or below average peer performance
(3)
or (ii) difference between AVB performance and average
peer performance)
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|
Threshold
|
Target
|
Maximum
|
Percent of
Total Award
|
Core FFO per share growth vs. peers
|
-3.0%
|
Equal to Peer Avg.
|
+3.0%
|
66.7%
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Net Debt-to-Core EBITDA ratio vs. peers
|
1.5x
|
Equal to Peer Avg.
|
-
1.5x
|
33.3%
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|
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(1)
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For target performance, 100% achievement is earned, for performance at maximum or above, 200% achievement is earned, and for threshold performance, 50% achievement is earned. For results between threshold and target, or between target and maximum, payouts shall be based on interpolation. For performance below threshold, no achievement is earned.
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(2)
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The absolute and relative metrics above reflect the metrics used for the awards made in 2017 for the performance period maturing on December 31, 2019.
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(3)
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The peers used in calculating each of the Operating Performance Metrics include: Apartment Investment and Management Company, Mid‑America Apartment Communities, Inc., Camden Property Trust, Equity Residential, Essex Property Trust, Inc., and UDR, Inc. Operating metrics for companies that are acquired during the performance period will be factored in for the portion of the performance period for which they were publicly traded companies that published operating results.
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Why These Performance Measures are Selected
The Performance Awards strengthen the alignment of executive compensation with long‑term stockholder value creation. Our Named Executive Officers have the opportunity to earn shares of AvalonBay common stock with a value that adjusts based on absolute increases in our stock price as well as AvalonBay’s TSR relative to the FTSE NAREIT Equity REITs Index and FTSE NAREIT Apartments Index. These two indices are selected because they represent the broader REIT industry and the REIT apartment industry, respectively.
Operating metrics in the form of Core FFO per share growth and Net Debt‑to‑Core EBITDA ratio against peers are chosen to motivate our officers to focus on critical operating performance objectives that we believe will translate into sustainable stockholder returns over the long term.
How the Company Performed for Performance Awards Ending December 2017
The goals, metrics and achievement for the performance awards maturing on December 31, 2017 are graphically illustrated in the following charts:
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2017 Compensation Determinations
|
The following tables provide information on the Named Executive Officers’ 2017 Compensation:
Review of 2017 Base Salary
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|
|
Name
|
Base Salary
($)
|
Mr. Naughton
|
1,000,000
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Mr. O’Shea
|
575,000
|
Mr. Birenbaum
|
575,000
|
Mr. Breslin
|
575,000
|
Mr. Wilson
|
500,000
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Review of 2017 Annual Cash Bonus:
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Annual Weight of Each Component
|
Name
|
Corporate
|
|
Business Unit
|
|
Individual
|
Mr. Naughton
|
75%
|
|
—
|
|
25%
|
Mr. O’Shea
|
40%
|
|
40%
|
|
20%
|
Mr. Birenbaum
|
40%
|
|
40%
|
|
20%
|
Mr. Breslin
|
40%
|
|
40%
|
|
20%
|
Mr. Wilson
|
40%
|
|
40%
|
|
20%
|
|
|
|
|
|
|
Name
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Actual Cash
Bonus
($)
|
Mr. Naughton
|
875,000
|
1,750,000
|
3,500,000
|
1,750,000
|
Mr. O’Shea
|
345,000
|
690,000
|
1,380,000
|
711,528
|
Mr. Birenbaum
|
345,000
|
690,000
|
1,380,000
|
725,880
|
Mr. Breslin
|
345,000
|
690,000
|
1,380,000
|
734,712
|
Mr. Wilson
|
250,000
|
500,000
|
1,000,000
|
632,400
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Review of 2017 Annual Stock Bonus (based on business unit performance for Named Executive Officers other than Mr. Naughton):
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|
|
|
|
|
Name
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Actual
Stock
Bonus
($)
|
Mr. Naughton
|
625,000
|
1,250,000
|
2,500,000
|
1,438,750
|
Mr. O’Shea
|
350,000
|
700,000
|
1,400,000
|
754,600
|
Mr. Birenbaum
|
350,000
|
700,000
|
1,400,000
|
791,000
|
Mr. Breslin
|
350,000
|
700,000
|
1,400,000
|
813,400
|
Mr. Wilson
|
275,000
|
550,000
|
1,100,000
|
900,350
|
2015 – 2017 Performance Awards Update
The following table shows the actual performance units earned at the completion of the three‑year performance period that are settled in restricted shares of stock subject to an additional three year service-based vesting requirement.
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|
|
|
Name
|
Target Number of Performance Units
|
Actual Performance
Achievement %
|
Actual
Number of Performance
Units earned (restricted shares subject to
additional time vesting)
|
Mr. Naughton
|
28,380
|
107.30%
|
30,436
|
Mr. O’Shea
|
4,366
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107.30%
|
4,682
|
Mr. Birenbaum
|
5,374
|
107.30%
|
5,764
|
Mr. Breslin
|
5,374
|
107.30%
|
5,764
|
Mr. Wilson
|
3,359
|
107.30%
|
3,602
|
|
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2018 Compensation Determinations
|
The following compensation determinations were made for 2018 for the Named Executive Officers:
Base Salary for 2018, effective February 25, 2018
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|
Name
|
Base Salary
($)
|
Mr. Naughton
|
1,000,000
|
Mr. O’Shea
|
600,000
|
Mr. Birenbaum
|
600,000
|
Mr. Breslin
|
600,000
|
Mr. Wilson
|
525,000
|
The target, threshold and maximum 2018 annual bonus for each Named Executive Officer:
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|
|
|
|
|
|
|
Annual Cash Bonus Targets
|
Annual Restricted Stock Bonus Targets
|
Name
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Mr. Naughton
|
1,000,000
|
2,000,000
|
4,000,000
|
875,000
|
1,750,000
|
3,500,000
|
Mr. O’Shea
|
375,000
|
750,000
|
1,500,000
|
350,000
|
700,000
|
1,400,000
|
Mr. Birenbaum
|
375,000
|
750,000
|
1,500,000
|
390,000
|
780,000
|
1,560,000
|
Mr. Breslin
|
375,000
|
750,000
|
1,500,000
|
390,000
|
780,000
|
1,560,000
|
Mr. Wilson
|
262,500
|
525,000
|
1,050,000
|
287,500
|
575,000
|
1,150,000
|
The target, threshold and maximum number of performance units granted in 2018 that may be earned for the performance period 2018‑2020:
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|
|
|
|
|
|
|
2018 – 2020 Total
Shareholder Return Metric
|
2018– 2020 Operating Metric
|
Name
|
Threshold
(#)
|
Target
(1)
(#)
|
Maximum
(#)
|
Threshold
(#)
|
Target
(1)
(#)
|
Maximum
(#)
|
Mr. Naughton
|
10,385
|
20,769
|
41,538
|
6,518
|
13,035
|
26,070
|
Mr. O’Shea
|
2,077
|
4,154
|
8,308
|
1,304
|
2,607
|
5,214
|
Mr. Birenbaum
|
2,314
|
4,628
|
9,256
|
1,453
|
2,905
|
5,810
|
Mr. Breslin
|
2,314
|
4,628
|
9,256
|
1,453
|
2,905
|
5,810
|
Mr. Wilson
|
1,138
|
2,275
|
4,550
|
714
|
1,428
|
2,856
|
|
|
(1)
|
The target number of units is derived from the following target dollar values: $5,250,000 for Mr. Naughton; $1,050,000 for Mr. O’Shea, $1,170,000 for Mr. Birenbaum, $1,170,000 for Mr. Breslin and $575,000 for Mr. Wilson. To derive the target number of units, 60% of the target dollar value (representing the portion of the award tied to TSR Metrics) was divided by the Monte Carlo value as of February 15, 2018 (the approval date) for a unit based solely on the TSR metrics ($151.67 per unit) and 40% of the target dollar value (representing the portion of the award tied to Operating Metrics) was divided by the closing price of Common Stock on February 15, 2018 ($161.10 per share). After a review by the Compensation Committee of (i) market practices, and (ii) the Company's experience in recruiting candidates and discussing our compensation program, and a determination made as a result thereof, starting with the 2018 – 2020 performance units, no additional time vesting requirement will be attached to these awards after they are earned at the end of the three year performance cycle. Additionally, cash dividends will be accrued and paid at the end of the performance period based on actual earned performance units. The 2018 Performance Award Agreement also reflected changes to the weightings of certain metrics and changes to the threshold and maximum levels of certain metrics.
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Pursuant to our Deferred Compensation Plan, certain employees, including the Named Executive Officers, may defer up to 25% of base annual salary and up to 50% of annual cash bonus on a pre‑tax basis and receive a tax‑deferred return on those deferrals. Deferral elections are made by eligible employees during an open enrollment period each year for amounts to be earned in the following year. Participating employees direct the deemed investment of their deferral accounts by selecting among certain available investments in mutual funds.
We have an employee stock purchase plan that allows our employees the opportunity to purchase up to $25,000 of our Common Stock per year at a 15% discount to the lower of the closing price of the Common Stock, as reported on the NYSE, on the first business day of the purchase period or the closing price of the Common Stock on the last day of the purchase period. For 2017 there were two purchase periods, January 1 – June 10 and July 1 – December 10, with the opportunity to purchase up to $12,500 of our Common Stock at the discounted rate previously mentioned during each of the two purchase periods (up to $25,000 annually). In addition, we maintain a 401(k) retirement savings plan and match 50% of the contributions up to the first six percent of a participant's eligible compensation (subject to certain tax limitations). We offer medical, dental and vision plans, a portion of the cost of which is paid by the employee. We also provide life insurance, accidental dismemberment insurance, and short‑term and long‑term disability insurance for each employee.
Executive Stock Ownership Guidelines.
The Company believes that stock ownership by its executive officers is important and has established formal Executive Stock Ownership Guidelines for officers who are at the executive vice president level or above or are subject to reporting under Section 16 of the Exchange Act. These guidelines provide that persons holding the title of Chairman of the Board, Chief Executive Officer or President are expected to maintain ownership of Common Stock (including unvested restricted shares) equal to six times their base salary. The multiples that apply to other covered officers are as follows: Chief Financial Officer and Executive Vice Presidents—three times; Senior Vice Presidents—one and one‑half times; Vice Presidents—one time. The full text of the Executive Stock Ownership Guidelines, which includes the time periods by which such ownership must be achieved and a retention policy during periods of non‑achievement, is posted on the Investor Relations section of the Company’s website (
www.avalonbay.com
) under “Corporate Governance Documents.” The Company also has Director Stock Ownership Guidelines as discussed in “Director Compensation and Director Stock Ownership Guidelines” of the proxy statement.
Prohibition Against Hedging, Pledging or Borrowing Against Company Stock.
The Company has adopted a formal policy prohibiting its officers and directors from (i) borrowing money from a broker or other lender that is secured by Company securities, and (ii) holding Company securities in a brokerage account that has outstanding “margin” debt. In addition, the policy prohibits sales of Company securities by an officer or director if he or she does not own the security at the time of the sale (a “short sale”), and prohibits the buying or selling of puts or calls in respect of any Company securities.
Severance Policy.
The Board has adopted a Policy Regarding Shareholder Approval of Future Severance Agreements (the “Severance Policy”). The Severance Policy generally provides that the Company will not, without stockholder approval or ratification, enter into or bind the Company to the terms of any future severance agreement with a senior executive officer that provides for severance benefits (as defined) in excess of 2.99 times the sum of the officer’s base salary plus annual cash bonus. The Severance Policy, which is posted on the Investor Relations section of the Company’s website (
www.avalonbay.com
) under “Corporate Governance Documents,” provides additional detail regarding the application of this policy.
Policy on Recoupment of Incentive Compensation (Clawback Policy).
The Board has adopted a Policy for Recoupment of Incentive Compensation (i.e., a compensation clawback policy), which applies to senior officers (generally senior vice presidents and above). Pursuant to this policy, in the event the Company is required to prepare an accounting restatement due to the material non‑compliance of the Company with any financial reporting requirement, then an independent committee of the Board of Directors may require any covered officer to repay to the Company all or part of any “Excess Compensation” that such officer had previously received. Excess Compensation is defined as that part of the incentive compensation received by a covered officer during the 3‑year period preceding the publication of the restated financial statement that was in excess of the amount that such officer would have received had such incentive compensation been calculated based on the financial results reported in the restated financial statement. The full text of the policy is posted on the Investor Relations section of the Company’s website (
www.avalonbay.com
) under “Corporate Governance Documents.”
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Practices with Regard to Dates and Pricing of Stock and Option Grants
|
The Compensation Committee determines the number of shares underlying options and shares of restricted stock to award to officers as part of annual compensation. Those members of the Board of Directors who would qualify for service on the Compensation Committee review and ratify these awards at the Board’s regularly scheduled February meeting. The award date for options and stock grants is generally the date of ratification, but may be delayed to a date after such ratification if there is a pending announcement by the Company of material non‑public information, such as an earnings release. In all cases, our options are granted: (i) on the dates described above; (ii) on the date of (or a date set in connection with) a new hire’s start with the Company as approved by the CEO in advance of the start date; or (iii) on the date of approval by the CEO for retention or recognition purposes up to a Board‑authorized maximum value of $250,000. Option exercise prices are determined by the NYSE closing price of our Common Stock on the date of grant. Additionally, all officers must receive prior authorization for any purchase or sale of our Common Stock (unless made pursuant to a previously approved Rule 10b5‑1 plan), which, in the case of open market transactions, is generally only given during approved trading windows that are generally established in advance based upon earnings release dates.
The Compensation Committee reviewed and considered risks arising from the Company’s compensation policies and practices for its employees. This review included consideration of the following specific elements of the Company’s executive compensation policies and procedures:
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•
|
annual bonus and long‑term incentive awards are based upon pre‑existing, defined goals;
|
|
|
•
|
annual goals contain multiple financial targets, including performance against a pre‑approved budget;
|
|
|
•
|
performance goals include both absolute performance and performance relative to industry peers;
|
|
|
•
|
annual goals balance financial and non‑financial performance;
|
|
|
•
|
goals include corporate, business unit, and individual performance goals;
|
|
|
•
|
performance goals include achievement against both single year and multiyear metrics;
|
|
|
•
|
executive compensation is structured as a mix among salary, cash bonus, and equity awards;
|
|
|
•
|
equity awards vest over time;
|
|
|
•
|
bonus and long‑term equity programs include maximum payouts or “caps”;
|
|
|
•
|
all unvested equity awards are forfeited upon a termination for cause or voluntary termination under certain circumstances;
|
|
|
•
|
the metrics that are included in our long‑term performance awards include a goal addressing appropriate leverage ratios;
|
|
|
•
|
achievement of metrics is not determined on an “all or nothing” basis, but rather goals may be achieved on a graduated basis based on performance against the stated target; and
|
|
|
•
|
while awards are generally made in relation to performance against specific goals, the Compensation Committee retains the discretion to adjust annual bonuses of cash and restricted stock as may be warranted by specific circumstances.
|
Following this review, the Compensation Committee concluded that any risks arising from the Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the Company at this time, although no assurances can be given in this regard.
The SEC requires that this report comment upon the Company’s policy with respect to Section 162(m) of the Tax Code, which limits the deductibility on the Company’s tax return of compensation over $1 million to the Chief Executive Officer and any of its three other most highly paid executive officers (other than the Chief Financial Officer) unless, in general, for the tax years prior to 2018, the compensation is paid pursuant to a plan which is performance‑related, non‑discretionary and has been approved by the Company’s stockholders. Although certain qualifying "performance-based compensation" was previously exempt from this deduction limit, the recently enacted Tax Cuts and Jobs Act made certain changes to Section 162(m) of the Tax Code. Pursuant to such changes, "performance-based compensation" is no longer exempt under Section 162(m) effective for tax years beginning after January 1, 2017, subject to a transition rule for written binding contracts which were in effect on November 2, 2017, and which were not modified in any material respect on or after such date. The Company believes that, because it qualifies as a REIT under the Tax Code and pays dividends sufficient to minimize federal income taxes, the payment of compensation that does not satisfy the requirements of Section 162(m) will generally not affect the Company’s net income. If that compensation does not qualify for a deduction under Section 162(m), there could be a modest effect on the Company’s dividend requirements to qualify as a REIT or on the tax characterization of such dividends. The Company does not believe that Section 162(m) will materially affect its dividend requirements or the taxability of stockholder distributions, although no assurance can be given in this regard due to the variety of factors that affect the tax position of each stockholder. For these reasons, the Compensation Committee’s compensation policy and practices are not directly guided by considerations relating to Section 162(m).
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Compensation Committee Report
|
The Compensation Committee of the Board of Directors of AvalonBay Communities, Inc., a Maryland corporation, has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S‑K of the Securities and Exchange Commission with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
Submitted by the Compensation Committee
W. Edward Walter (Chair)
Alan B. Buckelew
H. Jay Sarles